Johnson’s pricing strategy

Case Assignment
A well-written report should have a brief introduction, headings or subheadings, and a
brief concluding comment. Note that you should use some keywords as headings or
subheadings such as “Johnson’s pricing strategy,” instead of a sentence or a question.
Read and cite article listed above, supplemented with any other articles related to J.C.
Penney, and develop a report addressing following issues.

  1. Briefly describe Johnson’s pricing strategy, also providing background on the
    company and department store industry.
  2. Explain why Johnson’s pricing strategy did not work. Support your position in terms
    of environmental factors such as economy, the competition, and changing consumer
    behavior.
  3. What do you think Johnson could have done better? Take into account J.C. Penney’s
    segmentation, positioning, and branding strategies to explain this issue.
  4. Compare J.C. Penney’s current pricing strategy and Johnson’s pricing strategy,
    based on your research on the most recent situation of J.C. Penney. How do you think
    J.C. Penney would perform in the next five years? Take into consideration the
    relationships between pricing and other aspects of the marketing effort such as a change
    in merchandising, logo, atmospherics, use of celebrity spokespersons, and so on.

Introduction

Pricing strategies that are not well-informed by research and market surveys can lead to very
disastrous outcomes for companies especially in a price sensitive market with stiff
competition.

Background and Summary

Ron Johnson, after great successes at Target and Apple, was hired as the CEO of J.C. Penney,
one of the largest department stores in the U.S. By 2011, J.C. Penney had more than 1,100
stores and averaging about $17 billion in annual sales turnover.  In January 2012, Johnson
communicated a new pricing strategy that would breathe new life into the 100+ year’s
department store. Shortly after Johnson was hired, without conducting research and allowing
for a testing period, he implemented his vision that touched on the target market, products,
pricing, promotion and store layout. Johnson, defying J.C. Penney’s history of segmentation,
aggressively sought affluent, modern demographic who desired designer boutiques, Wi-Fi,

Johnson’s Pricing Strategy 2
and nail shops. Part of the overall strategy was the pricing strategy dubbed, “Fair and
Square,” sought to regularize prices based on product value throughout the year and therefore
doing away with the approach of periodic discounts and coupons offered to its customers.
The outcome of this new pricing strategy was a 10% decline in store traffic and a further 20%
drop in sale in Q1 2012 translating to a loss of $163 million. (Knowledge@Wharton, 2012).
Sales were down by $4.3B, the company lost close to $1B, and its stock price dropped by
more than 50%. Between 2011 and 2013, when Johnson was CEO, J.C. Penney suffered a net
income loss of around $1.3 billion but by 2016, this amount had gone down to about $500
million with its stock price rising from $6 to $11. JC Penney’s customers comprised mainly
of families as well as the young professionals, and fashion-oriented people who sought good
quality products at reasonably discounted prices. Johnson’s price strategy involved
redesigning sections of the store to increase appeal to the customers.  However, according to
the customers’ perception, the stores never changed, but the prices went up. The execution of
this strategy failed. It was a case of a poor strategy that was poorly executed (Strong & Ring,
2013).

US Department Stores

The future of the retail stores, commonly referred to as brick and mortar, is grim. This
is due to consumers’ ability to purchase products online using their phones or computers from
their comfort while expecting deliveries. The market is quickly shrinking with several of
these retailers closing stores every year. Sears, Macy’s and JC Penney have traditionally
sought the middle market while experiencing stiff competition from discount and off-pricing
counterparts such as Target, Wal-Mart, and TJMaxx as well and Kohl which focuses more on
promotions. The outlook is that in the medium term, there could be mergers.

Johnson’s Pricing Strategy 3
The retail industry is being impacted by various economic, technological and social
changes, which have created a challenging environment for J.C. Penney and its competitors.
With a high percentage of 79% of customers using their smartphones for online shopping,
J.C. Penney seeks to pay more attention to these hybrid shoppers. Competition in the retail
industry is stiff even as the share of online shopping eats into the percentage of in-store
shopping. With retailers as anchor tenants closing stores, there is fear that other tenants would
leave too (Matthews et al, 2017).

Johnson’s Strategy Failure

Johnson had the strategy to create stores within stores with the aim of exciting J.C.
Penney’s customers. This looked great on paper, but it was not well implemented. This
caused the failure of the overall pricing strategy which was to go with the creation of stores in
stores. According to consumer psychology, the perception of prices ending with 0 appears
higher than those ending with .99. The idea of “fair and square pricing” strategy did away
with a decades-old JC Penney’s high-low pricing strategy of rock bottom discounting and
coupons. This change unsettled several loyal customers. Johnson did not factor in that in
value pricing; true value is both relative and subjective (Chernev, 2012). According to
Johnson, the strategy was meant to ensure that customer traffic was leveled the whole year
and that customers did not have to wait for the traditional discounts and coupons. The
withdrawal of discounts created a market perception and image that the J.C. Penney’s is
highly priced. This price positioning was a gross miscalculation of J.C. Penney’s profile of
customers. The strategy was not well timed as the overall industry experienced less in-store
shoppers who preferred online shopping. Johnson did not factor in this. The image of the
stores never improved after all (Rafi, 2012).

A Better Performance by Johnson

Johnson’s Pricing Strategy 4
Johnson’s over-ambitious and confident strategy should have been tested and tried for
a period before the immediate and radical shift of the company’s overall strategy. This should
have been preceded by market surveys to inform the company change of direction. Macy’s
and American Airlines had experimented the same no discounting price strategy but upon
failure, reverting to other strategies. Johnson did not and remained optimistic. In a bid to
reinvigorate the business, customers could have been offered comparatively the lowest prices
as was the case with Walmart. After Q1 2012 losses, owing to poor customer reception,
Johnson should be reverted to a different strategy of high volumes low margins to attract
volumes of sales. Johnson could also have understood the profile of JC Penney’s customers
as well as their needs (Strong, 2013).

Comparison and Outlook

J.C. Penney, like many of its competitors, has been focusing on its supply chain as
well as integrating its stores and e-commerce. The company has sought to reinstate the
traditional sales promotions and couponing. It has reintroduced privately-labeled brands
which Johnson had done away with. The main aim is to retain and excite the traditional
customer base as opposed to Johnson’s strategy of going for the affluent. Johnson did not
allow exclusive brands, which differentiated retail stores, could generate higher margins. J.C.
Penney now seeks to grow the percentage of exclusive brands from 52% to 70% of the hybrid
merchandising mix accounting for about $2 billion in sales by the year 2019. J.C. Penney has
also shifted from gut feelings and personal confidence as a basis for making decisions to
evidence-based decisions informed by consumer behavior and shopping patterns.
Additionally, the company is also now focusing on making better the once thriving hair
salons to increase foot traffic (Ofek, 2013). J.C. Penney has plans to commit about 30% of its
capital expenditure to further invest in e-commerce platform as well as seeking a balance
between in-store shopping experience and online purchases as well as seek to implement

Johnson’s Pricing Strategy 5
same day deliveries. The company sought various partnerships such as with Ashley Furniture,
Empire Flooring among others to leverage and increase sales.
In appreciation of their core female customers that make about 72%, JC Penney
changed their mission from being “America’s favorite store” to “helping our customers find
what she loves for less time, money, and effort.” J. C. Penney’s future looks much brighter
than it did before. Despite losing $513 million in 2016 over $3.5 billion in the last four years
with a long-term debt burden of about $5 billion, the company’s outlook is optimistic
(Matthews et al, 2017). The company has an ambitious long-term return-to-profitability plan
with specific prudent pricing strategies. The goal is to grow comparable sales by 3% annually
in 2018 and 2019 as well as improving gross margins by 75-100 basis points, reduce
operating expenses as a percentage of revenue by 215 to 240 basis points, and produce as
much as $500 million in net income by 2019. (Matthews et al, 2017).

Conclusion

The US Retail department is undergoing several changes mainly due to stiff competition,
technological advances, and multichannel distribution challenges. This requires excellent
overall company strategies with well-informed pricing decisions. Any failure in pricing
strategies, as well as late responses to these problems, will lead to bankruptcy and collapse of
the companies.

Johnson’s Pricing Strategy 6

References

Chernev, A., (2012, May 29). Can There Ever Be a Fair Price? Why JC Penney’s Strategy
Backfired.

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