A Big Company to Watch in 2012
What do you get when you put the man responsible for Apple's sleek retail stores design at the helm of flailing retailer J.C. Penney (NYS: JCP) ? An elaborate transformation plan, including a new logo and pricing strategy. But will it revive sales?
The department-store chain plans a 40% reduction in prices of all products, fewer promotions, and a new store format. Penney's will also bring on board celebrated talk show host Ellen DeGeneres as its new spokeswoman.
The problem at hand
Penney's has been struggling to keep up revenue and contain costs. On average, only one out of Penney's 500 products sells at its full price. More than 70% of its total revenue comes from discounted items (50% or more) while items priced at full hardly move. As a result, while revenue continued to falter, costs associated with promotions hurt the bottom line.
Fewer promotions, tiered pricing
As a part of its new pricing strategy, J.C. Penney is moving to a daily low-price plan with monthly special promotional offers in certain counters. The daily low price will hopefully encourage shoppers to indulge in multiple purchases.
Penney's also plans to reduce the number of annual promotions drastically from 590 to just 12. These will be focused promotions based on a specific theme such as "back-to-school items reduced." The idea behind this strategy seems simple -- attract customers year-round.
The company hopes to boost overall volumes while saving approximately $300 million in four years on account of fewer promotions. Now that the plan is spelled out, I believe the success depends on execution. This is where the company can cash in on the experience of its new CEO, Ron Johnson.
A whole new feel
Apple stores offer the unique "Apple experience." The store's design entices a person to buy. Well, Johnson was instrumental in creating that. Can he do the same for Penney's? Can he make the shopping experience at Penney's unique? He certainly has the plan in place.
Penney's hopes to beat competition from peers Macy's (NYS: M) and Kohl's by creating a new shopping experience. Instead of giving its stores a typical department store look and feel, Penney's will look to create the feel of a mini town with stores within stores housing various brands. The area within a store that'll house some 80-100 brands will be called "Main Street" with a specific area for customer services to be christened "Town Square." The prospect definitely sounds exciting and should give a whole new meaning to shopping.
The first few branded stores in Main Street will include Martha Stewart (NYS: MSO) and Nanette Lepore. In December, Penney's struck a 10-year merchandising deal with Martha Stewart Living. Martha Stewart's brand presence will add to the stores' appeal, and time will tell how much it adds to the company's sales. But the tie-up has definitely made Macy's uncomfortable as it has filed a lawsuit against Martha for violating its exclusive merchandising contract.
The moves are encouraging and a full-scale overhaul may breathe life into J.C. Penney. It'll possibly help in boosting sales and foot traffic for Penney's and the cost-cutting efforts should eventually lead to improved margins and profitability. They say when it ain't broke, don't fix it. But, Penney's needs fixing and one looking to reinvent itself is surely a positive in my books.
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At the time this article was published Fool contributor Shubh Datta doesn't own any shares in the companies listed above. The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of Apple.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.