A Benefit from the Recession

January 25, 2012

Getting rid of markup prices:

NEW YORK (AP) — J.C. Penney is permanently marking down all of its merchandise by at least 40 percent so shoppers no longer have to wait for sales to get bargains.

Penney said Wednesday that it is getting rid of the hundreds of sales it offers each year in favor of a simpler approach to pricing. Starting on Feb. 1, the retailer is rolling out an “Every Day” pricing strategy with much fewer sales throughout the year.

The plan, the first major move by Apple executive Ron Johnson since he became Penney’s CEO in November, is different from Wal-Mart’s iconic everyday low pricing. Unlike Wal-Mart, Penney’s goal isn’t to undercut competitors, but rather to offer customers more predictable pricing.

“Pricing is actually a pretty simple and straightforward thing,” Johnson told the Associated Press during an interview ahead of the announcement at the company’s Plano, Tex. headquarters. “Customers will not pay literally a penny more than the true value of the product.”

Penney’s plan comes as stores are struggling to wean Americans off of the profit-busting bargains that they have come to expect in the weak economy. The move is risky, though, because shoppers who love to bargain-hunt may be turned off by the absence of sales.

Recessions often cause businesses to clean house and become more competitive for the consumer dollar.  Doubling the price of clothing is nonsense and I usually wait until a good sale happens–but now I can count on “sales” being the everyday price.  Losing money is not sustainable over the long-haul, and other businesses will have to stop putting on sales that lose money or declare bankruptcy.

While they are cutting their margins, they are not completely.  All prices will be marked up slightly.  If a price is cut by 40%, you can bet it was marked up 100% from the manufacturing price.  That still means 20% markup.  For example, a suit that cost J. C. Penney $50 is marked up to $100, but now gets cut back to $60 still means they make $10 on the suit.  Given that they target the middle class, it makes sense to just cut down the markups simply because most people in the middle class don’t pay over-the-top prices on clothes (during a recession) when they know they will be on sale at least once a year.

This makes me wonder if J. C. Penney thinks the recession is far from over.  After all, businesses don’t remake strategies for brief, minor recessions (unless they were so bad they would fail during the economic hiccup).  This sort of plan makes me think that their economists and analysts view the recession as permanently altering spending habits–no more of impulsive buys on huge markups.  It also seems like a good strategy to eliminate millions spent on weekly ads and changing sale prices every month.  It creates certainty and rapport with customers, just like Walmart has created a reputation for cheapest prices.  It also gives them a jumpstart on the competition; despite what people say, business is about beating the competition, and lowering prices without lowering quality without losing money is a great way to win.

And the clearance rack will still be around.

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One Response to “A Benefit from the Recession”

  1. Simon Grey Says:

    Sounds like it’s time to go shopping


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