Back in January, J.C. Penney (NYSE:JCP) announced plans to return to the appliance market after a three decade absence. Since beginning in February with a small-scale test in just three metro areas, it has steadily expanded its ambitions, intruding into one of the last remaining areas of strength for struggling retail giant Sears Holdings (NASDAQOTH:SHLDQ).
In May, J.C. Penney began selling appliances nationwide through its website. More recently, it has started opening appliance showrooms in more stores, as part of a broad rollout that will put appliance showrooms in nearly 500 J.C. Penney locations by the fall. Sears is trying to defend its market share in appliances through aggressive promotions, but it is fighting a losing battle.
A price war begins
Not surprisingly, J.C. Penney is offering substantial discounts to build customer awareness of its new appliance sections. The company has been offering discounts of up to 20% on name-brand appliances, according to Fortune. That's fairly significant in a category where initial markups tend to be modest.
J.C. Penney is also matching competitors' prices, offering 0% financing for up to 24 months on purchases of at least $799 (when charged to a J.C. Penney credit card), and providing free delivery and installation for purchases of $299 or more.
Sears has responded with even more aggressive promotions. Recently, it has been advertising discounts of up to 40% on appliances, though the biggest savings at Sears seem to be reserved for its Kenmore private brand.
In all likelihood, J.C. Penney will pull back on discounting over the next few months, once it has gained a firm foothold in the appliance market. Still, with one more competitor in the appliance market, price competition is likely to remain elevated.
Sears can't afford this war
This appliance price war highlights how Sears' long string of sales declines and massive losses has made it a target for competitors. That's especially true for J.C. Penney, which has significant overlap with Sears both in terms of customers and store locations.
Sears has made no secret of its plans to close or downsize unprofitable stores. Therefore it is in J.C. Penney's interest to put more Sears locations in the red by being aggressive in the appliance market. J.C. Penney is hardly a healthy business, but it's not in immediate danger of going bankrupt. It can afford to forego some profit now to push a key competitor out of business.
Sears doesn't have any good way to respond to this onslaught. Having burned through more than $5 billion in the past three years, Sears can't afford to operate money-losing stores just to show that it won't be bullied.
Sears' only hope of staying afloat is to dramatically pare back its retail footprint in order to reduce its costs. Unfortunately, each time it closes a store, it cedes a little more market share to rivals like J.C. Penney, encouraging them to be even more aggressive.
Hurting Sears may be J.C. Penney's measure of success
J.C. Penney isn't likely to become a major player in appliances overnight, even with aggressive promotions. But given how poorly its home section has performed in recent years, J.C. Penney's new appliance showrooms don't have to produce much profit to do better than the sections they are replacing.
As a result, J.C. Penney can afford to run a marginally profitable appliance business for the time being, undermining one of Sears' few remaining profit centers. The more J.C. Penney damages its rival's profitability, the faster Sears is likely to close stores. In the long run, this will likely lead to Sears' utter demise -- and a huge windfall for J.C. Penney.
Adam Levine-Weinberg owns shares of J.C. Penney. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.