University of Chicago
Type of paper: Thesis/Dissertation Chapter
J.C. Penney: Creating America’s Favorite Store
In 2013, this department store has been celebrating being in business for 110 years. It also once lured its customers in with its famous discount pricing strategy and coupons. The retailer is J.C. Penney, a fixture at shopping malls across the country. In 2012, J.C. Penney rebranded itself by making the announcement that it wanted to become America’s favorite store by creating a specialty department store experience (JCP, 2013). Founder James Cash Penney began the company with a Golden Rule: treat others the way you want to be treated Fair and Square (JCP, n.d.).
The well-known retailer has grown to nearly 1,100 stores and boasts a workforce of more than 116,000 full and part-time employees (Strand, 1998). JCP operates in the continental United States, Alaska, and Puerto Rico. Loyal consumers flocked to the giant big box store where it sold women, men, and children’s clothing along with jewelry and household items such as appliances and home furniture. Over the years, the giant retailer has polished its marketing finesse. JCP’s current catchy advertising line: “Creating America’s Favorite Store” (JCP, n.d.).
In corporate America, there are four different market structures: pure competition, pure monopolistic, l responsibility, Decision making, oligopoly, and monopoly. J.C. Penney falls under the pure competition market structure which is defined as many sellers supplying identical products (Douglas, 2012, Ch. 7). J.C. Penney humble beginnings started as a dry foods store and branched out over the years as a successful chain department store competing against other stores such as Sears, Macy’s, and Dillard.
J.C. Penney’s corporate culture includes social responsibility to its consumers, its employees, its suppliers, and to the environment. However, over the two several years, J.C. Penney has endured an economic downturn which began after the hiring of former Apple executive Ron Johnson in late 2011 and his subsequence firing in early 2013 (“J.C. Penney’s Chief Executive Ron Johnson Ousted,” 2013). Executives, such as Johnson, have the power to influence the purchasing power of consumers through several different variables such as product pricing, product design and packaging, product availability, and product promotion (Douglas, 2012, Ch. 3).
This paper shall explore the company’s managerial economics decision which includes taking a look at its corporate social responsibility, consumer demand, the change in its pricing strategy over the past two years, attitudes toward risk, and the price elasticity of demand. SOCIAL RESPONSIBILITY COMPANY:
J.C. Penney sets high corporate social responsibility for itself. On the company’s official website, it lists the company’s social responsibility which includes establishing strong environmental responsibility. Under the company’s corporate governance, JCP touts itself as a stewardship to the environment and approved its core principles in 1991( JCP, 2013).
Among some of JCP’s core principles include: continuing to review its operations practice in assessing its potential impact on the environment or related human health or safety issues; working with suppliers and merchandisers to develop packages and products that are environmental responsible and safe; and taking steps to reduce the use of non-renewable energy. Among some of the company’s recent progress include: making a conscious effort to reduce packaging and paper usage, setting up an elaborate waste management recycling program, and promoting energy conservation (JCP, 2013).
JCP’s corporate social responsibility shows that the company follows the Triple Bottom Line concept shortened to TBL. This concept follows the three pillars: people, profit, and planet (Faragher, 2008). Author Jo Faragher (2008) explained in her article “Sustain To Gain”, that the triple bottom line means a “business is run not just on economic performance, but also on how it affects the community and the environment” (p. 20-22). Companies such as JCP find that they cannot operate while ignoring its responsibility to the environment. By being environmentally responsible, JCP’s actions may entice certain consumers who may only spend their money on companies that care about their community and the environment. Despite a long-standing and strong corporate governance, JCP profits spiraled in 2012 following a series of poor economic managerial decisions. 2012 SEC ANNUAL REPORT:
The latest figures for J.C. Penney’s sales and profits are from 2008 to 2012. According to the company’s latest United States Securities and Exchange Commission filings for 2012, the report states that the company’s market price common stock has fluctuated substantially and may continue to fluctuate significantly (JCP, 2013). Below is a graph with values indicating the company’s struggle for profits in 2012 following the hiring of Ron Johnson. The former Apple executive launched a new pricing strategy following his appointment as CEO of J.C. Penney in late 2011.
In its first quarter in 2012, the company’s profits lost $163 million dollars, sales skidded to 20%, and traffic to its stores decreased by 10% (Zmuda, 2012). By the end of 2012, the company net sales decreased by more than five million dollars compared to 2011 prior to Johnson’s appointment. Unfortunately for Johnson, his confusing pricing strategy did not catch on with loyal JCP shoppers. In addition, Johnson was stubborn and did not believe in conducting research with his new marketing strategy at a few select stores before he rolled it out to all the stores (Kumar, 2013). Johnson’s biggest cheerleader at the time of his appointment was William Ackman, Founder and CEO of Pershing Square Capital Management, LP. Ackman serves on the Board of Directors of JCP and owns 18% of the company as well as other derivatives that further would boost his exposure (Glazer, Lublin, & Mattioli, 2013).
Below is a graph with figures showing JCP’s total net sales in 2012 which decreased by more than five million dollars versus in 2011 (JCP 2012 SEC, 2013). In this case, poor management decisions impacted the company’s profits. | | |2012 |2011 |2010 |2009 |2008 | |Total Net Sales: | |$12,985 |$17,260 |$17,759 |$17,556 |$18,486 | |Sales Percentage: | |-24.80% |-3% |1.20% |-5.00% |-6.90% | |Operating Income: | |-1,310 |-2
|832 |663 |1,135 | |Income loss | | | | | | | |Continuing operations | |-985 |-152 |378 |249 |567 | | | | | | | | | |($ in millions) | | | | | | |
CONSUMER DEMAND AND PRICING STRATEGY:
Former Apple executive Ron Johnson took the helm at J.C. Penney in late 2011. At the time, Johnson’s predecessor was Mike Ullman whom was fired after more than seven years at the top strategist for JCP (“J.C. Penney’s Chief Ron Johnson Ousted,” 2013). Johnson’s experience on paper looked great. He worked for Apple and Target and his appointment was considered a coup for JCP (Kumar, 2013). Ackman touted him as the man who would turn J.C. Penney’s stores into sellers of name-brand clothes with few discounts (Glazer, Lublin, & Mattioli, 2013). In the article “The Man Who Went Too Far At J.C. Penney”, author Nikhil Kumar (2013) stated that “for decades it has served the great American middle class, luring them in with discounts and coupons” (p. n/a).
Johnson’s first action in changing JCP included eliminating the company’s old pricing strategy which he considered as fake prices because the company was constantly marking down prices (Kumar, 2013). Johnson eliminated the fake prices and called his new pricing strategy as fair and square. Here is an example of Johnson’s new pricing strategy. Instead of marking up a t-shirt at the price of $14 dollars and then slashing the price to $6 dollars with its markdowns and coupons, Johnson suggested to just marked the t-shirt at $7. Johnson explained that his new pricing policy not only simple, but fair and square (Kumar, 2013). Unfortunately, the new strategy did not meet with enthusiasm from loyal consumers.
In managerial economics, the pricing strategy is important for consumers especially for loyal shoppers. A change in pricing also means a movement in the consumer demand curve (Douglas, 2012, Ch. 4.1). Pricing is considered a
decision variable and plays a part in consumer demand (Douglas, 2012, Ch. 3). In managerial economics, decisions makers can follow a model called the utility-maximizing model of consumer demand. In the textbook “Managerial Economics”, author Evan J. Douglas (2012) explained this model as a way “individual consumers make decisions to buy products based on the expectation that the purchase will allow them to gain the most psychic satisfaction, or utility, from their limited incomes” (Ch. 3.1). Limited income is also another way of describing discretionary income, money that is available to consumers after paying the necessary expenditures such as mortgage, utility, and other bills.
In the case of JCP, the company experienced a diminishing marginal utility. The marginal utility of a product means that as one product goes up, another product that is a substitute goes down (Douglas, 2012, Ch. 3.1). With the confusing pricing strategy, loyal shoppers and prospective shoppers turned elsewhere to shop such as Sears, Target, and Macy’s to achieve their satisfaction in spending their money. In managerial economics, consumer’s satisfaction is explained as the total utility. In describing this relationship between Product A which is JCP versus Product B, Sears, the graph will show the indifference curves to be convex which means as Product A goes down while Product B go up (Douglas, 2012, Ch. 3.1). Thus, the consumers’ total utility continued to achieve while JCP’s marginal utility diminished.
Perhaps another mishaps of Johnson’s new pricing policy included using the concept of penetration pricing which is the practice of setting relatively low price to achieve more consumers’ sales, therefore in return, the end result is gaining more market shares (Douglas, 2012, Ch. 9.1). Before Johnson came on board, he believed that JCP’s old pricing policy devalued the company’s brand, but it also caused confusion because the company was constantly sending out flyers and coupons that added little to the shoppers’ experience (Kumar, 2013). In the end, Johnson’s risky move did not pay off and the company saw a decline in profits in 2012. ATTITUDES TOWARD RISK:
Johnson’s mistake was not road-testing his pricing ideas plan before implementing it. Risk analysis is part of managerial economics. Johnson did not take into account adjusting for risk using the certainty equivalent factor looking at the decision and the amount of money that a decision-maker feels is equivalent to the expected value of a decision (Douglas, 2012, Ch. 2.1). There are several different attitudes toward risk running from the gamut of being risk neutral to an individual who is a risk seeker. Johnson’s attitude toward risk appeared to be more of a risk seeker defined as an individual who seeks a risky action because in return that risky action means a high rate of return (Douglas, 2012, Ch. 2).
Another more transparent decision rule that should have been followed for Johnson was using the Maximin Decision Rule (MDR) which is the practice of choosing choose the alternative that has the highest maximum value and the lowest minimum outcome (Douglas, 2012, Ch. 2.2). Although it appeared that Johnson did not seek out an alternative to his plan, perhaps, his best practice should have involved following the MDR concept. PRICE
ELASTICITY OF DEMAND:
Along with the decision variables of product, pricing, placement, and promotion, in managerial economics, decision makers also need to consider the price elasticity of demand or PED. The sensitivity of quantity demand is known as the elasticity of demand. The price elasticity of demand is affected by prices where high prices suggest consumers would buy less of the product and lower prices mean consumers would buy more of the product (Douglas, 2012, Ch. 4). PED is influenced by a multitude of factors such as availability of substitutes, household income, consumer preferences, expected duration of price change, and the product’s share of a household’s income (Andreyeva, Long, & Brownell, 2010). According to the website www.About.com Economics:
The higher the price elasticity, the more sensitive consumers are to price changes. A very high price elasticity suggests that when the price of a good goes up, consumers will buy a great deal less of it and when the price of that good goes down, consumers will buy a great deal more. A very low price elasticity implies just the opposite, that changes in price have little influence on demand (About.com Economics, 2013).
In the case of JCP, the company witnessed the opposite with the price elasticity of demand. Even though Johnson’s new pricing ideas were meant to streamline the shopping experience for the consumers, the end result did not take place. Consumers did not understand nor did they liked the ideas. In the end, the faithful consumers abandoned the company and looked elsewhere to spend their money. Shoppers felt the new pricing ideas were confusing adn did not feel that they adhere to JCP’s The end result: profits suffered in 2012 with a 25% sales slumped compared to 2008 when the company brought in nearly $19 million dollars in total net sales (JCP, 2013). RECOMMENDATIONS:
Steps have been taken to rectify the managerial decision makings that took place in late 2011. In less than two years, Johnson is out, along with his team of executives. The Board of Directors for JCP replaced Johnson earlier this year with his predecessor Mike Ulman (Kumar, 2013). Although Ulman received criticisms under his leadership, JCP and the Board of Directors returned to the old strategy
In addition, the company returned to its popular pricing strategy that it abandoned in 2011 following the appointment of Johnson. That pricing strategy involved increasing prices of private label lines followed by slashing prices as a means of bringing up sales and margins (“Department Store JCPenney Revives Abandoned Pricing Strategy”, 2013). Companies tend to go back to the same marketing strategies that worked in the past. Prior to Johnson’s departure, he admitted that his bold, but risky pricing ideas were a mistake and acknowledged that ending the retailer’s markdown and couponing were a mistake that cost him company’s profits and his job.
Before JCP commit to changing its marketing strategy, it needs to consider and perhaps ask consumers what they want. At times, decision makers forget to consider and ask consumers what they want versus just believing or thinking consumers want change. Johnson’s rejected retail industry procedures which included testing changes in limited stores before rolling them out to all the stores (Glazer, Lublin, & Mattioli, 2013). This was not the case for loyal shoppers. They wanted to feel that they were getting a bargain versus just paying for one simple price.
These are necessary changes the company has implemented following the firing of Johnson in early 2013. JCP is now looking to regain its standing in the department stores war. At the helm is Ulman who lead the company for the past seven years prior to being replaced two years ago. During his time as CEO, JCP saw profits gain (JCP 2012 SEC, 2013). CONCLUSION:
J.C. Penney is reinventing itself and wants consumers to remember that it is “Creating America’s Favorite Store”. It has a new CEO who was reinstated and returned to its old pricing plan. It is a company that has a strong corporate governance, but due to poor managerial economic decisions, J.C. Penney went through a spiral for nearly 18 months before the bleeding stop. The poor economic decisions led to profits loss along with low morale within the company (Kumar, 2013). In managerial economics, decisions such as pricing, product, placement, and promotion affect the consumers demand curve. JCP experienced it firsthand.
About.com Economics (2013). Price elasticity of demand. Retrieved on June 2, 2013 from
http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm Andreyeva, T., Long, M. W., M.P.H., & Brownell, K. D., PhD. (2010). The impact of food prices on consumption: A systematic review of research on the price elasticity of demand for food. American Journal of Public Health, 100(2), 216-22. Retrieved from ProQuest Central. doi: 903343408. Department store JC penney revives abandoned pricing strategy. (2013). Retail Week, Retrieved ProQuest Central. doi: 1324133045. Douglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: Bridgepoint Education. Faragher, J. (2008). Sustain to gain. Personnel Today, pp.20-22. Retrieved from ProQuest Central. doi: 229932707. Glazer, E., Lublin, J.S., & Mattioli, D. (2013, April 9). Penney backfires on ackman. Retrieved on June 2, 2013 from http://online.wsj.com/article/SB10001424127887324504704578412440293890624.ht