Pinching Pennies at J.C. Penney Inc.

The department-store chain is giving consumers what they said they wanted; now let's see if they respond.

Feb 1, 2014 at 11:15AM

J.C. Penney (NYSE:JCP) is raising prices! For a retailer that's clinging to life by a thread because it's finding it difficult to attract customers, it seems sheer lunacy to increase prices, as that would surely keep customers away, right?

No worries: The department store chain is only raising costs now so that it can cut them later on.

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Sources report that Penney is quietly raising prices ahead of St. Valentine's Day so that it can provide blotto blowouts in time for the next holiday rush. The New York Post says the department store has been advertising discounts of as much as 40% to 60% on jewelry, a popular item for the day of love, cuts that are much steeper than the 20% to 0% discounts it previously offered. But in the run up to the sale, the chain is raising its prices, which will presumably preserve its margins.

This is the sort of idiocy former Penney CEO Ron Johnson was trying to stop when he switched store policy to low, everyday pricing. Customers, though, abandoned the retailer in droves, heading for Macy's (NYSE:M) and Kohl's (NYSE:KSS), which continued to offer the artifice. Where revenues for Penney's two rivals were up almost 5% and 2.5%, respectively, in 2012, the time period in which the policies were implemented; they plunged more than 24% at the troubled chain. It's clear Johnson overestimated the intelligence of the consumer, and for that he was excoriated and ultimately ousted.

Listen -- there were a lot of problems with many of the policies Johnson implemented, or, perhaps more correctly, in how he implemented them. For example, rather than testing them in limited, sample markets, he rolled them out immediately nationwide in what could best be described as a shock to the system. The result was the patient nearly died, and it still might unless current CEO Myron Ullman can reverse course.

But some of the emergency measures Johnson undertook were necessary. People seem to forget that when Ullman was leading the company before Johnson took the reins, the department store was already hemorrhaging sales, and the former Apple executive believed strong measures were needed to reverse course. Maybe his biggest sins were in thinking clothes could be sold like computers and in believing his customers would rationally react to the new pricing policies.

He remodeled J.C. Penney stores to make the layout a more Zen-like experience. Instead of racks upon racks of clothes, he cleared out the aisles and created store-in-store "boutiques," opting for brand-name designers instead of house favorites. Cash registers were eliminated in favor of employees walking around with iPads to assist with checkout, which undoubtedly had its stodgy customers walking around wondering where the heck they go to pay for the stuff. Eventually they just left the store and didn't buy anything. Or return.

The flat pricing policy also fell flat. Accustomed as they were to using their sharp elbows needed to get those big discounts, the customer felt in an alien landscape when there was nothing special about buying a T-shirt for $6 that was marked $6. The customer indicated that he or she would rather spend $6 on a shirt that with a $10 price tag.

And that's what Ullman is doing now, bringing back the fake pricing its customers (and Wall Street pros) said they wanted. The Christmas shopping season got off to a bang in November with big doorbuster sales, and though by all appearances it fizzled out by the time the holiday actually rolled around (as it seemingly did across much of the retail landscape), Penney is bringing it back in time for its customers to express their love for the store, it's pricing policies, and their sweethearts.

Whether this Valentine's Day scheme will work remains to be seen, as we're still waiting for some concrete evidence it panned out for Christmas, but whatever J.C. Penney's critics will say about this period, it won't be that it didn't give the customers what they wanted. 

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