Consumers are like Pavlov's dog. When retailers ring the sales bell, we salivate and rush forward to buy up the great deals.
Indeed, the return of the doorbuster sale is credited in large part with resurrecting J.C. Penney's (NYSE:JCP) fortunes. Previously, it had been teetering on the edge of bankruptcy after former CEO Ron Johnson switched to everyday low pricing and shoppers fled in droves.
However, when retailers indiscriminately ring the bell and tell us there's a sale going on when there's not, they run the risk of ruining their reputations. They are increasingly being called out for this shady tactic.
The never-ending sale
Recently, J.C. Penney was slapped with a class action lawsuit alleging that it advertised "regular" prices from which it was marking goods down, but in reality, they were never (or rarely) offered at that higher price.
While it's tempting to think there is no harm here -- after all, we still got the goods we wanted at the price for which they were advertised -- we're still suffering from being duped. Because of our Pavlovian response to sales, we're being enticed to buy a product we otherwise might not have purchased because of the perceived value we were seeing.
Prices convey important information to shoppers. When a retailer advertises "fake prices" (as Penney's Johnson once called them) in order to promote a "sale," it's a deception every bit as damaging as if it engaged in other forms of false advertising.
J.C. Penney isn't the only retailer to get into hot water due to this practice. Kohl's and men's clothier Jos. A. Bank have previously been taken to task for using such ruses to induce customers to buy. Indeed, the practice has become so widespread that more class action lawsuits are being filed against retailers. And just because everyone's doing it doesn't make it right.
When a discount is whatever you want it to be
So, who's the latest retailer to be caught up in these shenanigans?
That would be off-price retailer TJX Companies (NYSE:TJX), which runs deep-discount outlets T.J. Maxx and Marshalls.
According to the lawsuit, TJX tricks customers into believing they're getting a super-discounted value because the "compare at" prices listed on each article of clothing are so much higher. But instead of those higher prices being actual prices found at some other retailer -- T.J. Maxx, for example, promises customers "that they can get name brand products for up to 60 percent off department store prices" -- in reality, they're just estimates made by the company's buyers of what they think the items would sell for.
Don't discount the power of discounts
TJX is certainly having an enviable run. Over the past three years, revenue has grown at a compounded 7.5% rate annually while operating profit has increased at a better than 14% clip. Earnings per share has jumped almost 18% annually.
In comparison, Kohl's sales growth has been virtually nil, and EPS has been stagnant over that period, too. Meanwhile, Macy's has only witnessed a 2% jump in sales and a 5% increase in operating income each year. Not surprisingly, J.C. Penney's financial metrics have collapsed, with losses as far as the eye can see, and revenue has fallen at a 10% compounded rate.
Retailers have observed TJX's outperformance and now want to emulate it. Kohl's is testing out a store concept that sells returned merchandise at a discount, and Macy's is attempting to start its own off-price chain called Macy's Backstage.
A good defense always wins
Undoubtedly, TJX will say that unlike other "fake sale" practitioners, it's actually up-front about discounting. There's a link at the bottom of the T.J. Maxx website that explains what "compare at pricing" means. In part, it says:
The "compare at" price is our buying staff's estimate of the regular, retail price at which a comparable item in finer catalogs, specialty or department stores may have been sold. We buy products from thousands of vendors worldwide, so the item may not be offered by other retailers at the "compare at" price at any particular time or location. We encourage you to do your own comparison shopping as another way to see what great value we offer.
However, the plaintiffs say that even if it's disclosed on the website, it's not advertised in the store or on the merchandise, and besides, "they are not true, bona fide comparative prices" anyway.
There's more where that came from
T.J. Maxx may be just the latest retailer accused of deceptive practices, but it's not likely to be the last. Checkbook.org tracked a basket of goods from a variety of retailers over a 44-week period and found that much of the merchandise was rarely or never sold at the full price. It found Sears Holdings was the most egregious violator, though Kohl's and Macy's were serial offenders, too.
Retailers know that most consumers react almost unthinkingly to the word "sale." Now they're starting to find themselves in the doghouse, and that may be just what they need to reform this deceptive game.
Rich Duprey owns shares of J.C. Penney Company. 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.