Ron Johnson's Plan Puts J.C. Penney At Risk

| About: J.C. Penney (JCP)

When Ron Johnson took over J.C. Penney Company Inc. (NYSE:JCP), the market was excited that he would be the one to bring change to the company. Johnson did a great job when he was SVP of retail operations at Apple (NASDAQ:AAPL). He is the one that created the concept of the Apple store. He also started the genius bar, which is Apple's version of tech support.

While Ron Johnson did a great job at Apple, he has not been able to achieve that sort of success at J.C. Penney. The shares of J.C. Penney are down more than 20% since Johnson took over as CEO.

When Johnson took over as CEO, one of his major plans was to simplify the pricing strategies the company uses. For example, if you go to an Apple store looking for a Macbook or an iPod, chances are you will know what price to pay. Little discounts are offered and generally all Apple stores have similar prices.

Whereas if you go to a J.C. Penney store, you will see various sales every other day. Sometimes they have yellow sticker sales, where you get 15% of an additional 50%. Sales vary all the time at J.C. Penney stores. Johnson thought this pricing style was confusing shoppers and was costing the company sales.

So instead of J.C. Penney saying "sales", the company called the new promotions "month long values". However, this strategy proved to horrible when shoppers became confused about the promotions. Before shoppers were simply presented with coupons and J.C. Penney made their sales clear on the newspaper ads. Johnson's strategy was worse as consumers had little idea if a discount would be given or if the value was in the retail price.

This strategy ended up being poor as SSS fell 18.9% in the first three months of the introduction of the strategy. With the lack of coupons, shoppers perceived the prices to be higher and they didn't feel as if they were getting a discount on their items.

I admire Johnson's 'Keep It Simple' approach, but J.C. Penney is not the type of store where that strategy works. It worked great for Apple because it only has a small line of products it needs to market, so its easy to implement this strategy. However, J.C. Penney has various different brands and types of products, so a simplified approach may not be the best.

J.C. Penney is among a list of big box retailers that are taking a hit as consumers choose to shop online from retailers such as Amazon (NASDAQ:AMZN). Amazon has been seeing rapid growth due to the offering of better discounts, as well as a higher selection of clothing.

Its good the company has realized the strategy didn't work, but it will still take a toll on sales. Damage has been done on revenue as consumers were confused about pricing. Remember when Netflix (NASDAQ:NFLX) tried to implement a dual pricing model. Reed Hastings planned to charge differently for mail and online movie rentals. The company thought this would give consumers more choice, but in the end Netflix users became frustrated.

Netflix's user base fell as consumers opted to go elsewhere. After a PR nightmare, Hastings decided to change the pricing back to what the company initially had. Johnson's mistake shows that the company has very little direction on what it wants to do. Johnson must understand that what worked for Apple won't work for J.C. Penney.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.