EDLP: It’s not as easy as Walmart makes it looks
JCPenney got a lot of love this week from investors and the media after the company’s senior leadership unveiled a simplified pricing and promotional strategy that sounded an awful lot like another well-known retailer’s success formula.
The revelation from JCPenney would be transitioning to a simplified pricing and promotional strategy sounded an awful lot like EDLP, except CEO Ron Johnson called it “fair and square.” Either way, JCPenney plans to take prices down about 40% to the level where most of its sales occur anyway because the company has essentially trained its shoppers to never buy anything until it is marked down.
Johnson deserves credit for pursuing a strategy that is a radical departure from JCPenney’s recent past, and the highly promotional pricing approach employed by its direct competitors. Fair-and-square pricing can be a very alluring proposition to those who have never attempted to implement it because the approach promises simplicity and cost savings to operations. However, even Walmart doesn’t practice EDLP in its purest form, as Rollbacks and other limited duration pricing events are required to add some promotional intensity to the store experience.
Now JCPenney wants to do something similar with its fair and square pricing, month-long promotional events and selective features a few times during the month. All in the name of restoring price integrity. It sounds good on paper, and it looked even better in person during an elaborate unveiling presentation that several veteran analysts told Retailing Today was unlike anything they had ever seen before, but what JCPenney is likely to learn the hard way in the months ahead, as other have before it, is that there are some nasty withdrawal symptoms associated with kicking the promotional habit. And JCPenney had it bad before Johnson arrived as CEO last fall after leading Apple’s retail operations for more than a decade. According to Johnson, JCPenney spent $1 billion marketing 590 unique promotional events in 2011, and beginning Feb. 1 it plans to shift to monthly promotions that it will spend $80 million apiece marketing.
It amounts to the most dramatic shift a retail company has attempted to execute since Walmart put Eduardo Castro-Wright in charge of U.S. stores and John Fleming in charge of merchandising. The strategies they pursued and how they pursued them took Walmart down a path from which the company is still attempting to recover.
As for JCPenney, the company needed to do something and Johnson’s strategy may ultimately be the right one. Simplified pricing could be an effective way to differentiate itself from direct competitors (Macy’s and Kohl’s) who run such a mind numbing level of promotions that their customers too never buy anything at full price. In fact, plenty of merchandise at those chains arrives on the floor with no sales ever having occurred at the so-called “regular” price.
However, in the near term the company’s shoppers are likely to find the transition quite confusing and considerable sales volatility could be in store. Perhaps that’s why the day after the big reveal of the new strategy at a follow-up meeting to provide a financial update the company announced it would no longer report monthly sales or even provide quarterly sales or earnings guidance. Walmart did the same thing a few years back at the height of the Project Impact disruption in the name of focusing investors on the company’s long term performance.