The bold plan has been closely watched by others in the retail industry, which is notorious for offering deep discounts to draw shoppers. But so far the experiment has served as a cautionary tale of how difficult it is to change shopper' habits: Penney next month is expected to report its fourth consecutive quarter of big sales drops and profit losses. After losing more than half of its value, Penney stock is trading at around $18. And the company's credit ratings are in junk status.
CEO Ron Johnson, who rolled out the pricing plan shortly after taking the top job in November 2011, told The Associated Press last week that the latest moves are not a "deviation" from his strategy but rather an "evolution." He also vowed he would not be bringing back coupons.
"Our sales have gone backward a little more than we expected, but that doesn't change the vision or the strategy," said Johnson, who previously masterminded Apple's retail stores and Target's cheap chic fashion strategy. "We made changes and we learned an incredible amount. That is what's informing our tactics as we go forward."
But critics say that Johnson is backpedaling. Walter Loeb, a New York-based retail consultant, said Johnson "is now realizing that he has to be more promotional to attract shoppers."
This pricing strategy has been a key part of Johnson's plan to reinvent Penney from the ground up that also included adding hip new brands such as Joe Fresh and replacing racks of clothing with small shops-within-stores by 2015. But this isn't the first time the plan has been tweaked it.
The pricing plan, which was rolled out in February 2012, entailed permanently slashing prices on everything in the store by 40 percent. Instead of the 600 or so sales and coupons it used to offer, Penney would hold just 12 monthlong sales events on some merchandise. And there would be periodic clearance events throughout the year.
But the plan wasn't well received on Wall Street or Main Street, so six months after launching it, Johnson ditched the monthlong sales, saying that they were too confusing to shoppers. Johnson said Penney since has learned that people don't shop on a monthly basis, but rather they buy when they need something for say, back-to-school or during the winter holidays. And during those times, he says, they're looking for even more value.
"I still believe that the customer knows the right price, but they want help," he says.
Penney declined to say how many sales events it will offer going forward, citing competitive reasons. But the company said the figure will be well below the nearly 600 that it used to offer. The company said the discounts will vary depending on the sale. From Feb. 1 through Feb. 14, for instance, shoppers will get 20 percent off some jewelry for Valentine's Day. One example: half carat diamond heart pendants will have a sale price of $96. Penny's everyday price was $120.
Penney said the decision to add tags on much of its merchandise that shows the "manufacturer's suggested retail price" along with Penney's "everyday" price came about because he realized that shoppers wanted a reference price. National brands were also asking Penney to show the suggested price to shoppers, he said. Penney started to test showing the suggested price on Izod men's merchandise last fall, and was encouraged by the sales.
Burt Flickinger, a retail consultant, said the move could help Penney because manufacturers' suggested retail prices can be as much as 40 percent higher than what retailers would end up selling it for. That practice of marketing suggested prices with their own price is common in the home appliance industry because shoppers like a reference price for items they don't buy often. But it's spotty with the department industry because stores generally hike prices up even more to give shoppers an illusion of a big discount, says Flickinger.
"The strategy will be helpful for shoppers to understand lower prices. At the same time, it will be tough to get consumers back in the store from competitors," said Flickinger.
But Craig Johnson, another retail consultant, said adding the suggested manufacturer's price is just a gimmick. "The objective of this exercise is to maximize the perceived value for the purchase," he said.
Johnson says Penney will submit supporting data to its legal team for approval before it advertises its prices, using certain criteria. For example, they'll make sure the fabric used is of the same quality as its rivals. For jewelry, Penney is using the International Gemological Institute, a third-party appraiser.
Penney says it will not show comparison prices for merchandise that is part of exclusive partnerships with brands such as Nicole Miller and Mango. Penney said it's difficult to offer such references.
"There are no makeup prices here," he added. "It's all about trying to communicate what it's worth to the customer
To promote the strategy, Penney will start airing TV, print and digital ads. One TV ad compares a $9 polo shirt under its store brand Arizona with $19 "elsewhere." "Two polos, same color, same vibrant, same details, same swing, same swagger, different prices," the ad says.
Going forward, Johnson reiterated that he expects Penney to return to growth sometime in 2013. That would be a welcome change for Penney, whose business has suffered under the new strategy.
For the first nine months of its current fiscal year, Penney lost $433 million, or $1.98 per share compared with a loss of $65 million, or 30 cents per share in the year-ago period. Total sales dropped 23.1 percent to $9.1 billion.
Johnson declined to comment on holiday sales. But analysts expect a loss of 17 cents on sales of $4.22 billion for the fourth quarter. That would mean the company's annual sales shrunk by 23 percent, or nearly $4 billion, to $13.3 billion for the latest year. Revenue at stores opened at least a year are expected to drop 25 percent, in line with the third quarter, according to analyst polled by research firm FactSet.
"A year ago, we were launching a major transformation and didn't know what to expect," he said. "Today, I know what happened. Our team has a year's worth of history. This is going to be a great year because the new JCP is coming to life for customers."