Penney’s Business Model Experiment Goes Splat

Penney’s Business Model Experiment Goes Splat


 

J.C. Penney just reported a bigger-than-expected loss and rapidly declining sales, as customers vote with their wallets and revolt against the new pricing plan that gets rid of hundreds of sales in favor of every day lower prices. Only six months ago, Penney’s launched this bold new business model. In light of this recent announcement, is it time to throw in the towel?

It seems like Penney’s strategy is one that should have worked- cut out the "BS," treat the customer like an adult and price everything fairly every day. However, Penney’s poor results show how difficult it is for a company to change the way shoppers behave. In a tough economy, shoppers are still looking for racks of "70 percent off" sales signs and coupons. Apparently, the good feeling of an apparent deep discount works better than fair everyday pricing.

Penny's sales slide

Should Penney’s do an about-face and go back to the old system?  For now, they are staying with the plan. At what point does CEO Ron Johnson change course? From the outside looking in, it appears that the Kohl’s strategy of everyday deep discounts (which everyone knows are not really discounts) works better than everyday low prices.

Is the issue that Penney’s is fighting basic human psychology? Does today’s consumer so value a good deal that they cannot bring themselves to buy something not on sale? Here are some options for Penney’s:

  1. Stay the course. Ron Johnson was a golden boy at Apple.  Let’s see what his plan can do over time.
  2. About face. Penney’s needed a facial, not a face lift. Clean up the stores, paint the walls, get a new look and go back to the old pricing strategy.
  3. Overboard correction. Give consumers what they really want- great deals. Adopt the Shoe Carnival strategy of Monty Hall shopping. Have a Friday clothing auction or a spin the wheel for 99% off a random item.
  4. Best Buy strategy. Old-time mall big boxes are all getting killed. Stores are too big. Overhead is too high. Get out of the malls. Cut store sizes in half. Effectively, become Kohl’s Version 2.
  5. Go online only. This is probably not the best option, but it is certainly worthy of consideration.
  6. Costco strategy. Consumers want a great deal, fine. Members only can shop at Penny’s and the deals are spectacular.
  7.  Stop being so bland. Is there any item for which you can say, “I HAVE to go to Penney’s for XYZ?” Nope! Some hard core product innovation would probably do more good than pricing tricks.

The tougher issue at hand for CEO Johnson may be Penney’s irrelevance. Perhaps the pricing plan did not work because shoppers have no real reason to shop at Penney’s, period. For all Sears' problems, they have some destination brands like Craftsman, Land’s End, and Kenmore. Penney’s does not have any magnetic brands or must-have items pulling consumers into their stores.

What do you think Penney’s should do with their business model? Do you think Penney’s can compete in the tough retail marketplace?

 

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