J.C. Penney lost $163 million in the first quarter, compared to a gain of $64 million a year ago; sales fell 20%, while comparable store sales dropped 18.9%, and the store is discontinuing its quarterly dividend. 

This is despite a new approach to pricing recently announced by CEO Ron Johnson that relies less on discounting and the ever-present coupons, and more on everyday prices and special value offers. But given the figures announced this week, it seems that consumers aren’t buying into the new strategy – at least not yet.

KnowledgeToday asked two Wharton marketing experts for their views on the new strategy, and what Johnson, a former executive at Apple, should do moving forward.

Wharton marketing professor Barbara Kahn, faculty director of the Jay H. Baker Retailing Center, says she was initially excited about the new strategy. “In theory, it makes a lot of sense. It is not only about the pricing strategy, which is basically a return to everyday low prices, but it is also a merchandising strategy – including new brands in a store-within-store setup designed to create excitement.”

But she cites two problems with the pricing strategy’s implementation. The first is that customers don’t understand it, and may have trouble grasping it in the future as well, because “they have become addicted to high/low pricing in which a high price is listed to communicate the value of the good, and then a coupon or price discount is issued to signal a ‘good deal.’” Under the new strategy, Kahn says, consumers have “no reference price to signal what the ‘fair’ price should be. They [are not used to] buying on absolute price figures, but on relative price figures, and they are having trouble adapting.”

The second problem, Kahn says, is that the new look/new brands part of the strategy will take “a long time to fully implement. I think Ron Johnson said close to five years. So the consumers are not seeing the new JCP [J.C. Penney] in the stores yet. The employees who are there are the old employees for the most part, and they don’t really know how to [explain] the new strategy.” Unless JCP does a better job of communicating to the consumers that the prices in the store are fair and “low,” the strategy will not work, she notes.

Kahn also points out that before Johnson joined Apple, he worked with Target, whose approach to merchandising is similar to Penney’s. “Target has been doing well, so it is clear this type of strategy can work. But JCP is a different store, and department stores have a different relationship with consumers than do mass merchandising stores.” Macy’s, which was the subject of a recent Wall Street Journal article describing its new on-line sales distribution centers, is also doing well. “The real competitor here, though, is probably Kohl’s,” says Kahn. “Kohl’s responded in part to the JCP strategy by offering new discounts and coupons, which, at least initially, were well received by the customers.”

If Kahn were Ron Johnson, what would she do in the coming year? Perhaps offer “new cues so that the customer understands the low price,” Kahn says. “For example, follow some sort of ‘low price guarantee’ strategy, or do promotions that [list] the price at JCP and the comparative price at a competitor’s store, and then show how it is cheaper at JCP. The customer is looking for in-store cues that these prices are indeed low.” The commercials are not effectively communicating that fact, Kahn adds, “and the message is not being reiterated in the store.”

In addition, she says, “the faster Johnson can get some merchandising excitement into the store, the better. He might use events – such as the Target Missoni campaign, which was a huge success – to draw traffic.”

Wharton marketing professor Jagmohan Raju offers a general look at pricing strategy. In theory, he says, “not discounting essentially means you will not do any price discrimination. If done well, price discrimination can lead to higher profits and sales [by offering] discounts to people who would not have bought otherwise. In practice, however, discounts are often used by people who would have bought the product anyway. This is where the dilemma comes in.”

Discounting can also be used as a loss leader strategy to get people in the store who will then buy other items, he adds. So even if people “who would have bought the product anyway buy it on discount but buy many other things also, the strategy can work. Discounting also allows one to advertise prices and create an image of good prices, which always helps, especially when your clients are short of money or not rich to begin with.”

The problem with the strategy is sequencing, Raju says. “For the strategy to work, one should not be able to compare prices across stores, which means you must have products that only you sell — or if others sell it, they sell it at the same price. This requires a strong brand, what we might call [in the apparel category] ‘private labels’… But people like variety in apparel, so relying solely on your brand is often not easy, especially when you are catering to the mass market.” If retailers rely on multiple brands to offer variety, and these brands sell in other stores also, then “price comparisons are easy,” Raju notes. “Discounting, therefore, [is offered as a way] to attract the other stores’ customers.”

As for Johnson’s strategy for Penney, “it might work,” Raju says, “but then JCP might become a smaller niche store with a strong brand – smaller, but profitable.”