The metaphor that bargains = drug works in two ways. For consumers, they're addictive. For retailers, too much can lead to overdose and brand damage. In 2008, with clothing stores like American Eagle slashing prices in the teeth of the recession, Abercrombie & Fitch announced it was done with discounts for fear the constant promotions would destroy the brand. The stock plunged 80% in 11 months. Witness the (pricing) power of the bargain.
JC PENNEY vs. HISTORY
There are two kinds of shoppers, says Brett Gordon, a professor at Columbia Business School. There's the bargain-hunter and the clock-watcher. If the first walks into a store without a bargain, she leaves. But the second customer isn't looking for markdowns. She's looking at her watch. She just wants what she wants, and fast, coupons or no.
"With constant promotions, JC Penney has been attracting the first customer, who is cheap, and losing the second customer, who is actually willing to spend more," Gordon says. "They're stuck with the lemons addicted to coupons. And, like with any addiction, you can either cut them off or wean them off."
JC Penney chose to go cold turkey. Its new strategy features normal low prices, monthly specials, and once-a-year discounts. Even if it isn't paying off immediately, Gordon says it's the right way forward. Or, perhaps, the only way forward.
"It's very hard to get
people to change behavior when it's been ingrained in the customer," he said. "The
issue is: Can JC Penney weather the temporary decline before customers
start coming around, or will they fail in the interim?" The company is flying into a perfect storm. Department stores are in decline for economic reasons (the recession), demographic reasons (incl.: younger people moving away from older suburbs), and technological reasons (Amazon.com is a department store in every room).
"A lot of people have said Ron Johnson has to succeed because he did amazing things for
Apple stores. But this isn't apples to oranges," he said. "Literally, it's apples to pennies."
In January 2009, the stock of Abercrombie & Fitch hit rock bottom at $17, months after the company announced it was done with bargains. Then, with the economy, the stock started to climb. Past $30. Past $50. Past $70. The pricing strategy, whose failure was so obvious to business writers in 2008, had ostensibly preserved the company's brand among upper-middle-class buyers.
But profits are fickle. Three years later, the stock is back to $30.
Abercrombie's story might be a perfect example for JC Penney, or a horrible example, or something in between. Who knows? But victory depends not on the unstoppable genius of Ron Johnson, but on his customers' immovable dedication to discounts. Changing somebody's mind about a product isn't so hard. Changing our brains? That could take a few business quarters.