Penney Pricing Strategy

The merchandise Spinney sells consists of clothes, cosmetics, electronics, boo;ear, furniture, housewives, and jewelry. The company also sells its merchandise online through its website ‘spinney. Com’. Furthermore, it is one of the biggest apparel and home-furnishing retailers in the LASS. The company’s motto is to sell unparalleled designs or styles and to have a good balance between quality and price. L In 1927, Spinney had its initial public offering and is a publicly traded company since then on the New York Stock Exchange.

James Cash Penned retired in 1946, but he and his policies stayed influential for more than 10 years. The company did not sell n credit until 1 958 in order to avoid that customers could face the burden of debt. Later on, however, Spinney introduced store credit cards and shopping on credit became an alternative to the traditional cash-and-carry. The firm had overseas operations running from 1968 to 2003, the year it closed its international merchandise division. In 2008, it added a product line designed by Ralph Lauren to its range of goods. 2 2.

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Situation Analysis 2. 1. Background Spinney is a very traditional company with a history of over 100 years. Nevertheless, there were quite a few drastic changes happening during that mime period. F-room the sass to 1 sass, the firm experienced a rapid growth. During the Great Depression, the company’s profit even increased. The era from 1 960 to 1 975 could best be described as New Era because the company got into the mail-order business for the first time. Compared to its competitors, Spinney started quite late. From 1986 to 1995 a dramatic turnaround happened.

The corporation discontinued some of its product lines and also cut down its regional operations from five to four. Expenses also started to concentrate almost only on women as its customers. Up to date, the company has around 267. 00 employees and had 31. 85 billion USED sales in 2001. 3 2. 2. Customers 50% of Expenses customers are over the age of 55. For the company ‘Target’ this age group only makes up around 25%. Furthermore, only 36% of Kohl’s and Macy’s customers are over 55 years. So Spinney has, compared to its competitors, relatively old clients.

This is not good news because retailers normally love their customers to be rich and young. Expediency customers are exact the opposite in both ways. The percentage of the company’s customers under the age of 35 is only 20%. This percentage is higher for Target and Macy’s also. Their customers are richer than Spinney’s as well. 4 2. 3. Competitors Expenses competitors are Macy’s, Target, Kohl’s and Wall-Mart. Macy’s is higher priced than Spinney and sells more exclusive brands. Kohl’s, in comparison, operates at a lower price point than Spinney.

Kohl’s is also a little bit smaller than Spinney. Nevertheless, they are a competitor for Spinney that has to be taken seriously. Kohl’s positions itself as a discount retailer. They also sell their merchandise online, so the fact that they are smaller than Sixpenny is not a disadvantage. 5 Expenses market share in comparison to its competitors in 2012 2. . Industry Spinney operates in the retail sector. This sector is very sensitive to changes in the economy. For example if there is a recession, the sales often drop drastically compared to a boom where demand can exceed supply.

The biggest economic factor, which affects retails, is the unemployment rate. It is obvious that in times of high unemployment, the general public has significant less money to spend. So profits of retailers are closely related to the performance Of the economy. Accordingly, Spinney had good and bad times during its lifetime. 6 3. Change in Pricing Strategy This and the following chapters will describe one of the biggest management blunders in the retail industry. In the years before F-February 2012, Spinney was in general a very successful retailer in the US market.

Nevertheless, the board of directors and the shareholders were concerned about the image of Spinney and that the company could loose market share to big competitors like Wall-Mart. Consequently, they replaced their current CEO with a new chief executive officer, called Ron Johnson. Ron Johnson has a MBA from Harvard Business School and was responsible for making Apple’s in store concept, specially the genius bars, extremely successful. Because of this, Spinney was confident that Ron Johnson would be the perfect candidate to spice up their boring company image and to lead Spinney to a whole new level of success.

As a result, they granted Ron Johnson a lot of power and over the following years he was able to change the company accordingly to his personal taste without ever needing the approval of anyone else. Spinney’s board of directors and shareholders trusted him that much! The firm’s previous pricing strategy has always been focused on granting its consumers frequent discounts, coupons and sales. In order to not make losses because of that, the firm inflated the prices and then would grant a discount On it. No company on earth can give discounts on prices which are already fair all the time.

Ron Johnson did not like this way of pricing and he started to simplify it. It’s analyze in detail what he exactly changed in terms of pricing:7 1 . Former sale prices would now become every day prices That means disenchanted did not inflate the prices artificially anymore and instead offered the fair price without any discount. In that way the former sale prices became standard every day prices. 2. What used to be sales, is owe called ‘monthly value’ for certain items That means that Spinney still offered some discounts/sales but in a different way. Now, those items on sale would have the reduced price for a whole month.

This was not a very smart move of Ron Johnson because now customers do not feel the urge anymore to get something quickly before the sales stop. If customers have one month time, they might never come because they totally forget about it. 3. Best price on 1st and 3rd Friday each month This pricing policy was due to the fact that many customers got their salary on those days. 4. Easier pricing: 9. SUDS 10 USED for example Spinney started to change their price tags to whole figures. 5. Eliminated recommended manufacturer price Spinney did away with those prices on its price tags.

That was not a very clever decision because now the customers had no benchmark anymore. 8 Ron Johnson wanted to have a fair and transparent pricing. He personally detested this nontransparent pricing policy of Spinney. In order to illustrate his dislike better, here a quote Of what he said once: “Sales are akin to drugs, and I am trying to wean customers off drugs”9 Once Ron Johnson realized that his new way of pricing was not liked by a lot of Expenses customers, he aid: “… We have work to do to educate the customer on our pricing strategy and to drive more traffic to our stores… 1 0 We can see here, that Mr.. Johnson was using the inside-out approach in a rather ignorant manner. He believed that it is the customers’ fault if they do not like the new pricing strategy and that it is their responsibility to adapt to the changes. 4. Implementation Ron Johnson implemented all the changes very quickly. Experts heavily criticized this later on. He was so ignorant and arrogant that he did not think it would be necessary to ask customers in advance. He implemented the new rising strategy without doing any market research.

Also when the sales dropped in the first quarter after the implementation, he did not think that there might be something wrong with his new strategy, rather he believed that it just takes more time and that the customers will soon realize how much better Spinney is since the change in pricing. Ron Johnson had a simple and innovative vision but experts believe that he implemented all the changes too quickly. So it is important to learn from this that there are almost never “quick-fix” strategies. Al 5. Outcome The financial outcome of this new pricing Strategy, introduced and implemented by Ron Johnson, was a disaster.

First of all, lets look how the share price changed since the introduction of the new pricing strategy in 2012: Source: Google Finance This graph displays the loss in share value since 2012. The stock value of Spinney is now only 1/4 of what it used to be in 2012. A share price is always a good indicator of the general well being of a company. It is unfortunate for Spinney that they never managed to recover and to at least bring back the share price to where it used to be in 2012. The spreadsheet below compares Expenses and Macy’s financial at the end Of June 2013 in more detail:

The operating margins, the quarterly revenue growth and also the operating cash flow show worrying results. Macy’s seems to do much better. Furthermore, store sales declined by 18. 9 per cent in the first quarter after the change in pricing policy in February 2012 and total sales decreased by 20. 1 per cent. What is more, the Internet sales decreased by 27. 9 per cent compared to the year before. Those numbers clearly show a different situation than Ron Johnson wanted to make Expenses stakeholders believe when he said: “Customers love the new ICP they discover in our stores.