J.C. Penney or Sears: Which Struggling Retailer Is Better at Retaining Customers?

I often tell people that I've "paid my penance" given that I've previously worked in the retail sector. However, if you haven't worked in retail you're likely to assume that there isn't much to selling goods and providing good customer service. The reality is that it's much more complicated than you might think.

Changing fashion and accessory trends of consumers, uncontrollable acts of God wreaking havoc on your bottom-line (the polar vortex for example), and razor-thin margins complete with abundant competition for similar goods are just some of the challenges that department store retailers contend with on a regular basis. It's amazing that some of the companies around today managed to survive at all given the hardship they endure.

Source: Andigraf, Pixabay.

The woe of two struggling retailers
Of course, some department store retailers are thriving, even in today's tough spending environment, while others, such as J.C. Penney (JCPN.Q) and Sears Holdings (SHLDQ), are clinging to memories of a time when things weren't so bad and hoping for the best moving forward. Both companies clearly have issues to work through, but only one has a clear edge in its ability to drive consumer loyalty better than the other, giving it a better chance to survive.

Today, utilizing research from Brand Keys, whose proprietary Customer Loyalty Engagement Index affords us the ability to rank businesses across 64 industries from best to worst in terms of customer engagement and loyalty, we're going to take a look at which department store really is the worst when it comes to driving repeat business.

However, before we do that let's take a look at why customer engagement and loyalty is important, examine the company at the top of the pack to understand what it's doing right, and then dive into what's caused so many problems at J.C. Penney and Sears. Then we'll better understand why Brand Keys chose one of these companies as its worst in terms of customer loyalty for department stores.

Why consumer loyalty matters
Customer referrals are the lifeblood of the retail industry. Without a positive image of a business from consumers all of their advertising would do very little good. Advertising and promotional events do help lure consumers into the store, but it's up to a department store to remain consistent with its service and pricing, as well as its merchandise in order for its strategies to succeed.

The Mall at Millenia, Source: Macy's.

According to Brand Keys' survey the one department store that sits atop the sector above all others is Macy's (M 3.33%). Brand Keys' president, Robert Passikoff, in an interview with The City Wire in February, noted his contention that Macy's ability to bring brand-name merchandise to the consumer at a reasonable price, as well as help its customers forge an emotional connection with those brands, allows it to bring back more return customers than any other department store. 

I would also add, as a Macy's customer myself, that while the company does offer a number of differing sales each year, it's consistent with its pricing, return policy, and fashion selections. It does present new trends for its consumers, but there's a good sense of expectation and reward when you head to Macy's. It's one reason that in 2013 Macy's was able to deliver its fifth straight year of double-digit EPS growth while also growing comparable-store sales by 1.4% in an extremely difficult fourth quarter. 

J.C. Penney and Sears Holdings, on the other hand, have a mountain of issues to work through.

J.C. Penney and Sears Holdings' problems
J.C. Penney's biggest problem has been its lack of consistency, which actually went so far as to drive some of its core customers to competitors.

Current J.C. Penney CEO Mike Ullman, Source: J.C. Penney.

When previous CEO Ron Johnson -- a genius by all stretch of the imagination considering what he'd done for Apple in building up its physical store presence – was named Penney's next CEO in 2011 hopes were high that he would reinvigorate sales and bolster the Penney's brand. Johnson's two-pronged approach involved shelving Penney's trademark sales and going to an "everyday low price," as well as bringing in a number of new brand-name merchandise to create dozens of "stores within a store."

Long story short, both ideas backfired in a big way. Taking away discounts from Penney's core customer who'd come to expect steep discounts from the retailer for years, if not decades, simply caused them to stop shopping at Penney's. Similarly, the store within a store concept never gained legs after it was unsuccessful in legally bringing the Martha Stewart brand into its stores. Johnson's shortcomings also led to what I dubbed the worst quarter in retail history last year where same-store sales fell 31.7% year-over-year and Internet sales tumbled more than 34%.

Source: Sears Holdings.

Sears, which also owns Kmart under its umbrella, hasn't fared much better. Hedge fund genius Eddie Lampert was heralded as the source of Sears' possible turnaround, but the company has been run more like a hedge fund than a retail business during his tenure. A stale exterior and interior image, brands that have failed to excite consumers, and a steep recession are all reasons that Sears is struggling to survive.

However, before I spill the beans on the worst of the worst, which department store do you believe ranks dead last in consumer loyalty between J.C. Penney and Sears Holdings based on Brand Keys' research?

Got your answer?

Which brand is the bottom of the barrel in customer loyalty?
If you said J.C. Penney you've correctly guessed which department store Americans are least loyal to.

Source: J.C. Penney.

It would appear on the surface that the pricing inconsistency was simply too great for most of Penney's core customers to endure. Although we're finally starting to see comparable-store sale gains from Penney's since it reinstituted Mike Ullman back into the CEO role, it's still a long way from profitability and doesn't have any true catalysts to bring old customer back into its stores or court a significant amount of new customers.

This would mean that Sears Holdings, despite its numerous imperfections, is able to drive greater customer loyalty than Penney's and could give it a better chance to orchestrate a turnaround.

Both Sears and Penney's have been cutting costs and closing stores in the wake of their underperformance, but at least Sears can fall back on a couple of its emotionally attachable brands such as Craftsman and Kenmore which it can potentially lean on as it attempts to draw consumers into its stores once again. Please note this isn't a ringing endorsement for Sears in any way. In fact I still expect the retailer could have quite a bit of downside potential before it has any chance at a turnaround. What it does represent, though, is a clear picture from Brand Keys that Sears is engaging with consumers and bringing them back into its stores at a better rate than Penney's, making it the better choice of the two to succeed over the very long term.