J.C. Penney and America’s Addiction to Coupons

In explaining the company’s pricing strategy, J.C. Penney executives now regularly use the language of addiction to discuss America’s love affair with coupons.

“Coupons, that drug, drove traffic and conversions,” said J.C. Penney president Michael Francis in a conference call following the company’s dismal financial results. “We did not realize how deep some of the customers were into this.… We have got to wean off this and educate our consumers.” 

So basically, the new “Fair and Square” pricing strategy is Penney’s idea of coupon methadone. And on paper, the strategy makes sense. Who really believes all those discounts anyway?  

And yet, it has turned out—so far, at least—to be a huge dud, with comp sales plummeting 18.9 percent. Traffic is down 10 percent. Average spend: down 5 percent. And in fact, there are signs that Penney is beginning to backtrack. (Something Zale, did, too, a few years ago, when its non-price strategy came up short. The problem is, this just gets the customer even more confused.)

So is it all hopeless? Do America’s department stores have no hope but to appeal to coupon clippers? (One thing about coupons: They are interactive, and this is a participatory age. They make shoppers feel they have some control over the experience.) 

Let’s look at CEO Ron Johnson’s grandest creation: the Apple retail chain, one of the most successful retailers in history, and the reason his stewardship of Penney has attracted so much attention in the first place. Of course, Apple stores don’t discount—partly because they do what they do extremely well:

At the 2010 AGS Conclave in Boston, a professor from Harvard Business School discussed the Apple store as a model for jewelers trying to combat the Internet. Many in the audience assumed the chain’s success stemmed from the popularity of Apple products. The professor disagreed; Yes, he said, Apple products are great, but people can buy iPods anywhere, including online and at Best Buy. And in fact, when Apple launched its retail chain, many people thought they were crazy for just that reason. The reason the Apple stores do well, the professor argued, is because they offer an experience that doesn’t exist elsewhere: They have excellent customer service and are exceedingly customer friendly. All of which is just basic retail, he said, just taken to the nth degree.

That said, competitors like Microsoft have since tried to ape the Apple formula by opening clean, modern stores with super-helpful sales staff. And none have attracted the throngs the original has—because the merchandise isn’t there. And it’s product that lures people in the door. (If they feel that they are getting a good deal on that product, even better.)

Which may be why the new strategy faces some huge hurdles. This point was particularly well put in this Harvard Business Review article, written before the new strategy even started failing:

J.C. Penney lacks the differentiation to make this pricing strategy successful. J.C. Penney’s products are fairly homogenous. When selling a relatively undifferentiated product, the only lever to generate higher sales is discounts. Even worse, if competitors drop prices on comparable products, J.C. Penney’s hands are tied—it is a sitting duck that can’t respond.

Product differentiation is the key to avoiding drastic discounts. Bose and Cartier, for instance, have the differentiation necessary to set a price and stick to it—the price is what it is. Also, the J.C. Penney shopping experience hasn’t reached the “loyalty-inspiring” stage, like Nordstrom’s, which can immunize it from price competition.

Another example of a no-discount store is Trader Joe’s. When you shop there, you know everything will be of good quality and a good value. But no one would shop there if it didn’t feature above-average products.

Of course, the new Penney has set its sights on differentiated—and, one assumes, better—products. Just look at its new partnership with Tourneau, which seems designed to attract new watch brands to the store, even if they fall a little outside the retailer’s traditional price points. 

But the product mix hasn’t noticeably changed yet. And it may not even be possible to differentiate every department. (How much can you do with underwear?) The Penney shopping environment is nowhere near what you find at the Apple stores; some are still shabby, with indifferent staff. Johnson has said that employees are happy about the new change, but store employees are coping with layoffs and the end of traditional commissions. From what I hear, morale is rock-bottom. And it’s the store-level staff, as much as any corporate executive, that will ultimately determine the success of the new policy.

Johnson’s goals remain admirable. Customers have been duped by dubious discounts for too long. But to really bring Penney’s environment and product mix up to where customers will accept it as the no-discount store will take years. Yet it’s difficult to see how any new strategy will work until that happens. 

JCK News Director