Rude awakening: Selling “rags” isn’t as easy as selling iPhones.

Punch line: Ron Johnson earned fame by designing Apple Stores.  He was lured to JC Penney to inject some of his merchandising magic.  Johnson immediately set out to remake JCP into Apple Stores: no discounting, corner boutiques, hangout areas.  Based on initial results, it’s safe to conclude that JCP isn’t exactly Apple.  Hot, world class products can make a lot of store formats work … but, apparently, hot store formats can’t make “ordinary” products  explode.

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Excerpted from WSJ: Penney’s Stock Plummets on a Big Loss

J.C. Penney CEO Ron Johnson is getting a taste of what it’s like to run a retail operation without world-beating products, and so far it is not pretty.

JCP is in the early stages of a transformation led by Mr. Johnson, the former senior vice president of Apple’s retail operations who took over the retailer last fall.

Mr. Johnson, who won plaudits for reinventing the retail experience with Apple stores’ clean lines and empty space, has laid out an ambitious yet risky plan that involves carving stores into a warren of specialty shops, turning the center selling space into an entertainment and hangout area, and eschewing constant “sales” in favor of lower prices every day.

So far, consumers don’t seem to like the strategy,

Company executives said that weaning of shoppers from their coupon addiction has hurt sales and store traffic more than anticipated.

65% of sales were at full price, but store traffic dropped 10% and average customer spend dropped 5% compared with a year earlier.  

JCP’s quarterly earnings report marked the first time that investors could gauge the impact of the new strategy.

The company missed nearly every financial target it had set for the latest quarter.

The retailer reported a $163 million loss, more than twice what analysts were expecting.

Same-store sales slid 19% … margins narrowed to 37.6% from 40.5%.

Investors whispered to each other about the “bloodbath.” 

Penney’s shares plummeted 13% to around $29 as the company suspended its quarterly dividend and announced that it will not meet its previous annual earnings target.

Fitch Ratings lowered its credit ratings on Penney to junk territory, citing risks of rolling out the new pricing strategy.

The earnings report is a blow to Mr. Johnson, who said  the turnaround has been a lot harder than management expected.

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Ken’s Take:

(1) When economic times are tough and daily deals (think Groupon) are the rage, it’s a fool’s mission to try peddling “ordinary” merchandise at list price. You’re just a sitting duck for competitors who will discount off your benchmark price.

(2) Unless you have exclusive, hot products or a substantial competitive cost advantage (think Walmart), everyday low pricing won’t work … you have to provide a lot of shopping “experience” to justify higher prices.

(3) Stop by a JCP store and ask yourself: Are these folks clamoring for a shopping “experience’?  Or, flip the question: Are there a lot of folks who are looking for a shopping experience thinking “let’s rush over to Penney’s”?

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