J.C. Penney Switches to Two-Tier Pricing

J.C. Penney Co. (JCP) is switching to a two-tiered pricing system and promoting price matching for the first time as Chief Executive Officer Ron Johnson alters a strategy that flopped with customers and caused sales to plunge.

The change to a system of everyday low prices and clearance items will take effect Aug. 1, as will the price-match guarantee, Kate Coultas, a spokeswoman for the Plano, Texas- based company, said today in an e-mailed statement.

Johnson, the former head of Apple Inc. (AAPL)’s retail operations, in January introduced a three-tiered pricing system of regular prices, monthlong sales on seasonal items and two “best prices” promotions each month. The strategy didn’t catch on: First-quarter sales fell 20 percent, the biggest quarterly drop since the period ended in October 2004.

“A change in the pricing policy was absolutely necessary,” Bernie Sosnick, an analyst at Gilford Securities in Melville, New York, with a hold rating on the stock, said in a telephone interview. While the monthlong sales didn’t excite shoppers, “‘clearance’ is a word they understand.”

J.C. Penney will match similar local competitors’ current advertised prices on identical items if customers show the ad at checkout, Coultas said. The program doesn’t include Sephora cosmetics or the retailer’s salon, optical, portrait or custom decorating departments, she said in an e-mail.

Exclusive Brands

Private and exclusive brands accounted for 55 percent of merchandise sales at J.C. Penney in 2011 and 2010. Outside of that, much of the merchandise is items such as Nike Inc. (NKE) footwear or Levi Strauss & Co. denim that is manufactured at suggested prices, so J.C. Penney’s business model “doesn’t lend itself to direct price competition,” Sosnick said.

“It’s not a grocery store or a Best Buy,” he said. “I find it hard to imagine as a consumer what I would match.”

Price-matching will be helpful for J.C. Penney’s credibility as the retailer reduces its assortment of private- label products, Liz Dunn, a New York-based analyst at Macquarie Group, said in a telephone interview.

“It definitely adds a layer of pricing integrity and conveys value to consumers, but then it also puts the onus on the consumer to kind of go out there and see if they can find a better deal,” Dunn said. “It’s a marketing tactic, but it’s one that other retailers use, and use successfully.”

J.C. Penney will promote the price-match program on store signs, on the back of receipts and in preprints and direct mailers in August, Coultas said.

Johnson said last week that the retailer was working on simplifying its pricing strategy.

“Our pricing has been kind of confusing, our marketing overreached, so we’re going to bring that back,” Johnson said on July 18 at the Fortune Brainstorm Tech conference in Aspen, Colorado. “We’ll really honor the everyday price in a different way.”

J.C. Penney rose 1 percent to $22.21 at the close in New York. The stock has dropped 37 percent this year.

To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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