JCPenney's Pricing Fix Cost $4.3 Billion in Sales

Transcript

Every figure is a link to the document it comes from.

0:00 · Cold open

If you wait for sales, this story is about you. JCPenney tried to make you stop. Why did it cost the company $4.3 billion in sales?

In March 2012, as the plan began, JCPenney's own annual report warned that the new pricing "could result in a prolonged decline in sales."

A year later, the next report used almost the same sentence. The changes "have resulted in a prolonged decline in sales."

This is the story of the year between those two sentences.

0:34 · The question

In November 2011, JCPenney hired a new chief executive. Ron Johnson had run Apple's retail business. Fortune called him the Apple Store's creator.

Three months later, on the first of February 2012, he changed how the company priced almost everything it sold. He called it Fair and Square.

He had unveiled the plan the week before, to about 700 guests on a pier on New York's Hudson River. Fortune said the staging had "the kind of fanfare best suited to the launch of a new iPhone or iPad."

JCPenney was founded in 1902. It had been selling to middle America for 110 years, and Johnson bet its sales on one idea about what those customers wanted.

Why did someone with his record think it would work? And what did he miss?

1:28 · Before the decision

Start with what he inherited.

In 2011, JCPenney ran 590 different sales. In Johnson's own words, "the price changed every hour."

Promotions need advertising. The company spent about a billion dollars a year on marketing. Yet each square foot of its stores sold only about $200 of goods a year, the lowest figure among its competitors.

Sales weren't growing either. In 2011, comparable sales were, in the company's words, "essentially flat."

So the old way wasn't working. Shoppers had learned to wait. A price on a tag meant very little, because next week it would be lower. The company was paying to advertise discounts on prices it had raised in the first place.

To Johnson, that was a business teaching its customers not to believe it.

2:20 · The move

Here's what Fair and Square actually was, because it's usually described wrongly.

JCPenney didn't stop having sales. It replaced hundreds of them with three types of price. There was an everyday price. There was a monthly special, about 30 percent off. And there was a "best" price, around 40 percent off, on the first and third Fridays of every month. On top of those came twelve promotional events a year, one for each month.

What went away were the coupons and the constant markdowns.

Johnson explained his thinking later that year. "It's hard to have integrity," he said, "when you artificially mark up products just to mark them down."

He had a commercial reason too. He wanted better brands in his stores, and he believed they would never come to a discount house. "No great brand wants to be put into that environment, because you're devaluing the brand."

Price was only the first piece. Each store was to be rebuilt as a set of small shops along an inner street, around a central square. JCPenney struck a deal with Martha Stewart's company and sped up its purchase of the Liz Claiborne brands. Fair pricing was meant to make the store a place those brands would want to be.

He pointed to Walmart. By his account, when Walmart moved to everyday low prices in the 1980s, its sales fell hard at first too.

He expected pain. He called 2012 "a one year depromote": a year of weaning shoppers off sales. In January he had said the change could take four years. He even said he didn't know how big the company would be at the end of it. "Is it $15 billion in revenue, is it 14, is it 13.5?" He would treat JCPenney, he said, "like a start-up."

And he had a story about patience. When Apple opened its first Genius Bars, he said, "nobody came." People at Apple wanted to close them. He kept them open.

Steve Jobs, Johnson said, "frequently took a contrary perspective, and he stuck to his vision." He meant to do the same.

4:22 · Reality arrives

The first quarter of Fair and Square ended in April. Comparable store sales were down 18.9 percent.

Fewer people came in. Store traffic fell about ten percent, and the share of visitors who bought something fell about five percent.

The second quarter was worse, down 21.7 percent. By midsummer the company had cut back its marketing, it said, "as we reconsidered our approach to pricing and marketing."

That July, on stage at a Fortune conference, the interviewer put the obvious objection to him. People like sales, she said, because "they feel they've gotten something over on somebody."

Johnson didn't give ground on the idea. He did give ground on how it had been done. "Our pricing's been kind of confusing. Our marketing overreached." The new branding, he said, "didn't really communicate with our core customer." The monthly special would go.

Here is the assumption underneath all of it.

At Apple, Johnson sold products people already wanted, at prices that rarely moved. Nobody walked into an Apple Store hoping for a coupon. The product was the reason to come.

JCPenney's customers had spent years being given a different reason. For a lot of them, the discount was the point of the trip. His lessons from Apple, about integrity and about holding your nerve, were real. He learned them with customers who never needed a deal to walk in.

5:48 · The dip that didn't end

He had planned for a dip. A dip has a bottom.

Comparable sales fell 18.9 percent in the first quarter and 21.7 in the second. Then 26.1 percent in the third. Then 31.7 percent in the fourth. Every quarter was worse than the one before.

Online sales fell further still, down 33 percent for the year. The company later explained why: on the internet, a customer can search for a competitor's promotion in seconds.

The switch had cost money before it even began. Every item needed a new ticket. Paying staff to re-ticket the stock, and buying the tickets, was part of a hit that took 59 cents a share off earnings in the last quarter of 2011. Nearly thirty thousand sales staff came off commission.

Then the old stock had to go. JCPenney took $155 million of markdowns on merchandise that no longer fit the plan. Restructuring and management changes cost another $298 million. Pension expense added $315 million more.

Not all of that came from the price tags. It was the cost of changing everything at once.

7:03 · Outcome

For the full year, JCPenney's net sales fell by $4.3 billion. Comparable sales were down 25.2 percent. The net loss from continuing operations was $985 million.

The annual report carried the sentence we started with. The changes "have resulted in a prolonged decline in sales."

In April 2013, seventeen months after he arrived, Ron Johnson left. The board brought back Myron Ullman, the chief executive he had replaced.

By spring 2013 the company was moving most of its business back to promotions. Under new management, it described the fall more bluntly. The decline was "primarily related to the change in our pricing strategy." Those strategies, it said, "did not resonate with our customers."

The brands went the same way. Some of JCPenney's own labels had been dropped in 2012 to make room for the new ones. In 2013 they came back. The new mix, the company said, "has not resonated well with our customers."

Going back didn't rescue the next year either. In 2013, JCPenney lost $1.388 billion.

8:17 · What it means

It's easy to tell this as the story of a man who wouldn't listen. That isn't quite fair. The old model had stalled. His reasoning hung together, and his own company had warned, in writing, that it might hurt.

What he misjudged was who he was selling to. A price isn't only a number. For a lot of shoppers it's also the small win of having beaten it. Take that away and you haven't made shopping simpler for them. You've taken away the reason they came.

JCPenney asked its customers to give up the discount.

A few years later, another company tried the opposite. It handed customers a discount it couldn't afford. That's MoviePass.