J.C. Penney’s “Fair and Square” Pricing Strategy Essay Example for Free

J.C. Penneys moderately and Squ are Pricing Strategy Esenunciate sell is hard, and thats what Steve Jobs said to me when we started incloses at Apple. Ron Johnson, CEO, J.C. Penney1It was August 2012 and the release of second quarter earnings was looming for Ron Johnson, the chief executive officer of J.C. Penney, one of the Statess offshoot section hive aways. Johnson, HBS 84, had intimated to Wall Street that the sellers second quarter results were homogeneously to miss expectations again, pursuit grubby first quarter results that had sent the friendships stock harm careening to little than half of its February 2012 honor of a partake in. The Q1 raw(a)s released in May was grim a $163 million loss, same store revenue down 19%, and the number of clients shopping in J.C. Penney stores down 10%. These results were particularly disheartening given the corporations radical displace of its business model and its carry in February 2012. The centerpiece of the re g everywherenment agencying initiative was a switch from J.C. Penneys existing risque- poor set strategy, in which the retailer ran back up gross changes to offer customers deep discounts off of its higher list termss, to a rude(a) strategy the telephoner dubbed bonnie and Square set. average and Square set was meant to simplify J.C. Penneys pricing structure and key out it more(prenominal) straightforward for customers to shop. It offered commodious values distributively day, with less frequent footing promotions. The company t exposeed its novel pricing strategy as offering no games, no gimmicks and invited consumers to do the math to see how it offered them cheaper scathes on a regular basis with less hassle. Moving away(predicate) from high-low pricing was a massive shift for J.C. Penney. In 2011, the retailer spent $1.2 billion to execute 590 distinguishable gross sales events and promotions2 and generated 72% of its $17.3 billion in course of instruct ionbook revenue from products sold at steep discounts of more than 50% off of the initial list price.3 Wall Street was initiallysupportive of the companys devises for change.Investors, who sent J.C. Penneys stock soaring up 24% pursual the announcement of the saucy pricing plan, viewed it as a way for J.C. Penney to escape the remorseless downward spiral of escalating price promotions that gripped the Statess retailers struggling to survive the economic recession. alone by mid-summer 2012, customers and shareholders appeared to be voting with their feet, leaving the retailer in droves. Was Johnsons currentfangled pricing strategy misguided or was it just a matter of time before customers fully embraced it? Johnson was under enormous squelch to turn involvements around quickly as the all-important back-to-school and holiday shopping seasons were imminent. Many voices were bring uping on him to consider changing the pricing strategy again.____________________________________ ____________________________________________________________________________ HBS prof Elie Ofek and Professor Jill Avery (Simmons School of Management) prepared this case. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are non think of to serve as endorsements, sources of primary data, or illustrations of effective or ineffective focussing. Copyright 2012, 2013 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard crinkle School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.This document is authorized for use only by Jack Cherewatti in MKTG MGMT taught by S. Adam Brasel Boston College from November 2014 to May 2015.For the exclusive use of J. Cherewa tti513-036J.C. Penneys Fair and Square Pricing StrategyCompany BackgroundJohnson was at the helm of what at one time was considered Americas more or lessvenerated division store. at a time the largest department store chain in the country with over 2,000 stores, as of 2012, the 110 year old retailer operated 1,100 stores, claiming to serve more than half of Americas households with 41 million square feet of retail space. Founded by crowd Cash Penney in 1902, the companys first out permit was opened in a Wyoming mining town under the name The Golden Rule, that signified its philosophy of treating customers the way Penney himself wished to be treated. Johnson believed that his Fair and Square pricing plan corresponded to the fails beliefs, Now if you go back to the founding of this company, James Cash Penney believed in anyday fair prices. He said, We dont mark goods up just to mark them down. We dont believe in sales.4 The company enjoyed years of rapid growth and expansion. By its 50th anniversary, annual sales exceeded $1 billion.It initially offered consumers one stop shopping as a mass merchandiser, selling soft goods, much(prenominal) as clothing, as well as hard goods, such as appliances, hardware, electronics, and sporting goods. Its retail business was joined by a mail order catalog in 1963 and an ecommerce website in 1998. However, following tough times in the 1980s, the company reorganized, phasing out its hard goods lines and refocusing on its soft goods to become a fashion oriented department store. But by its 100th anniversary, the company appeared to be running out of steam. Price-oriented mass merchandisers, such as Walmart and Tar run low, had garnered the lower end of the securities industry, while higher end department stores, such as Macys and Nordstroms, were catering to the upwardly mobile middle class.Although the economic recession of 2008 was difficult for all retailers due to consumers increasing frugality, middle commerciali se retailers, care J.C. Penney and Sears, were hit the hardest. By 2011, J.C. Penneys stores were old, often disorganized, and faded, and the brand and its merchandise were starting to happen dated. About 400 of its stores were located in small towns, such as Alpena, Michigan with a population of a little over 10,000. In such towns, there were often only few, if any, other department stores. The be 700 or so stores were located in major metropolitan areas, often in suburban malls, such as the Northshore Mall in Peabody, Massachusetts (15 miles labor union of Boston). undermentioned years of store closings, sales malaise, declining market share,slumping earnings, and weak stock market performance, activist investor and hedge free reind manager, William Ackman (HBS 92) obtained an 18% majority shareholder position in the company in 20102011. He was determined to turn J.C Penney around and extract its value, much of which was locked up in its vast real estate holdings that were e stimated to be worth $11 billion.5 J.C. Penney owned 400 of its retail stores and gainful low rents (an average of less than $5 per square foot) for the remainder. Specialty stores like Gap paid much higher rents (around $40 per square foot) for their retail space.6 Looking to shake up the company, Ackman was instrumental in luring Johnson to take the CEO position. Johnson was a big catch.In the 1990s, he was vice president of merchandising at Tar sterilize where he helped transform the mass merchandiser into a hot retail brand selling stylish yet affordable products. During his time there, Johnson negotiated a contract with designer Michael Graves, beginning Targets profitable partnerships with high end designers, which enhanced its brand image as a chic, fashion-forward retailer. Starting in 2000, he worked with Steve Jobs to develop the wildly successful Apple retail stores. Johnson was the brainchild behind the Genius exclude c erstwhilept, a free technical help and support ar ea staffed by sleep togetherledgeable customer service representatives, widely touted as one of the nigh advanced retail concepts of the end decade. Johnson was regarded by some(prenominal) as creative and determined according to a friend, What slew loved more about him than his talent was his persistence. He was just relentless.7 Johnsons deep retail experience unite with his wholesome charisma and boyish enthusiasm made him the perfect change agent. The media dubbed him the Steve Jobs of the retail industry and on the day his appointment was announced J.C. Penneys stock jumped 18%.An Industry under PressureJ.C. Penneys 2011 sales were lower than they were in the 1990s and the retail landscape was getting more competitive. Department stores, in particular, were under increased pressure. refreshful retail formats, such as big boxful retailers like Walmart that operated free standing supercenters selling mass merchandise and small specialty stores like Gap and J. Crew that we re located in shopping malls and offered specialised merchandise, were squeezing department stores out of the market (see Exhibit 2). An emerging challenge came from large international clothing retailers, such as HM and ZARA, that were predatoryly entranceway the U.S. market.These retailers relied on shorter product life cycles and partnerships with top designers to offer fast-fashion merchandise at relatively low prices. Johnson explained the challenge as he stepped into his new role all over the past 30 years the department store has become a less relevant part of the retail infrastructure, largely because of decisions the stores induct made. As America exploded with big box and specialty stores and new shopping formats, department stores abdicated their unique role instead of engaging the competition. They retreated from categories and assortments that made them distinctive.Department stores were once the most popular places for Americans to shop, offering distinctive merchan dise in elegant fits that provided special services, such as tearooms, salons, and on-site tailoring, and served as social hubs. Johnson reminisced, In the friendly age of department stores, Americas families came for more than just to shop. They were able to shed fun experiences and were offered a range of useful services. . . . If we want to transform the department store, we flip to conceive what happened. These stores were a pillar of the community.9 Johnson, unlike others, believed that department stores could be revived. Theres no reason department stores cant flourish. They can be peoples favorite place to shop. Theyve got all these strategic advantagesthe lowest cost of real estate, exceptional access to merchandise, scale to fix enormous marketing power, colocation with specialty stores. And people like storeswith huge assortments and one-stop shopping.10J.C. Penneys performance had been lackluster for quite an some time, and the retailer was losing market share even within the shrinking department store channel (see Exhibits 3 and 4). Competitors Macys and Kohls were nipping at J.C. Penneys business from both the high and low end. The average J.C. Penney customer only visited a store four times per year and sales per square foot ($156) were low compared to those of its competitors and the specialty stores Johnson hoped to copy (Gap $30011, Apple $5,626 in sales per square foot).12 Department stores and big box stores had increased their promotional budgets since the outbreak of the Great Recession in 2007 and most used blockbuster sales, coupons, and frequent price promotion to drive purchases. According to consulting firm A.T. Kearney, more than 40% of the items Americans bought in 2011 were bought on sale, up from 10% in 1990.13 Many retailers were eager to wean shoppers off of the big discounts that had become commonplace.Competition was in like manner increasing from online retailing. Yet Johnson believed brick and mortar stores were sa ve relevant, Physical stores are still the primary way people acquire merchandise and I think that will be true 50 years from now. . . . A store has got to be much more than a place to acquire merchandise. Its got to help people enrich their get it ons. If the store just fulfills a specific product need, its not creating new types of value for the consumer. Its transacting. Any website can do that.14 Many of J.C. Penneys largest competitors, such as Macys, seemed to have a differentview and were investing heavily in their e-commerce operations and in catering to what they called the omnichannel consumer, who accessed the retailer through the web, on mobile devices or in physical stores (often as part of the same purchase decision). Although it had been a pioneer in multi-channel commerce, with 2001 combined catalog and web sales of nigh $3.4 billion, J.C. Penneys ecommerce sales had stagnated over the last three years while those of Macys and Kohls had grown substantially during t he same time frame.15 (See Exhibit 5 for E-commerce sales growth).J.C. Penneys Radical MakeoverFollowing his appointment in November 2011, Johnson determined that nothing short of a complete overhaul would solve J.C. Penneys problems. Just two months after taking the helm, Johnson and his new recruited leadership team, culled largely from Apple and Target, announced a radical repositioning of the J.C. Penney business model and brand. Following the announcement, Forbes powder magazine dubbed J.C. Penney the most interesting retail bill of the year, proclaiming, This week, Johnson took a sledgehammer to the J.C. Penney way of doing business. Its the most arouse thing Ive seen in retail since Apple opened stores, again with Johnson at the helm.16 The turnaround plan evoked J.C. Penneys founding spirit, and Johnson declared it a reclamation of the companys heritage. J.C. Penneys website announced, Over 100 years ago, James Cash Penney founded his company on the principle of treating customers the way he wanted to be treated himself fair and square.Today, rooted in its rich heritage, J.C. Penney Company, Inc. is re-imagining either purview of its business in order to reclaim its birthright and become Americas favorite store. . . . At all visit, customers will discover straightforward Fair and Square Pricing.17 The four-year plan involved several distinct, yet integrated elements that touched every part of the business and were designed to re acquire a thriving age department store that appealed to all Americans, across age, income, and geographic demographics. As Johnson explained, We are going to rethink every aspect of our business, boldly pursue change, and create long-term shareholder value, as we become Americas favorite store. Every initiative we pursue will be guided by our marrow squash value to treat customers as we would like to be treatedfair and square.18New LogoJ.C. Penney had been tinkering with its brand logo, changing it three times in thre e years. In 2011, the company asked the public for help in redesigning the logo in a crowd-sourcing experiment. The winning design was submitted by a University of Cincinnati student and was uncover with much fanfare via social media. In 2012, Johnson scrapped this design and hired an agency to redesign the logo once again. The new logo evoked the American swag with red, white, and blue colors and the letters jcp in lower case font within a square that represented the new Fair and Square mantra. J.C. Penney, which some(prenominal) affectionately called Penneys would now be cognize as jcp. (See Exhibit 6 for the new logo.)New Brand SpokespersonOne of the most exciting and controversial developments of the plan was the announcement of comedian and talk show host Ellen DeGeneres as the new brand spokesperson. DeGeneres, who once worked at a J.C. Penney store as a teenager in Louisiana, appeared in television advert, developed J.C. Penney themed skits for her popular talk show, and tweeted about the company on Twitter. Johnson proclaimed DeGeneres to be one of the most fun and vibrant people in entertainment today, with great warmth and a down-to-earth attitude. . . . Importantly, we share the same fundamental values as Ellen.19Shortly after DeGeneres advertising debut, the conservative Christian group One Million Moms took offense, citing DeGeneres homosexuality asproblematic for the brands image and its conventional family shopper demographic. The group asked its members to boycott J.C. Penney and to call their local store manager to ask for DeGeneres removal as spokesperson. DeGeneres went on the offensive to defend her personal values and to sustain her relationship with her fans and with J.C. Penney, producing a witty, yet heartfelt response delivered on her talk show that quickly went viral on the social web. A firestorm erupted and played out on J.C. Penneys Facebook page, where both pro- and anti-gay posters pledged their support for and/or rejectio n of the retailer. J.C. Penney survived the controversy by standing firmly behind its choice of spokesperson. The protest event generated important positive press for the company and Facebook feedback was more positive than negative. Riding the wave of publicity, J.C. Penney went on to feature two gay dads in a widely touted dons Day advertising candidature.New Store DesignWhile the new logo and spokesperson were short-term fixes that could be executed quickly, Johnson knew from his experience at Apple that, to really make a difference, he had to make significant changes to the product offering, a longer term proposition. He embarked on a multi-year plan to re-energize and redesign J.C. Penneys product offering and its merchandising at retail. He began by forging new supplier relationships with top brands like Martha Stewart and hot designers like Nanette Lepore to create J.C. Penney-specific merchandise lines, a strategy reminiscent of Target. He then went to work to improve the quality of J.C. Penneys sagging and dated private tag brands, Worthington, St. Johns Bay, The Original Arizona Jeans Co, and Stafford, to reinvigorate them and restore their brand integrity. These efforts could also build on J.C. Penneys recent purchase of the Liz Claiborne brands (which, among others, included Liz Claiborne brand apparel, Lucky Jeans, Kate Spade and Juicy Couture) and the ongoing opening of about 300 Sephora locations inside J.C. Penney stores, which offered a select set of Sephora beauty care products.20 He envisioned the in-store retail environment as a series of interactive specialty Shops, along a visually engaging and vibrant Street, with a rudimentary Square that would serve as the social hub of the store. J.C. Penneys vast array ofmerchandise, currently hung on crowded racks and shelves, would be regrouped and merchandised in 80-100 stores-within-a-store, each meant to simulate the get experience of a specialty shop. The first shop to appear was devoted to jeans and featured a denim bar, trained fit specialists, and Levis innovative prune ID curriculum that helped women find the right jeans for their body type (see Exhibit 7). Plans for future shops included Joe Fresh and Mango. The company planned to install two to three new shops each month, beginning in August 2012, over a four year period. Many of the shops were designed to pull in younger shoppers, a famine in J.C. Penneys current customer base.The Street would consist of wider aisles with a fresh, clean look, more streamlined with less signage and bold, colorful, upscale graphics featuring the square from the new logo (see Exhibit 8). Each month would have its own unique personality and color-coded signage that changed the look of the store to freshen its appeal. Ten thousand square feet at the center of the store would be designated for the Town Square. In this area, J.C. Penney planned to offer complimentary services, such as gift wrapping, and special promotional events to create fun and excitement. During the summer of 2012, the company offered free hot dogs and ice cream, free Go USA Olympic t-shirts during the Summer Olympics, and free back-to-school haircuts for school children. Johnson summarized his vision for the new environment, We are going to make the store a place people love to come-just to come. Well transform the bargain foring experience not unlike what we did at Apple.21New Sales StructureTo support the new retail environment, Johnson needed to re-energize J.C. Penneys sales force. His goal was to create a team of specialists who were product experts, much like Apples Geniuses. J.C. Penney sales clerks had always been paid commissions based on how much they sold. This system back up sales clerks to sell aggressively to customers. Johnson felt that this aggressive sales culture did not fit with the new Fair and Square positioning and set out to change it by eliminating all sales commissions. It was a controversial decision, especi ally among the sales employees, many of whom had just been through a wave of layoffs and were nervous about keeping their jobs. Johnson explained his rationale for the change, A lot of great retailers dont use commissions. We never used them at Apple. . . . And I think its a better thing to do to pay people in advance for what you want them to do and let them look in the customers hearts and try to help them. . . . We think weve got a great way to do business for the middle class, where we really put a big bear hug around the middle class and help them look better and live better every day.22 But some employees expressed dissatisfaction, I must take offense at Ron Johnsons reason for eliminating commission. Ron Johnson should remember that J.C. Penney is not Target, we are better. When people come into our store they expect to be greeted, they expect someone to be available to help, they expect good service, said a sales associate. Another associate claimed, I lost about $250 per pa y period and Mr. Johnson thinks this is FAIR and SQUARE. From all of J.C. Penneys little workers, this stinks.Another lamented, We long-term employees are despondent at what we see around us. Ron Johnson may have a grand plan, and it may work, but we feel like he is destroying us in the performance of implementation. It has become an awful place to work, short-staffed to the point that we struggle to properly service what customers we do have.23 But without a doubt, the cornerstone of the change program was a new pricing scheme that many believed to be the riskiest part of the strategy.The New Pricing StrategyLooking at the numbers, Johnson believed that he needed to name and address the existing high-low pricing structure that had gotten out of control. J.C.Penneys customers had become hooked on the deals over the past ten years, the average discount to get customers to buy went from 38% to 60%24. At some point you, as a brand, just look desperate. J.C. Penney spent over $1 bill ion on price promotion, and the customer didnt even pay attention, he agonized.25 In his first report to shareholders, he spoke about the detrimental long term effects of lush price promotions, Plagued by the games of the industry over the last several decades, retailers-including J.C. Penneybarraged customers with a constant quantity stream of promotions that proved to be ineffective. Each time we participated in this pricing war, we were discounting our brand and eroding the trust and loyalty of our customers.The company announced its Fair and Square pricing plan in January 2012. The plan had three pricing tiers. First, the company reduced prices by an average of 40% to offer consumers an Every Day Fair and Square price. Second, every month the company ran a Month enormous Values Event with special pricing on seasonal items, marked down an additional 20-29%, meant to coincide with events such as Back-to-School and Fathers Day. Third, every first and third Friday of each month (p aydays for many working Americans) were designated Best Price Fridays, where J.C. Penney would offer special deals on items it was looking to liquidate, about 20% of the stores stock, at deals of about 1/3 off of the every day price. Each price point was supported by unique signage at retail, (see Exhibit 9). J.C. Penney sweep awayd its famous Doorbuster sales, such as those that it traditionally held on Black Friday, the day after Thanksgiving and the busiest shopping day of the year, that featured outrageously low prices onover 500 items from 400 a.m. to 100 p.m. Exhibit 10 shows an example of the different price tiers.Importantly, J.C. Penney avoided using the words sale and clearance in its messaging of the new program to consumers. Said Johnson, Sale is not in our vocabulary. . . . Every item in the store is priced to be its best price every day.27 The Fair and Square price was the only price listed on the price tag, moving J.C. Penney away from the practice of listing the man ufacturers suggested retail price (MSRP) and the sale price, which was intended to show customers how much they were saving relative to somewhat fictitious list price. In the highly competitive world of retailing, nearly no one priced goods at the MSRP. Breaking with another retailing best-practice, J.C. Penney ended all of its Fair and Square prices with .00 instead of .99, rounding up to the nearest dollar. Johnson also instituted a no restrictions Happy Returns return policy, designed to take the hassle out of returning items, even without a receipt.In effect, the new plan combined elements of two traditional pricing strategies. The Every Day Fair and Square prices represented an everyday-low-price (EDLP) strategy, while the Month Long Values and Best Price Fridays maintain some emphasis on high-low pricing. High-low pricing strategies are intended to allow retailers to use price discrimination to maximize the average price paid by customers who differ in their willingness to pa y. Customers who are highly price sensitive wait for sale days to purchase, use coupons and rebates, scour the crowded clearance racks to find a bargain, and take advantage of retailers gateway buster specials on big shopping days like Black Friday. Customers who are less price sensitive buy when it is convenient for them, tend not to use coupons and rebates due to the time it takes to clip and organize them, and rarely join in on door buster specials or clearance sales.Thus, the retailer reaps higher non-sale prices from many of their purchases. However, given the predominance of high-low pricing strategies across retailers in todays marketplace, even less price-sensitive consumers had become savvy about waiting for sales to buy or comparing across retailers to find the store offering the best prices that week. Instantaneous price comparisons weregetting easier, given the rise of mobile applications that allowed a consumer to scan a bar code on a product and find the lowest price for it at online retailers and nearby stores. Kohls was an aggressive high-low retailer, featuring small electronic signs on shelves throughout the store that displayed original prices and discounted prices.These signs allowed Kohls the flexibility to change prices instantly, to facilitate frequent, short-term sales. Marketing consultant Jonathan Salem Baskin offered his thoughts on the high-low practice retailers engage in, When no price is the price for an item, it means that instead retailers engage customers in a constant cat-andmouse game in pursuit of the truth. No individual store can own sale pricing each simply participates in a round-robin of discounted offers that its competitors have and/or will again match.28 Johnson felt that todays retail customer was savvy, The customer knows the right price. To think you can fool a customer is kind of crazy.2EDLP pricing strategies, such as that offered by Walmart, promise consumers that they will pay the same, low price every day. This frees customers from waiting for sale periods to purchase, and eliminates the need for retailers to offer coupons to drive purchase or to engage in constant advertising of price promotions via periodical newspaper circulars. EDLP is designed to make customers feel comfortable purchasing at the retailer without worrying that they could be getting a better deal somewhere else or at another time. In general, most department store retailers used high/low pricing strategies. Macys and Sears had flirted with EDLP pricing in the past but both had largely prone it once they realized how addicted department store customers were to sales, coupons, and other discount programs.AlthoughMacys still offered a limited set of items at an everyday value price, it heavily supplemented this practice with aggressive coupons and frequent sales events for the majority of the goods it carried. Macys customer Marietta Landon summarized the promotion addicted retail climate, Especially Macysthey make every weekend a sale with saving passes and advertising galore.30The new pricing strategy was a big shift for J.C. Penney, a company known and loved for its JCP Cash coupons distributed to customers via direct mail and email, its RedZone Clearance aisles, and its weekly circulars advertising that weeks price specials. The Fair and Square pricing program would eliminate all coupons and weekly circulars instead the company would distribute a high quality, editorial content-heavy glossy magazine each month to highlight its Monthly Values. The 96page magazine was as much a branding vehicle as it was a promotional one. $80 million in promotional funding would support each Monthly Value event.J.C. Penney now promised its customers that they would not have to jump through hoops to get a good price. Johnson hailed the strategy for its simplicity and transparence and the way it respected customers, People are disgusted with the lack of integrity on pricing,31 adding that We want shoppers to shop on their terms, not ours. Johnson intimated that By setting our store monthly and maintaining our best prices for an entire month, we feel confident that customers will love shopping when it is convenient for them, rather than when it is expedient for us.32 Michael Francis, J.C. Penneys new president, was excited about the new pricing moves, We are redefining the J.C. Penney brand so we become a store for all Americans, by offering an experience they cannot get anywhere else.This will start by freeing consumers from the barrage of promotions and undifferentiated shopping experiences they have become used to and replacing it with something entirely fresh and new that is transparent in every aspect of our store.33 He added, It will be a breath of much-needed fresh air and give customers reasons to visit J.C. Penney more often than ever before. Our objective is to make our customers love to shop again.34 Francis was recruited by Johnson from Target and offered a signing bonus of $12 millionand a total compensation package worth $44.7 million. He was charged with managing the marketing and merchandising efforts.Reactions to Fair and Square PricingIndustry observers could not contain their noticeable opinions on the new pricing strategy. Some called the move refreshing, daring and probably exactly what the retailer needs, noting that its a shocking move for any retailer, let alone a department store where high-low pricing and promotions have long been the norm.35 But others were far more skeptical. Pricing consultant Rafi Mohammed proclaimed, J.C. Penney lacks the differentiation to make this pricing strategy successful. . . . When selling a relatively undifferentiated product, the only lever to generate higher sales is discounts. Even worse, if competitors drop prices on comparable with(predicate) products, J.C. Penneys hands are tied-it is a sitting duck that cant respond.36 Mohammed also noted, J.C. Penneys Every Day prices will not be as low as the bigg est discounts that it once offered.Instead, its pitch to customers is why play the wait for the rock-bottom price game when Penney offers pretty good prices every day?37 Ignoring the skeptics, Johnson was committed to his new pricing plan, rolling it out across all stores on February 1st, after deciding not to conduct market research to test its appeal with customers, We debated whether there was a way to test. . . . We would have needed everyone to run the old business model and would have had to add new people to run a test in 10 percent of our stores. . . . We knew the customer would love the new strategy. We decided to get on with our future.38 found on his experience at Apple, Johnson also believed thatcustomers didnt always know what they wanted it was up to companies to lead the way, You cant follow the customer. Youve got to lead your customers confront their needs and meet those needs, even before they know what they want.39A lot was riding on the decision. COO mike Krame r explained, We are fundamentally reimagining every aspect of our business and we fully expect the bold and strategic changes we are making to our operations will result in improved profitability. This should enable us to fund the transformation of J.C. Penneys store experience, while at the same time returning value to shareholders with steady earnings growth.40Communicating Fair and SquareDeGeneres was featured in a new advertising campaign to usher in the new Fair and Square positioning. Bearing the tagline Enough. Is. Enough, the campaign encouraged consumers to revolt against complex pricing structures, never-ending sales, an overabundance of direct mail circulars and coupons cluttering their mailboxes, and the hassles of returning unwanted products without a receipt. In the ads, DeGeneres travels back in time to antiquated Rome, Edwardian England, and the Wild West to learn if todays confusing price environment was always the norm.She encourages customers to reject the crazy price environment. The creative campaign was witty and contemporary many found it reminiscent of Targets award-winning advertising. It was quite a departure from J.C. Penneys previous campaigns that were more normal of department store messaging. Launched during the Academy Awards broadcast, the ads appeared to be a hit with consumers. Ace Metrix reported that the ads scored well above average on persuasion and watchability metrics and achieved a personal best score for J.C. Penney.41Initial ResultsIn the first three months following the launch, 67% of products sold at J.C. Penney were purchased at the Fair and Square price, the highest price the retailer listed. Johnson could not hold back his satisfaction, This is profound. People are now buying at the first price, the right price. Thats the dream of every retailer.42However, trouble was looming on the horizon. Through mid-March, mothers, a critically important target market for most department stores, steadily scored J.C. Penney lower on valueperception scores. These women, suddenly not receiving coupons and not seeing the weekly price promotions in the circulars, were downgrading their opinion of whether J.C. Penney offered good value for the money.43 This was despite the fact that J.C. Penneys prices during the time period were actually quite competitive. A Deutsche Bank analyst report showed that for a random basket of 50 identical items, J.C. Penney was 9% cheaper than Macys, and 26% cheaper than Kohls.Consumer research firm BIGInsight reported negativism among adults 18+ for whether J.C. Penneys advertising campaign was Hot or Not? and showed Macys gaining ground on J.C. Penney in womens apparel shopping trips following the launch (See Exhibit 11). Morgan Stanleys Michelle Clark reported consumer survey results revealing that Shoppers think that the J.C. Penney of old actually offered better value than the fair and square model introduced a few months ago. Of the consumers who had been inside a J.C. Penney store since February, more cited higher prices (rather than lower) at the department store. In fact, only 16% of shoppers associated Best Prices with JCP. Furthermore, customers cited that bargains were harder to find and fewer aisles with deals were evident (see Exhibit 12).45 Loyal J.C. Penney customers were moving away from the retailer. One shopper, Wendy Ruud, complained that she was no longer receiving coupons from J.C. Penney and was shopping more frequently at Target and Walmart, The closest J.C. Penney is about a half hour away from me.If I dont get a specialdiscount, its not worth the trip, she said.46 Another shopper e-mailed the Huffington Post apothegm, They are catering to the younger shopper, and it isnt the younger shopper that kept them afloat.47 A third who considered herself frumpy and proud, commented, Hes working hard to de-frump the store without considering that many if not most of its customers might have shopped there precisely because they like the more conservative frumpy look.48 These early indicators played out in J.C. Penneys first earnings report following the launch of the new plan. Johnson had to announce a significant earnings loss ($163 million) based on plummeting sales revenues (-19% overall, with e-commerce sales dropping 28%), gross margin compression (from 40.5% to 37.6%), and decreasing customer conversion. Johnson asked investors to be patient, calling the first quarter sales drop the price were paying to get integrity back.49 He held fast to his convictions, We had to make the bold step. Its one big year we have to go through. Its really hard but well get through it.50 Investors showed no patience, sending the companys stock down 20%, the biggest exclusive day drop in over four decades.51The critics did not waste time to pile on Johnson. Time columnist Brad Tuttle wrote, JC Penneys nub seems to be one that some shoppers dont want to hear. They like playing games and hunting for deals, and the markdown from t he original price is how they keep score. By eliminating coupons and most sales, JC Penney has been saying it doesnt want to play games anymore. That sounds wonderful, but among certain shoppers, its the equivalent of grabbing the ball and taking it home. No more games, no more fun-and not much reason to visit JC Penney on a regular basis anymore. If, for the most part, a stores prices are going to remain the same tomorrow, and next week, and the month after that, theres not much incentive to browse the aisles for special deals today.52A Forbes columnist concurred, By taking away the weekly sales customers loved, Johnson abandoned his core JCP shopping enthusiasts. In effect, signaling to the core JCP enthusiastsshoppers who have sustained J.C. Penney through its years of retail muddling, that they no longer mattered. He confused them, and he pissed them off.53 The Motley Fool sarcasticallyquipped, The silver lining in J.C. Penneys awful report is that Sears struggling with its own dismal results has someone it can laugh at now.54Macys CFO Karen Hoguet was crowing that her company was benefiting from J.C. Penneys missteps, reporting that sales in Macys stores that shared out a mall with J.C. Penney were up significantly since the changes.55 And J.C. Penneys apparel suppliers were becoming anxious, as their sales dropped precipitously, some as much as 70% over the prior year. One prominent supplier indicated that he was increasing his business with Kohls to make up for the shortfalls at J.C. Penney.56These developments were sobering for Johnson yet he remained unfazed, Its been tougher than we anticipatedYou know, we expected to be down. We are down a little more than we thought, but not enough to change the strategyWere treating this company as a startupWere inventing a whole new model to do businessIt is a one year transition thats part of a multi-year transformation. But once we get to one year of de-promoting or repurchasing our integrity, I fully expect u s to grow. And so weve just got to get through that year. And well get through it.57 Speaking at Fortune magazines Brainstorm Tech conference in July, Johnson reiterated his support for the new pricing strategy, claiming that his board was totally supportive.When asked if he had a contingency plan whereby the company would revert back to high/low pricing, Johnson swore it was not in the cards, It wont happen while Im here because I know its not the right thing to do. And I know this is what connects completely with our own unique heritage. And every longstanding company has a DNA in its core thattypically goes back to its founder. And when you reconnect with that, thats when good things happen. Thats what Wal-Mart has had to do. And its really led to great success. Thats what Apple had to do when Steve came back. Thats what were going to do.58Making Some AdjustmentsAs J.C. Penney management tried to decipher the disappointing results, much of the blame was put on the marketing execu tion and on customers stubborn reliance on price promotions. Mike Kramer, J.C. Penneys new chief operating officer expressed his frustration, Coupons, that drug. We did not realize how deep some of our customers were into this. . . . We have got to wean them off this and educate our consumers.59 Johnson blamed the marketing execution, claiming that it failed to clearly communicate the new pricing strategy, Our execution wasnt what we needed. Our pricing is kind of confusing. Our marketing kind of overreached Now the most important thing is to educate consumers on the price changes and make sure the core customer understands J.C. Penney still has products they love, at exceptional value, every day.60 Francis took the fall for the poor earnings, unawares leaving the company a mere eight months after he started as president.Following Francis departure, Johnson took responsibility for marketing and merchandising, believing that customers just didnt understand the story behind Fair and Square. He tweaked the marketing plan, adding five additional Best Price Fridays to the calendar, including the important Fridays anchoring Memorial Day Weekend and Black Friday. The advertising creative was changed to incorporate a harder-hitting Do the Math positioning (See Exhibit 13 for an example). In June, J.C. Penney reintroduced the S word sale into its advertising to help explicate that its Best Price Friday deals actually extended through the weekend until all inventory was sold. Under pressure, Johnson speculated what his old mentor, Steve Jobs, who passed away in October 2011, would have advised, I think Steves advice would be dont worry about what others say.Trust your instincts. Do the right thingStay the course. But he would also say the essence is in the simplicity. And so he would have liked where we are going on pricing, but he would have said Youve got to clean it up. Youve got to be more direct.61 Johnson buckled down, What you cant do is chicken out.If you had looked at the data on the Genius Bar after a year and a half, we should have taken it out of the store. But it was something I believed in with every bone in my body.62 He continued, The world moves by innovators and innovators have to have the courage to imagine something that hasnt been done before and the conviction to see it throughIt is really hard. It takes a lot of courage. Youve got to be able to have a few arrows shot in your back.