Archive for May, 2012

JCP adds promotional events

Today’s RetailWire panel discussion centers on JCPenney’s decision to add five additional “Best Price Friday” events through the rest of 2012, in addition to the two-a-month already planned. (One of the added events will be on Black Friday.) I think this is indicative of the problem JCP has had communicating its new “Fair & Square” value strategy in the first place:

Part of the problem with “Best Price Fridays” is that they have been positioned as clearance events. These are the dates (twice a month, with some added events according to the news story) when new markdowns are taken. The problem with this concept is that there is no “call to action” if the clearance goods are at lower prices until they are gone.

Likewise the selected monthlong sale prices that are better than the everyday “Fair & Square” prices: No sense of urgency, no clearcut savings message. JCP would be wise to spend more money building store traffic, and less money on the “Pin the Tail on the Donkey” spot promoting hassle-free returns.

As I’ve said before, JCP should have worked on reinvention of the store and merchandising experience first, then get the marketing and pricing in sync…instead of the other way around.

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Price maintenance on TVs: A winning strategy?

As a recent RetailWire panel discussion points out, the 2007 Supreme Court ruling (“LeeGin”) makes it easier for manufacturers to conduct price maintenance than in the past. In this case, Sony and Samsung seem to be following the Apple model, where there is very little deviation in selling price whether in their own stores or at discounters. And Samsung has been more successful in the mobile phone business avoiding widespread discounting of its products while it continues to gain share.

The problem here is that TVs have become a “commoditized” category for the last several years…as manufacturing costs have fallen, so have the retail prices for flat-screen TVs with similar features. In this case, Sony and especially Samsung are setting themselves up for rivals (like LG) to be very aggressive on price. If you were a consumer, would you rather pay $100 more for a virtually identical TV?

The current price wars have made it tough for electronics retailers, from Best Buy to regionals, to make margins in this category. This move might help them in the short term, but only if Sony and Samsung are willing to market themselves as superior products. And, meanwhile, we are all waiting for the other shoe to drop: The eventual launch of a truly game-changing TV from Apple.

Grocer of the future?

As with my last post, some discussion topics on RetailWire focused on food retailing have equal application to general merchandising:

There may not be one “grocer of the future” prototype, but there are at least two trends at work that are also going in the general merchandise world:

1. The “barbell effect” is driving sales for huge, low-priced stores like Woodmans as well as grocers like Whole Foods and Wegmans focused on assortment and service. Those in the middle are the ones losing share, unless they develop a clearer point of view one way or the other.

2. “Smaller is better”: Some of the fastest growth in the grocery industry is coming from stores like Aldi and Fresh Market, both offering tightly edited assortments in small footprints even though they offer different price points. It’s the same trend that is driving big box and discount stores to develop newer, simpler concepts.

Are consumers moving back to national brands?

I commented on a recent RetailWire discussion about the apparent move back to national brands. While the focus of the panel was on food retailing, I think the trend is apparent in general merchandising, too:

Retailers (especially in department stores) have been in an arms race for the last few years to develop more and more private labels and exclusive brands. Sometimes it’s driven by perceived assortment voids but just as often to drive margins.

The consumer move back to national brands may signal that exclusive labels are not always offering perceived value. More likely the consumer is expressing some dissatisfaction with over-assortment and lack of brand clarity

Pulling the plug on 77kids

Interesting recent discussion (on RetailWire) about why American Eagle failed in its attempt to create a kids’ spinoff. I start with the name as the first misstep:

American Eagle has built up considerable brand equity, and despite some of its recent struggles its comp sales appear to be back on track. (And it is doing a better job than some of its competitors like Aeropostale learning how to execute “fast fashion.”) But AEO did not take advantage of that brand equity when it launched 77kids.

I realize that Justice has been more successful under its own brand than previously (as Limited Too), but in this case American Eagle might have tried to be more patient with the concept. Testing the concept with bricks and mortar might (in hindsight) have been a more effective idea than starting out online.

Some recent comments on Walmart Express

I’m posting two separate comments about Walmart Express (its small format experiment) that were published within a few days of each other on RetailWire:

1. When Walmart is satisfied that its pilot is ready to roll out nationally, there is no doubt that it can move fast. There is still plenty of real estate out there, including takeover space available at the right price. The key is to make sure that the merchandise message inside Walmart Express is clearly defined: A knee-jerk response to dollar stores or chains like Aldi is probably not what’s called for.

2. Walmart may be making its own argument for going slowly, by ensuring that Walmart Express meets its own profitability standards before rolling it out. One of the secrets of its early success is the ability to edit assortments in a small footprint, to ensure that only the most productive and “wanted” merchandise is in the store. I see a lot of potential for Walmart Express in various locations, but especially in high-density sites where the costs of a full-sized store (site selection, zoning, etc.) are prohibitive.

Early thoughts on JCPenney Q1 results

Before posting comments from RetailWire (probably tomorrow), I thought I would reflect on JCP first quarter results a day after their release:

1. I have been skeptical about several elements of the new strategy since it was announced in January, and many of my observations since then (on this blog and during several consultations) are based on repeated visits to JCP stores. I’ve visited stores from Florida to Wisconsin, and both mall anchors and small prototype stores. My biggest initial impression was that JCP needs to communicate its new pricing message more forcefully in-store, not just with an endless barrage of TV spots that look (frankly) just like Target ads.

2. At the same time, I appreciated that Ron Johnson and team needed to shake things up at JCP. The status quo was not an option, and nobody should have expected stellar results three months into the new strategy. However, the results are lower than even the most reduced expectations.

3. There are clear warning signs about the viability of the strategy as it stands today. The comp sales are tougher than expected, the gross margin is disappointing, the SGA rate soared instead of dropping despite the announced cuts in payroll, headquarters staffing and marketing. (Yes, I know these are annualized savings of $900 million.) And there are warning signs on the balance sheet, such as the 10% drop in inventory in the face of a 20% sales drop. If this trend continues, liquidating inventory will continue to be a problem and investors will run out of patience for “extraordinary items” given the $1/share writeoff at the end of fiscal 2011. The cash reserves are not a pretty sight, either.

4. I’ve said that — good or bad — the JCP experiment will be a B-school case study in the future. Right now, the biggest problem I see is the decision to change the pricing (thus chasing away JCP’s most loyal, value-driven customers) and the marketing before delivering on the brand promise of new content and an innovative in-store experience. Meanwhile, many of the new brand initiatives (Betsey Johnson, Tourneau) represent a pricing tier at odds with JCP’s own heritage as a purveyor of well-priced and well-made basics — and, more importantly, flying in the face of key competitors who are putting more emphasis on opening price key items.

5. Finally, a lot of the hype (and stock run-up) has been built on hope and the “personality cult” surrounding Ron Johnson and his new hires. Some members of this team reportedly received extraordinary compensation packages to sign up, while meanwhile the company is cutting commissions to sales associates and ending its dividend (not likely to sit well with JCP retirees). Not good symbolism for a company going through an austerity phase at the same time that it tries to reinvent itself.

Ron Johnson’s comment to an analyst question about employee morale (“It’s hard to know from where I sit”) seems especially tone-deaf…and he’d better figure it out. If his own organization doesn’t buy the vision, why should the rest of us?

And one final thought: If JCP drops 15% in volume this year (optimistic given the 20% decrease in Q1 but let’s give them credit for new initiatives during the second half), it needs four straight years of 5% comps to surpass its 2011 sales. (And no guarantees of that sales performance.) Unless the overall profit and productivity model becomes starkly higher, do investors have the patience to wait it out?


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