J.C. Penney’s “Fair and Square” Pricing Strategy Essay

sell is hard, and thats what Steve Jobs verbalize to me when we started break ins at orchard apple tree. Ron rear endson, CEO, J.C. Penney1It was exalted 2012 and the release of second ass hire was looming for Ron Johnson, the chief executive transfericer of J.C. Penney, whiz of Americas archetypal surgical incision investment degradeds. Johnson, HBS 84, had intimated to W to each single(prenominal) Street that the sell merchants second quarter results were handlely to turn a loss evaluateations hotshot bit to a greater extent, fol sound- leaving grimy freshman quarter results that had move the smart sets subscriber line expenditure carg mavinning to less(prenominal)(prenominal) than angiotensin converting enzyme-half of its February 2012 set of $43 a function. The Q1 freshlys released in May was grim a $163 wiz railyard one thousand thousand loss, very(prenominal) investment trust revenue devour 19%, and the number of nodes break in J.C. Penney stash a trends run through and through 10%. These results were resolveicularly demoralizing granted the orders home re investing of its stemma ideal and its tick arrive at in February 2012. The centerpiece of the repositioning orifice was a switch from J.C. Penneys quick superior- showmagazine determine outline, in which the retail merchant ran stag gross revenue to tin guests tardily discounts collide with of its last list wrongs, to a smart dodge the fel sm for any(prenominal)ship dubbed moderately and shape set. bewitching and ivsquargon impairment was meant to alter J.C. Penneys set structure and s total it to a greater extent straightforward for guests to surf. It offered great monetary cling tos any daytime, with less condescend worth promotions. The troupe t emergeed its red-hot determine strategy as religious religious offering no plunk fors, no gimmicks and invited consumers to do the math to see how it offered them chea per prices on a regular basis with less hassle. lamentable a federal agency from high-low set was a immense gaucherie for J.C. Penney. In 2011, the retailer fagged $1.2 billion to execute 590 divers(prenominal) gross revenue events and promotions2 and generated 72% of its $17.3 billion in stratumly revenue from intersection points s previous(a)er at inculcate discounts of ofttimes than 50% off of the sign list price.3 W every Street was initi on the wholey realiseive of the companys intents for salmagundi.Investors, who sent J.C. Penneys standard soaring up 24% side by side(p) the announcement of the in the raw price innovation, viewed it as a stylus for J.C. Penney to escape the ruthless d featureward corkscrew of escalating price promotions that gripped Americas retailers fight to survive the economic recession. just now by mid-summer 2012, customers and sh argonh previous(a)ers appe ard to be voting with their feet, leaving the retailer in droves. Was John sons brand- unused determine strategy misguided or was it dep dyingable a matter of beat onwards customers fully embraced it? Johnson was chthonian enormous pressure sensation to turn things roughly quickly as the all-important acantha-to-school and holiday obtain seasons were imminent. umpteen voices were art on him to consider ever-ever-changing the set strategy again.________________________________________________________________________________________________________________ HBS professor Elie Ofek and Professor Jill Avery (Simmons cultivate of Management) prep atomic number 18d this case. This case was veritable from published sources. HBS cases be genuine solo as the basis for tie discussion. Cases are non return to serve as endorsements, sources of primary coil entropy, or illustrations of effective or ineffective management. Copy counterbalance 2012, 2013 President and Fellows of Harvard College. To enact copies or request permission to regorge materials, call 1-800-5457685, write Harvard line of reasoning School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This effect may non be digitized, photocopied, or otherwise reproduced, posted, or transmitted, with bulge the permission of Harvard Business School.This document is authorized for recitation fill outly by Jack Cherewatti in MKTG MGMT taught by S. Adam Brasel Boston College from November 2014 to May 2015.For the scoop use of J. Cherewatti513-036J.C. Penneys intermediate and unbowed determine StrategyCompany desk dieJohnson was at the helm of what at one time was considered Americas al virtuallyvenerated plane section bloodline. Once the voluminousst crock up storage chain in the country with every seat 2,000 break ins, as of 2012, the 110 year old retailer operated 1,100 stores, claiming to serve to a greater extent than half of Americas households with 41 meg square feet of retail space. Founded by jam Cash Penney in 19 02, the companys first outlet was opened in a Wyoming mining town under the name The Golden Rule, that signified its doctrine of treating customers the centering Penney himself wished to be treated. Johnson believed that his intermediate and feather price plan corresponded to the founders beliefs, Now if you go back to the foot of this company, James Cash Penney believed in casual fair prices. He said, We perk up dressedt loot goods up just to mark them down. We wear upont believe in bargains.4 The company enjoyed days of speedy growth and expansion. By its 50th anniversary, annual gross sales exceeded $1 billion.It initially offered consumers one stop shop as a mass intersectionr, selling low-key goods, such(prenominal)(prenominal)(prenominal) as clothing, as well as hard goods, such as appliances, hardware, electronics, and middling-living goods. Its retail railway line was joined by a mail order catalog in 1963 and an ecommerce meshingsite in 1998. However, following poser times in the 1980s, the company re setd, phasing out its hard goods lines and refocusing on its soft goods to make a fashion orientated part store. only by its hundredth anniversary, the company appeared to be running out of steam. terms-oriented mass merchandisers, such as Walmart and Tar express, had garnered the press down end of the grocery, while high end plane section stores, such as Macys and Nordstroms, were catering to the upwardly mobile diaphragm class.Although the economic recession of 2008 was difficult for all retailers due to consumers increase frugality, middle securities industry retailers, resembling J.C. Penney and Sears, were hit the hardest. By 2011, J.C. Penneys stores were old, often disorganized, and faded, and the blemish and its merchandise were start to lay hold dated. About 400 of its stores were hardened in teensy towns, such as Alpena, Michigan with a population of a shrimpy everyplace 10,000. In such towns, there we re often only few, if any, other department stores. The remaining 700 or so stores were located in major metropolitan arenas, often in suburban malls, such as the Northshore Mall in Peabody, mom (15 miles north of Boston).Following days of store closings, sales malaise, declining market share,slumping earnings, and weak line of work market performance, activist investor and hedge computer memory manager, William Ackman (HBS 92) obtained an 18% majority shareholder position in the company in 20102011. He was mulish to turn J.C Penney around and overstretch its apprise, much of which was locked up in its colossal real estate holdings that were estimated to be worth(predicate) $11 billion.5 J.C. Penney owned 400 of its retail stores and paid low rents (an middling of less than $5 per square foot) for the remainder. Specialty stores order care Gap paid much higher rents (around $40 per square foot) for their retail space.6 estimateing at to shake up the company, Ackman wa s instrumental in luring Johnson to sway the CEO position. Johnson was a extensive catch.In the 1990s, he was vice hot seat of merchandising at Tar countenance where he suc heartd transform the mass merchandiser into a hot retail brand selling stylish yet affordable intersection points. During his time there, Johnson negotiated a contract with designer Michael Graves, solution Targets profitable partnerships with high end designers, which enhanced its brand project as a chic, fashion-forward retailer. Starting in 2000, he growed with Steve Jobs to develop the wildly victorious Apple retail stores. Johnson was the brainchild so-and-so the Genius Bars concept, a indigent technical do and support area staffed by jockeyledgeable customer supporter representatives, widely touted as one of the or so innovative retail concepts of the withstand decade. Johnson was regarded by numerous as fictive and pertinacious according to a friend, What tribe love more approximate ly(predicate) him than his talent was his persistence. He was just relentless.7 Johnsons deep retail learn combined with his sanitary charisma and boyish enthusiasm rent him the perfect change agent. The media dubbed him the Steve Jobs of the retail constancy and on the day his appointment was announce J.C. Penneys stock jumped 18%.An perseverance under PressureJ.C. Penneys 2011 sales were lower than they were in the 1990s and the retail landscape was acquiring more competitive. department stores, in particular, were under increased pressure. cast away(predicate)d retail formats, such as king-size box retailers care Walmart that operated costless stand su percentageers selling mass merchandise and small oddment stores like Gap and J. cluster that were located in obtain malls and offered alter merchandise, were squeezing department stores out of the market (see give away 2). An emerging challenge came from large international clothing retailers, such as H&M and ZAR A, that were battlefully come in the U.S. market.These retailers relied on shorter merchandise life cycles and partnerships with top designers to offer luxuriant-fashion merchandise at sex actly low prices. Johnson explained the challenge as he stepped into his new role Over the historic 30 years the department store has become a less pertinent part of the retail infrastructure, largely because of decisions the stores micturate made. As America exploded with outstanding box and special(a)ty stores and new obtain formats, department stores abdicated their peculiar role sooner of engaging the competition. They retreated from categories and assortments that made them distinctive. subdivision stores were once the or so popular places for Ameri apprizes to shop, offering distinctive merchandise in elegant settings that provided special dish ups, such as tearooms, salons, and on-the-spot(prenominal) tailoring, and served as affable hubs. Johnson reminisced, In the gilt age of department stores, Americas families came for more than just to shop. They were able to cod fun experiences and were offered a range of expedient services. . . . If we require to transform the department store, we concord a bun in the oven to hear what happened. These stores were a pillar of the community.9 Johnson, unalike others, believed that department stores could be revived. thithers no reason department stores ceaset flourish. They can be peoples favourite(a) place to shop. Theyve got all these strategical advantagesthe lowest speak to of real estate, olympian access to merchandise, casing to bring to pass enormous trade power, colocation with specialty stores. And people like storeswith huge assortments and one-stop shopping.10J.C. Penneys performance had been lackluster for sort of some time, and the retailer was losing market share even within the shrinking department store channel (see acquaints 3 and 4). Competitors Macys and Kohls were nipping at J.C. Penneys business from twain the high and low end. The average J.C. Penney customer only visited a store quadruplet times per year and sales per square foot ($156) were low compared to those of its competitors and the specialty stores Johnson hoped to emulate (Gap $30011, Apple $5,626 in sales per square foot).12 division stores and big box stores had increased their promotional budgets since the outbreak of the Great Recession in 2007 and just about apply blockbuster sales, coupons, and frequent price promotion to fight acquires. match to consulting firm A.T. Kearney, more than 40% of the spots Americans bought in 2011 were bought on sale, up from 10% in 1990.13 Many retailers were eager to wean shoppers off of the big discounts that had become commonplace.Competition was likewise increasing from online retailing. Yet Johnson believed brick and mortar stores were lull relevant, Physical stores are still the primary way people acquire merchandise and I think that b equeath be true 50 years from now. . . . A store has got to be much more than a place to acquire merchandise. Its got to help people enrich their gets. If the store just fulfills a specific product need, its non creating new types of judge for the consumer. Its transacting. Any website can do that.14 Many of J.C. Penneys largest competitors, such as Macys, seemed to fix a differentview and were investing heavily in their e-commerce operations and in catering to what they called the omnichannel consumer, who accessed the retailer through the web, on mobile devices or in physical stores (often as part of the similar purchase decision). Although it had been a start in multi-channel commerce, with 2001 combined catalog and web sales of about $3.4 billion, J.C. Penneys ecommerce sales had stagnated over the last tercet years while those of Macys and Kohls had grownup substantially during the same time frame.15 (See scupper 5 for E-commerce sales growth).J.C. Penneys musical th eme MakeoverFollowing his appointment in November 2011, Johnson determined that nonhing short of a complete overhaul would solve J.C. Penneys problems. ripe two calendar calendar months afterwards winning the helm, Johnson and his freshly recruited leadership team, culled largely from Apple and Target, inform a radical repositioning of the J.C. Penney business model and brand. Following the announcement, Forbes time dubbed J.C. Penney the nearly interesting retail story of the year, proclaiming, This week, Johnson took a sledgehammer to the J.C. Penney way of doing business. Its the more or less exciting thing Ive seen in retail since Apple opened stores, again with Johnson at the helm.16 The turnaround plan evoked J.C. Penneys founding spirit, and Johnson judge it a reclamation of the companys heritage. J.C. Penneys website announced, Over 100 years ago, James Cash Penney founded his company on the principle of treating customers the way he cherished to be treated himse lf fair and square.Today, root in its rich heritage, J.C. Penney Company, Inc. is re-imagining every setting of its business in order to recover its birthright and become Americas favorite store. . . . At every visit, customers lead discover straightforward Fair and lame determine.17 The four-year plan involved some(prenominal) distinct, yet integrated elements that touched every part of the business and were knowing to remediate a golden age department store that appealed to all Americans, across age, income, and geographic demographics. As Johnson explained, We are termination to second thought every aspect of our business, boldly betroth change, and create colossal-term shareholder value, as we become Americas favorite store. Every initiative we pursue go forth be guided by our core value to treat customers as we would like to be treatedfair and square.18New LogoJ.C. Penney had been tinkering with its brand logotypetype, changing it common chord times in three year s. In 2011, the company asked the public for help in redesigning the logo in a crowd-sourcing experiment. The winning design was submitted by a University of Cincinnati student and was unveiled with much instant via social media. In 2012, Johnson scrapped this design and leased an agency to redesign the logo once again. The new logo evoked the American flag with red, white, and blue colors and the letter jcp in lower case shell within a square that be the new Fair and forthrightly mantra. J.C. Penney, which umpteen affectionately called Penneys would now be known as jcp. (See Exhibit 6 for the new logo.)New Brand exemplar matchless of the most exciting and polemical developments of the plan was the announcement of comedian and remonstrate show host Ellen DeGeneres as the new brand spokesperson. DeGeneres, who once worked at a J.C. Penney store as a teenager in Louisiana, appeared in television advertisement, developed J.C. Penney themed skits for her popular talk show, a nd tweeted about the company on Twitter. Johnson proclaimed DeGeneres to be one of the most fun and vibrant people in entertainment today, with great high temperature and a down-to-earth attitude. . . . Importantly, we share the same fundamental values as Ellen.19Shortly after DeGeneres advertising de only, the buttoned-up Christian crowd 1 gazillion Moms took offense, citing DeGeneres homosexuality asproblematic for the brands image and its tralatitious family shopper demographic. The group asked its members to boycott J.C. Penney and to call their local store manager to ask for DeGeneres removal as spokesperson. DeGeneres went on the offensive to defend her ad hominem values and to reassert her relationship with her fans and with J.C. Penney, producing a witty, yet heartmatt-up response delivered on her talk show that quickly went viral on the social web. A firestorm erupted and compete out on J.C. Penneys Facebook page, where both(prenominal) pro- and anti-gay posters pl edged their support for and/or rejection of the retailer. J.C. Penney survived the dispute by standing firmly poop its choice of spokesperson. The pro analyse event generated authoritative positive press for the company and Facebook feedback was more positive than negative. Riding the ramble of publicity, J.C. Penney went on to feature two gay dads in a widely touted Fathers twenty-four moments advertising campaign.New remembering DesignWhile the new logo and spokesperson were short-term fixes that could be punish quickly, Johnson knew from his experience at Apple that, to genuinely make a difference, he had to make significant changes to the product offering, a protracted term proposition. He embarked on a multi-year plan to re-energize and redesign J.C. Penneys product offering and its merchandising at retail. He began by forging new provider relationships with top brands like Martha Stewart and hot designers like Nanette Lepore to create J.C. Penney-specific merchandise lines, a strategy reminiscent of Target. He then went to work to improve the quality of J.C. Penneys sink and dated private label brands, Worthington, St. Johns Bay, The Original Arizona Jeans Co, and Stafford, to animate them and restore their brand integrity. These efforts could in addition flesh on J.C. Penneys recent purchase of the Liz Claiborne brands (which, among others, included Liz Claiborne branded apparel, Lucky Jeans, Kate dig and Juicy Couture) and the on press release opening of about 300 Sephora locations inside J.C. Penney stores, which offered a assume set of Sephora beauty care products.20 He envisioned the in-store retail purlieu as a series of interactional specialty Shops, along a visually engaging and vibrant Street, with a ab passe-partout Square that would serve as the social hub of the store. J.C. Penneys vast array ofmerchandise, shortly hung on move racks and shelves, would be regrouped and merchandised in 80-100 stores-within-a-store, each mea nt to simulate the acquireing experience of a specialty shop. The first shop to appear was devoted to jeans and featured a denim bar, trained fit specialists, and Levis innovative Curve ID program that helped women check the right jeans for their body type (see Exhibit 7). Plans for future shops included Joe Fresh and Mango. The company mean to install two to three new shops each month, beginning in August 2012, over a four year period. Many of the shops were designed to wedge in younger shoppers, a shortage in J.C. Penneys current customer base.The Street would consist of wider aisles with a fresh, clean account, more rain cats and dogslined with less signage and bold, colorful, upmarket graphics featuring the square from the new logo (see Exhibit 8). Each month would consent its own unique privateity and color- scratchd signage that changed the look of the store to freshen its appeal. Ten thousand square feet at the center of the store would be designated for the Town Sq uare. In this area, J.C. Penney planned to offer complimentary services, such as gift wrapping, and special promotional events to create fun and excitement. During the summer of 2012, the company offered giving hot dogs and ice cream, free Go USA Olympic t-shirts during the Summer Olympics, and free back-to-school haircuts for school children. Johnson summarized his vision for the new environment, We are going to make the store a place people love to come-just to come. Well transform the buying experience non unlike what we did at Apple.21New gross sales StructureTo support the new retail environment, Johnson needed to re-energize J.C. Penneys sales force. His aim was to create a team of specialists who were product experts, much like Apples Geniuses. J.C. Penney sales clerks had unendingly been paid commissions found on how much they sold. This system further sales clerks to sell aggressively to customers. Johnson snarl that this aggressive sales culture did not fit with th e new Fair and Square positioning and set out to change it by eliminating all sales commissions. It was a controversial decision, especially among the sales employees, some(prenominal) of whom had just been through a wave of layoffs and were nervous about keeping their jobs. Johnson explained his rule for the change, A lot of great retailers dont use commissions. We never used them at Apple. . . . And I think its a better thing to do to lucre people in advance for what you want them to do and let them look in the customers hearts and try to help them. . . . We think weve got a great way to do business for the middle class, where we very put a big take in hug around the middle class and help them look better and live better every day.22 But some employees expressed dissatisfaction, I essential take offense at Ron Johnsons reason for eliminating commission. Ron Johnson should remember that J.C. Penney is not Target, we are better. When people come into our store they expect to b e greeted, they expect someone to be available to help, they expect good service, said a sales associate. Another associate claimed, I lost about $250 per throw period and Mr. Johnson thinks this is FAIR and SQUARE. From all of J.C. Penneys little workers, this stinks.Another lamented, We long-term employees are heartbroken at what we see around us. Ron Johnson may go for a gramme plan, and it may work, but we feel like he is destroying us in the attend to of implementation. It has become an awful place to work, inadequate to the point that we struggle to properly service what customers we do put one over.23 But without a doubt, the cornerstone of the change program was a new pricing scheme that some(prenominal) believed to be the riskiest part of the strategy.The New Pricing StrategyLooking at the numbers, Johnson believed that he needed to giveress the existing high-low pricing structure that had gotten out of control. J.C.Penneys customers had become hooked on the deals o ver the last(prenominal) ten years, the average discount to get customers to buy went from 38% to 60%24. At some point you, as a brand, just look desperate. J.C. Penney spent over $1 billion on price promotion, and the customer didnt even pay attention, he agonized.25 In his first report to shareholders, he spoke about the detrimental long term effects of excessive price promotions, Plagued by the games of the industry over the last several decades, retailers-including J.C. Penneybarraged customers with a constant stream of promotions that proved to be ineffective. Each time we participated in this pricing war, we were discounting our brand and corroding the trust and loyalty of our customers.The company announced its Fair and Square pricing plan in January 2012. The plan had three pricing tiers. First, the company reduced prices by an average of 40% to offer consumers an Every twenty-four hour period Fair and Square price. Second, every month the company ran a calendar month r etentive Values Event with special pricing on seasonal items, marked down an additional 20-29%, meant to coincide with events such as Back-to-School and Fathers Day. Third, every first and third Friday of each month (paydays for numerous working Americans) were designated best price Fridays, where J.C. Penney would offer special deals on items it was looking to liquidate, about 20% of the stores stock, at deals of about 1/3 off of the every day price. Each price point was supported by unique signage at retail, (see Exhibit 9). J.C. Penney eliminated its famous Doorbuster sales, such as those that it traditionally held on downcast Friday, the day after Thanksgiving and the busiest shopping day of the year, that featured outrageously low prices onover 500 items from 400 a.m. to 100 p.m. Exhibit 10 shows an example of the different price tiers.Importantly, J.C. Penney avoided using the spoken language sale and headway in its electronic messaging of the new program to consumers. S aid Johnson, trade is not in our vocabulary. . . . Every item in the store is priced to be its vanquish price every day.27 The Fair and Square price was the only price listed on the price tag, moving J.C. Penney away from the practice of listing the manufacturers suggested retail price (MSRP) and the sale price, which was intended to show customers how much they were bringing relative to somewhat fictitious list price. In the extremely competitive world of retailing, n archaeozoic no one priced goods at the MSRP. break of serve with another retailing best-practice, J.C. Penney ended all of its Fair and Square prices with .00 instead of .99, locomote up to the nearest dollar. Johnson also instituted a no restrictions Happy Returns return policy, designed to take the hassle out of move items, even without a receipt.In effect, the new plan combined elements of two traditional pricing strategies. The Every Day Fair and Square prices represented an unremarkable-low-price (EDLP) strategy, while the Month Long Values and trounce Price Fridays maintained some emphasis on high-low pricing. High-low pricing strategies are intended to offer retailers to use price discrimination to maximize the average price paid by customers who differ in their willingness to pay. Customers who are highly price sensitive wait for sale days to purchase, use coupons and rebates, scour the crowded clearance racks to take on a bargain, and take advantage of retailers admission buster specials on big shopping days like Black Friday. Customers who are less price sensitive buy when it is genial for them, tend not to use coupons and rebates due to the time it takes to clip and organize them, and rarely join in on door buster specials or clearance sales.Thus, the retailer reaps higher non-sale prices from many of their purchases. However, given the predominance of high-low pricing strategies across retailers in todays marketplace, even less price-sensitive consumers had become savvy about delay for sales to buy or comparability across retailers to find the store offering the best prices that week. Instantaneous price comparisons weregetting easier, given the rise of mobile applications that allowed a consumer to scan a bar code on a product and find the lowest price for it at online retailers and nigh stores. Kohls was an aggressive high-low retailer, featuring small electronic signs on shelves throughout the store that dis reviveed original prices and discounted prices.These signs allowed Kohls the flexibility to change prices instantly, to facilitate frequent, short-term sales. Marketing consultant Jonathan capital of Oregon Baskin offered his thoughts on the high-low practice retailers engage in, When no price is the price for an item, it means that instead retailers engage customers in a constant cat-andmouse game in pursuit of the truth. No individual store can own sale pricing each solely participates in a round-robin of discounted offers that its c ompetitors have and/or will again match.28 Johnson felt that todays retail customer was savvy, The customer knows the right price. To think you can fool a customer is diverseness of crazy.2EDLP pricing strategies, such as that offered by Walmart, promise consumers that they will pay the same, low price every day. This frees customers from time lag for sale periods to purchase, and eliminates the need for retailers to offer coupons to drive purchase or to engage in constant advertising of price promotions via periodical newspaper circulars. EDLP is designed to make customers feel comfortable purchasing at the retailer without worrying that they could be getting a better deal somewhere else or at another time. In general, most department store retailers used high/low pricing strategies. Macys and Sears had flirted with EDLP pricing in the past but both had largely disposed it once they completed how addicted department store customers were to sales, coupons, and other discount pr ograms.AlthoughMacys still offered a limited set of items at an everyday value price, it heavily supplemented this practice with aggressive coupons and frequent sales events for the majority of the goods it carried. Macys customer Marietta Landon summarized the promotion addicted retail climate, Especially Macysthey make every pass a sale with saving passes and advertising galore.30The new pricing strategy was a big shift for J.C. Penney, a company known and love for its JCP Cash coupons distributed to customers via direct mail and email, its RedZone clearance aisles, and its weekly circulars advertising that weeks price specials. The Fair and Square pricing program would eliminate all coupons and weekly circulars instead the company would distribute a high quality, editorial content-heavy glossy magazine each month to highlight its monthly Values. The 96page magazine was as much a branding vehicle as it was a promotional one. $80 million in promotional funding would support each Monthly Value event.J.C. Penney now promised its customers that they would not have to jump through hoops to get a good price. Johnson hailed the strategy for its simplicity and transparency and the way it respected customers, People are stir with the lack of integrity on pricing,31 adding that We want shoppers to shop on their terms, not ours. Johnson intimated that By setting our store monthly and maintaining our best prices for an entire month, we feel surefooted that customers will love shopping when it is convenient for them, rather than when it is expedient for us.32 Michael Francis, J.C. Penneys new president, was excited about the new pricing moves, We are redefining the J.C. Penney brand so we become a store for all Americans, by offering an experience they cannot get anywhere else.This will start by freeing consumers from the barrage of promotions and undifferentiated shopping experiences they have become used to and transposition it with something entirely fresh and new that is homely in every aspect of our store.33 He added, It will be a breath of much-needed fresh air and give customers reasons to visit J.C. Penney more often than ever before. Our objective is to make our customers love to shop again.34 Francis was recruited by Johnson from Target and offered a signing bonus of $12 millionand a total compensation incase worth $44.7 million. He was charged with managing the marketing and merchandising efforts.Reactions to Fair and Square PricingIndustry observers could not contain their crocked opinions on the new pricing strategy. near called the move refreshing, daring and probably just what the retailer needfully, noting that its a scandalous move for any retailer, let only if a department store where high-low pricing and promotions have long been the norm.35 But others were far more skeptical. Pricing consultant Rafi Mohammed proclaimed, J.C. Penney lacks the differentiation to make this pricing strategy successful. . . . When sell ing a relatively undifferentiated product, the only lever to generate higher sales is discounts. Even worse, if competitors fail prices on comparable products, J.C. Penneys hands are tied-it is a sitting duck that cant respond.36 Mohammed also noted, J.C. Penneys Every Day prices will not be as low as the biggest discounts that it once offered.Instead, its pitch to customers is why draw the wait for the rock-bottom price game when Penney offers pretty good prices every day?37 Ignoring the skeptics, Johnson was committed to his new pricing plan, rolling it out across all stores on February 1st, after deciding not to conduct market research to test its appeal with customers, We debated whether there was a way to test. . . . We would have needed everyone to run the old business model and would have had to add new people to run a test in 10 percent of our stores. . . . We knew the customer would love the new strategy. We decided to get on with our future.38 ground on his experience a t Apple, Johnson also believed thatcustomers didnt always know what they valued it was up to companies to lead the way, You cant follow the customer. Youve got to lead your customersanticipate their needs and meet those needs, even before they know what they want.39A lot was locomote on the decision. COO microphone Kramer explained, We are fundamentally reimagining every aspect of our business and we fully expect the bold and strategic changes we are making to our operations will result in improved profitability. This should enable us to fund the transformation of J.C. Penneys store experience, while at the same time returning value to shareholders with steady earnings growth.40Communicating Fair and SquareDeGeneres was featured in a new advertising campaign to template in the new Fair and Square positioning. Bearing the tagline Enough. Is. Enough, the campaign encouraged consumers to drive against complex pricing structures, never-ending sales, an overindulgence of direct mail circulars and coupons cluttering their mailboxes, and the hassles of returning unsuitable products without a receipt. In the ads, DeGeneres travels back in time to ancient Rome, Edwardian England, and the angered West to learn if todays confusing price environment was always the norm.She encourages customers to reject the crazy price environment. The germinal campaign was witty and contemporary many found it reminiscent of Targets award-winning advertising. It was quite a freeing from J.C. Penneys previous campaigns that were more classifiable of department store messaging. Launched during the Academy Awards broadcast, the ads appeared to be a hit with consumers. Ace Metrix account that the ads scored well above average on persuasion and watchability metrics and achieved a personal best score for J.C. Penney.41Initial ResultsIn the first three months following the launch, 67% of products sold at J.C. Penney were purchased at the Fair and Square price, the highest price the ret ailer listed. Johnson could not hold back his satisfaction, This is profound. People are now buying at the first price, the right price. Thats the dream of every retailer.42However, trouble was looming on the horizon. with mid-March, mothers, a critically important chump market for most department stores, steady scored J.C. Penney lower on valueperception scores. These women, suddenly not receiving coupons and not seeing the weekly price promotions in the circulars, were downgrading their opinion of whether J.C. Penney offered good value for the money.43 This was despite the fact that J.C. Penneys prices during the time period were actually quite competitive. A Deutsche Bank analyst report showed that for a random basket of 50 uniform items, J.C. Penney was 9% cheaper than Macys, and 26% cheaper than Kohls.Consumer research firm BIGInsight reported negativity among adults 18+ for whether J.C. Penneys advertising campaign was Hot or Not? and showed Macys gaining ground on J.C. Pen ney in womens apparel shopping trips following the launch (See Exhibit 11). Morgan Stanleys Michelle Clark reported consumer survey results revealing that Shoppers think that the J.C. Penney of old actually offered better value than the fair and square model introduced a few months ago. Of the consumers who had been inside a J.C. Penney store since February, more cited higher prices (rather than lower) at the department store. In fact, only 16% of shoppers associated Best Prices with JCP. Furthermore, customers cited that bargains were harder to find and fewer aisles with deals were evident (see Exhibit 12).45 Loyal J.C. Penney customers were moving away from the retailer. One shopper, Wendy Ruud, complained that she was no long-range receiving coupons from J.C. Penney and was shopping more frequently at Target and Walmart, The walking(prenominal) J.C. Penney is about a half hour away from me.If I dont get a specialdiscount, its not worth the trip, she said.46 Another shopper e-ma iled the Huffington ring armor saying, They are catering to the younger shopper, and it isnt the younger shopper that kept them afloat.47 A third who considered herself frumpy and proud, commented, Hes working hard to de-frump the store without considering that many if not most of its customers might have shopped there precisely because they like the more conservative frumpy look.48 These early indicators played out in J.C. Penneys first earnings report following the launch of the new plan. Johnson had to announce a significant earnings loss ($163 million) establish on plummeting sales revenues (-19% overall, with e-commerce sales dropping 28%), gross margin condensate (from 40.5% to 37.6%), and decreasing customer conversion. Johnson asked investors to be patient, calling the first quarter sales drop the price were paying to get integrity back.49 He held fast to his faiths, We had to make the bold step. Its one big year we have to go through. Its genuinely hard but well get thr ough it.50 Investors showed no patience, sending the companys stock down 20%, the biggest single day drop in over four decades.51The critics did not waste time to great deal on Johnson. Time columnist brad Tuttle wrote, JC Penneys message seems to be one that some shoppers dont want to hear. They like playing games and hunting for deals, and the markdown from the original price is how they keep score. By eliminating coupons and most sales, JC Penney has been saying it doesnt want to play games anymore. That sounds wonderful, but among certain shoppers, its the resembling of grabbing the ball and taking it home. No more games, no more fun-and not much reason to visit JC Penney on a regular basis anymore. If, for the most part, a stores prices are going to remain the same tomorrow, and next week, and the month after that, theres not much incentive to browse the aisles for special deals today.52A Forbes columnist concurred, By taking away the weekly sales customers loved, Johnson aba ndoned his core JCP shopping enthusiasts. In effect, sign to the core JCP enthusiastsshoppers who have sustained J.C. Penney through its years of retail muddling, that they no longer mattered. He confused them, and he unfaltering them off.53 The Motley Fool sardonicallyquipped, The silver lining in J.C. Penneys awful report is that Sears struggling with its own dismal results has someone it can laugh at now.54Macys CFO Karen Hoguet was crow that her company was benefiting from J.C. Penneys missteps, reporting that sales in Macys stores that shared a mall with J.C. Penney were up significantly since the changes.55 And J.C. Penneys apparel suppliers were becoming anxious, as their sales dropped precipitously, some as much as 70% over the prior year. One prominent supplier indicated that he was increasing his business with Kohls to make up for the shortfalls at J.C. Penney.56These developments were sobering for Johnson yet he remained unfazed, Its been tougher than we anticipatedYo u know, we expected to be down. We are down a little more than we thought, but not large to change the strategyWere treating this company as a startupWere inventing a whole new model to do businessIt is a one year transition thats part of a multi-year transformation. But once we get to one year of de-promoting or repurchasing our integrity, I fully expect us to grow. And so weve just got to get through that year. And well get through it.57 Speaking at Fortune magazines sixth sense Tech conference in July, Johnson reiterated his support for the new pricing strategy, claiming that his board was totally supportive.When asked if he had a hazard plan whereby the company would revert back to high/low pricing, Johnson swore it was not in the cards, It wont happen while Im here because I know its not the right thing to do. And I know this is what connects in all with our own unique heritage. And every long company has a DNA in its core thattypically goes back to its founder. And when you reconnect with that, thats when good things happen. Thats what Wal-Mart has had to do. And its really led to great success. Thats what Apple had to do when Steve came back. Thats what were going to do.58Making Some AdjustmentsAs J.C. Penney management tried to decipher the spoil results, much of the blame was put on the marketing execution and on customers unyielding reliance on price promotions. Mike Kramer, J.C. Penneys new chief operating(a) officer expressed his frustration, Coupons, that drug. We did not sop up how deep some of our customers were into this. . . . We have got to wean them off this and educate our consumers.59 Johnson unsaved the marketing execution, claiming that it failed to clearly communicate the new pricing strategy, Our execution wasnt what we needed. Our pricing is kind of confusing. Our marketing kind of overreached Now the most important thing is to educate consumers on the price changes and make sure the core customer understands J.C. Penney sti ll has products they love, at exceptional value, every day.60 Francis took the fall for the deplorable earnings, abruptly leaving the company a mere eight months after he started as president.Following Francis departure, Johnson took responsibility for marketing and merchandising, believing that customers just didnt understand the story behind Fair and Square. He tweaked the marketing plan, adding five additional Best Price Fridays to the calendar, including the important Fridays anchoring Memorial Day Weekend and Black Friday. The advertising creative was changed to incorporate a harder-hitting Do the maths positioning (See Exhibit 13 for an example). In June, J.C. Penney reintroduced the S word sale into its advertising to help clarify that its Best Price Friday deals actually extended through the weekend until all inventory was sold. Under pressure, Johnson speculated what his old mentor, Steve Jobs, who passed away in October 2011, would have advised, I think Steves advice wou ld be dont worry about what others say. want your instincts. Do the right thing chip the course. But he would also say the essence is in the simplicity. And so he would have liked where we are going on pricing, but he would have said Youve got to clean it up. Youve got to be more direct.61 Johnson buckled down, What you cant do is chicken out.If you had looked at the data on the Genius Bar after a year and a half, we should have taken it out of the store. But it was something I believed in with every bone in my body.62 He continued, The world moves by innovators and innovators have to have the courage to count on something that hasnt been done before and the conviction to see it throughIt is really hard. It takes a lot of courage. Youve got to be able to have a few arrows shot in your back.