Steve Dennis on How Math is Hard…..For JC Penney

February 11, 2013

JC Penney’s CEO Ron Johnson has recently been making the rounds with various media outlets proclaiming that Penney’s will return to growth this year. They had better.

There is an old adage in retail that the best way to run a same-store sales increase THIS year is to have run a decrease LAST year.  While we are a couple of weeks away from learning the specifics of how Penney’s fared in their first year of radical transformation, it’s likely that they will be down 25% or so.

This means they will have to run a 33% same-store sales increase just to get back to where they started two years earlier.  Given that new shops are rolling out in the Spring (Joe Fresh in March, Martha Stewart and a new home concept in May) it’s difficult to imagine a major turnaround in sales growth until later in the year. Good luck getting back to even.

Another math problem is their new “semi-promotional” strategy.  While Penney’s sorely needed to re-introduce more aggressive promotions to restore traffic growth, the pricing strategy rolled out last year relied on having prices that were competitive day in and day out.  For this strategy to develop better gross margins, they would have to sell the vast majority of product at the new regular price.  Now, by layering on additional discounts, they will either run lower gross margins or need to take their regular prices up to end up in a sustainable place.  The problem with the latter approach is it means they will be uncompetitive when not on sale.  My guess is gross margin will continue to disappoint until they can fine tune this approach.

The last math problem is their recent institution of “Elsewhere Prices.”  The notion of giving consumers a comparison price is a good one.  But the fine print is the issue.  According to Penney’s most recent circular “the ‘Elsewhere’ price reflects a comparison to the price of that or a comparable item found on-line or in-store for national specialty stores during the last 90 days.”  In other words, not their most direct competitors prices. Not necessarily a price that more than a handful of consumers might actually have paid.

To be fair, lots of other retailers engage in such shenanigans. The off-price and factory outlet stores play this game all the time.  A charitable person might say that such comparisons represent a desire to be helpful for consumers.  A cynic might say that it’s closer to a con.  You can decide for yourself.

To claim truly meaningful progress in the transformation it’s not going to be enough to simply see sales growth.  To have any chance of justifying the massive investments being made, the new JCP must begin to consistently deliver out-sized same-store sales growth and evidence of progress on gross margin rates.

The math for improvement is not that hard. The math for success is pretty daunting. To read the full article please visit http://stevenpdennis.wordpress.com/.

 

Steven Dennis is President and Founder of SageBerry Consulting, a boutique consulting firm specializing in growth and marketing strategy for retail, luxury, and fashion brands. Prior to SageBerry, Mr. Dennis was Senior Vice President of Strategy and Marketing for The Neiman Marcus Group where he was responsible for strategic business development and corporate marketing (customer insight, enterprise marketing programs, and loyalty program strategy), and led the company’s partnership to operate its credit card business. Prior to joining Neiman’s, he was with Sears in a number of senior leadership roles including, Acting Chief Strategy Officer and Leader of the Lands’ End Integration Team. Mr. Dennis’s expertise spans all major retail and e-commerce product categories and formats. He will be participating in our Retail Roundtable on Thursday February 14th from 1:15-2:45 PM PT in San Francisco. If you are interested in attending or dialing-in please contact info@roulstonresearch.com.

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