Finding a Niche for Need

Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Discussions with my elders always end up talking about the "good old days" in some form or another. I nod my head when they talk prices, knowing inflation has caused everything to increase in dollar amounts. The holidays, however, bring on talk like this: "There weren't these huge malls. The only major stores, or the anchors, had everything you needed."

When it comes down to consumers' true needs and necessities, there are still stores that can fulfill this role. I'm specifically talking Wal-Mart  (NYSE: WMT) and Target (NYSE: TGT). Now that these two companies include a full grocery department within their locations, they can cater to almost every basic need for a family. Food, clothing, home, and entertainment desires can be found here with little to no problem. Obviously, consumers have choices and may choose to shop elsewhere for some things, but the point is that they are available in one spot. Why does this still succeed? Price, above all, drives the profits.

Let's narrow the playing field a bit. Taking grocery out of the equation, two players have found a way to stay profitable in the strategy of "We've got it all!" 'Macy's (NYSE: M) has been strong for 150 years. It features private brands such as Jenni and celebrity branding via personalities such as Martha Stewart. Through promotions, discounting, and high quality products, Macy's continues to attract crowds (believe me, I was there Thanksgiving night with my better half). Kohl's (NYSE: KSS) takes a very similar cost structure and business model to appeal mainly to consumers seeking value.

<table> <tbody> <tr> <td> </td> <td>Net Income (in millions)</td> <td>Free Cash Flow</td> </tr> <tr> <td>WMT</td> <td>$15,699</td> <td>$10,745</td> </tr> <tr> <td>TGT</td> <td>$2,929</td> <td>$1,066</td> </tr> <tr> <td>M</td> <td>$1,256</td> <td>$1,329</td> </tr> <tr> <td>KSS</td> <td>$1,167</td> <td>$1,216</td> </tr> <tr> <td>JCP</td> <td>$-152</td> <td>$186</td> </tr> </tbody> </table>

S&P 500 index data

Even in a slow economy, the first four companies are sitting on ridiculous cash piles. They don't even need major changes, yet they can afford to do just about anything (including pay their shareholders hefty dividends). J.C. Penney (NYSE: JCP), on the other hand, is in the middle of a multi-year turnaround. They eliminated coupons and are investing enormous amounts of money into restructuring the business model, much of which goes into changing the physical stores. Even before Ron Johnson took over as CEO, the company has not been able to keep up with its competitors. In the industry of "necessity," this company appears to be going nowhere fast. 

Consumers on a budget naturally search for the best balance between price and quality when shopping for their basic needs. In today's tight economy, price is the primary criteria, but quality still matters. This system works if consumers feel as if they are getting a deal. Wal-Mart and Target offer low prices on just about everything, just about all the time. Macy's and Kohl's offer fair prices on their products, but offer discounts all year, not just during the holidays as the inexperienced retail shopper may assume.

J.C. Penney sent a beautifully detailed holiday catalog to my house before Black Friday. The best discounts were in the ballpark of $3 off a $15 shirt, or 20% off; nothing too hard to find in the world of retail. Between "roll-backs," "temporary price cuts," and "extra _ percent off" already marked down items, Penney doesn't compete. I have not yet visited JCP in my holiday travels, but the promotions were not impressive. Sales numbers indicate I missed out on bargains, but I wasn't convinced.

Price, quality, and need. Consumers have to be motivated to enter the store, then be convinced to buy something. JCP is aiming at specialization with its store-within-a-store brands. Izod, Maidenform, and Martha Stewart are just a few of the many that will roll out over the next couple of years. These introductions, along with early successes such as Levi's 25% climb in sales climb at JCP, indicate that something is working. Let's not forget that JCP is over 100 years old as well; something had to be going right along the way.

Can J.C. Penney reclaim their niche in the industry of "need" retail? According to executives, the company will have over $1 billion in cash by the end of the year. Recall the introduction of the article about anchors. JCP owns nearly half of it's real restate, and is able to lease the rest at lower rates than most of the competition. This doesn't sound like a dead company to me. Some investors have starting digging the grave, but this is going to be a longer story either way. I wouldn't be a Fool if I didn't keep an eye on this one.

KyleVaughan has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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