NEW YORK (AP) – Turns out, American shoppers don’t prefer predictable pricing over blockbuster bargains — at least not yet.
Plano-based J.C. Penney on Tuesday reported a larger-than-expected first-quarter loss that missed Wall Street’s already low expectations largely because customers were turned off by the retailer’s new plan to get rid of heavy discounting periodically throughout the year in favor of everyday low pricing.
The idea of the strategy, which was rolled out on Feb. 1, is to discourage shoppers from waiting for the nearly 600 sales Penney used to offer each year. But the move has backfired: It seems many faithful Penny customers have stopped shopping altogether.
“Consumers want deals, and they’re willing to wait for them,” said C. Britt Beemer, chairman of America’s Research Group, a consumer research firm. “When you train customers to shop at big discounts, that customer is not going to change.”
Take Wendy Ruud, 49. She used to visit J.C. Penney near her home in Boca Raton, Fla. every two weeks. But she hasn’t been back to the store since early this year when she stopped getting coupons from the retailer in her email inbox.
“The closest J.C. Penney is about a half hour away from me,” said Ruud, who has been shopping more at Target and Wal-Mart for clothes for herself and her two teenage girls. “If I don’t get a special discount, it’s not worth the trip.”
Penney’s disappointing results offer the first glimpse into how the bold pricing strategy is playing out with customers. They underscore how difficult it is for a company to fundamentally change the way customers behave. Industry watchers say Penney’s faces an uphill battle in attempting to shift the mindset of U.S. shoppers, who increasingly have become accustomed to and spoiled by fat discounts during the economic downturn.
The company lost $163 million, or 75 cents a share, in the three months ended April 28. That’s down from a profit of $64 million, or 28 cents a share, in the year-ago period. Revenue dropped 20 percent to $3.15 billion.
Results fell well below the penny loss on revenue of $3.45 billion Wall Street had expected. Revenue at stores opened at least a year — a figure used to measure a retailer’s health — was down 18.9 percent, a much steeper fall than the 11.4 percent drop analysts polled by FactSet were forecasting.
The results illustrate just how risky the pricing plan is for the retailer. The strategy is the first move by new CEO Ron Johnson — a former Apple Inc. executive who started in November — to transform every aspect of the department-store chain from the brands it carries to the way it positions them in stores. Penney has said for months that it will take time for the pricing plan to work, but the poor results put more pressure on Johnson to convince investors that he’s on the right path.
Investors had put a lot of faith in Johnson, who was the mastermind behind Apple’s successful retail stores and who also spearheaded the cheap chic strategy at Target in the 1990s. But they’ve soured on the plan recently.
Penney shares soared 24 percent to about $43 after Johnson laid out the strategy in late January. But since the middle of February — after the plan was rolled out in stores– investors have become increasingly nervous, sending shares back down to trade around $34. After the company reported its disappointing first-quarter results after the markets closed on Tuesday, its shares fell 12 percent to $29.30 in after-hours trading.
Wall Street analysts and others in the retail industry are carefully watching how Penney fares. If the new pricing takes off, other chains could follow. Indeed, many clothing chains have been trying to figure out how to wean shoppers off of the big discounts that became commonplace during the Great Recession.
“This is an ambitious task. If Penney succeeds, (stores) will have to decide whether they’ll follow,” said Chris Donnelly, managing director of Accenture’s retail practice. “If not, they’ll have to make adjustments to their promotional pricing to compete.”
Analysts say part of the problem with the pricing plan is that Penney hasn’t effectively communicated it to consumers. As part of the plan, Penney got rid of its hundreds of sales and rolled out a three-tier pricing strategy: everyday prices that are about 40 percent less than what they were a year ago, one monthlong sale each month on select items and clearance events during the first and third Friday of each month.
But some observers say some of the company’s ads to familiarize customer with the plan — which mimic rival Target’s whimsical style — are confusing. In one TV spot, for instance, a dog donning a birthday hat continuously jumps through a hula hoop that a young girl is holding. The text reads: “No more jumping through hoops. No coupon clipping. No door busting. Just great prices from the start.”
“I think they’re trying to be too cute and entertaining,” said Laura Ries, president of Atlanta-based brand strategy firm Ries and Ries, which has worked with such names as Walt Disney and Microsoft. “I think a more direct message would work better.”
Analysts say that Penney will have an easier time conveying the everyday pricing plan once shoppers start to see new brands and other changes that the retailer is making in the stores.
For instance, in August, the chain plans to add 100 little shops within its stores that will either focus on one brand or a variety of labels. The shops, which include new brands such as Martha Stewart and designer Nanette Lepore, will replace the sea of clothing racks that have become typical in department stores. Penney also is planning to add spots in its stores called Town Squares that will offer services and advice.
“I am rooting for Ron Johnson to hit a home run,” said Ronald Friedman, the head of the retail group at Marcus LLP, an accounting firm that works with clothing companies. “But it won’t happen overnight. This is a process. It will take between 12 to 18 months.”
(©2012 CBS Local Media, a division of CBS Radio Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)
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