Focus On: Barbara E. Kahn

J.C. Penney’s New Old CEO

Posted on April 10, 2013

JCP_Header_logoWith the company’s stock price tanking (12% yesterday), sales falling (25% for the year) and store traffic dropping off, J.C. Penney’s board decided on Monday to replace CEO Ron Johnson with former CEO Myron Ullman. Johnson, a retailing whiz at Apple before he moved to Penney, failed to get mileage out of a new strategy that eliminated coupons, cut out hundreds of brands and introduced a new boutique-type store-within-a store concept.

Was the board’s move a surprise? Long overdue? And what lies ahead for Penney given the retail sector’s ongoing challenge to persuade consumers to keep buying?

“It was clear that there were problems. The issue was how long the board’s patience would last,” says Wharton marketing professor Barbara Kahn, director of the school’s Jay H. Baker Retailing Center. “Ron Johnson asked for a full two years to test his ideas; [the board] didn’t grant him that…. He burned through money, no question. So from a business point of view, the ouster might be considered long overdue.”

If Johnson had been given more time, could he have made his new strategy work?

“That’s the big question,” says Kahn, who wrote a blog post about Penney before Johnson’s ouster. “Johnson says ‘yes’. Most in the industry say ‘no’. They say he didn’t test his strategies; he didn’t understand the customers; he didn’t understand his employee base. The margins are quite different in this business than at Apple — significantly lower at JCP – and he didn’t seem to appreciate that.”

His biggest mistake, she adds, is that he “didn’t test any of his ideas to see customers’ response and understanding. There is no question that his pricing strategy was flawed. Originally, the new pricing strategy was too confusing. The initial advertising was negative, and telling customers that they were stupid to adhere to the old price promotions is not effective or smart advertising. A few more pricing mishaps later, and finally JCP was back to coupons – which the customers demanded. And why did they demand the coupons? Because they provided a reason for the customer to come into the store. Because having a discount price provides a reference price, and we know customers base value on relative pricing strategies.”

Furthermore, in bad economic times, Kahn notes, “JCP customers needed even more incentive to go shopping. The coupons provided all of that. But by the time Johnson understood this, it was too late, and even the coupons were not effective.”

Kahn, however, also offers praise for parts of Johnson’s merchandising strategy: “It is creative and has potential. Whether there are the resources and time to implement it now is questionable.” She points to his proposal for “stores-within-stores on a ‘street’ around a ‘town center.’ The street would encourage people to linger in the store, surf the net, drink coffee. The town center would feature events. Both would increase the in-store retail experience and the initial response was good…. But there were too many stores-within-stores planned, and it was too difficult to get them implemented quickly enough. And the trouble with Martha Stewart … didn’t help at all.” Macy’s sued Penney last year after Johnson partnered with Martha Stewart Living Omnimedia to sell Stewart’s housewares in Penney stores, despite the fact that Macy’s has an exclusive contract with Stewart for certain housewares categories.

As for Ullman, “he came back out of loyalty for the store and the brand. He’s in a very tough position,” Kahn says. “There is a possibility that the store will have to go through bankruptcy to get out of the mess.” In addition, “it should be noted that some of these problems were exacerbated by a customer base that was likely hit hard by the recession. Many stores suffered during this time, although none as badly as Penney.”

Wharton marketing professor Stephen Hoch wonders why Johnson took the job in the first place. “It was a career move from hell, and I’m not sure why he wanted to leave Apple. More importantly, I never could understand his enthusiasm for ‘reinventing’ the moderate-[priced] department store,” which Hoch considers a flawed concept.

Ullman, he says, “is a seasoned retailer so he will do okay. But he was responsible for where they were when Johnson took over, and that [situation] obviously needed fixing.” Johnson’s pricing approach, Hoch adds, “was obviously not going to work, and he should have known that from his pre-Apple days.” The company has “suffered a tremendous body blow in terms of lost sales and a huge cash drain. It will not be easy for them to get back into the thick of things and succeed. The brand name is not that strong and never has been.”

Wharton management professor John R. Kimberly says Johnson’s ouster “came sooner than I expected. It was clear that his magic hadn’t transferred from Apple, but boards typically are slower to move.” And while the huge drop in sales no doubt played a role in the board’s decision, “it’s more about what was behind the drop that shook the board’s confidence, particularly the waffling on the ‘no sales’ policy and the Martha Stewart mess.”

Kimberly doesn’t think giving Johnson more time to execute his strategy would have worked. “Penney’s customers were not Apple’s customers, and it’s hard to imagine that you could really turn a JCP store into an Apple store. The whole ‘customer experience’ in the two rests on fundamentally different bases.” One of Johnson’s mistakes, he adds, is that “he may not have understood the roots of his success at Apple; he may have drawn the wrong lessons from his experience there. Certainly it wouldn’t be the first time that’s happened when a senior executive transitions from one industry to another.”

As for Penney’s chances of surviving in this increasingly difficult market, Kimberly acknowledges it will be tough. “They have some formidable competition, and they were already losing market share, which is why they [hired] Johnson in the first place. They are now even further behind. I can’t imagine investors are going to be thrilled, and it’s a stretch to imagine how they will win back customers. It will take a turnaround executive with a cast iron stomach and Teflon outerwear to rescue this one.”

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Estee Lauder’s New Skin Care Brand in China: The Potential for High-risk, High-reward

Posted on October 15, 2012

Can Estee Lauder Companies make “Osiao” a household word in China’s luxury skin care market?

The New York-based manufacturer of skin care, makeup, fragrance and hair care products is banking that Chinese women will buy a new high-end brand tailored specifically for them, designed to promote what Estee Lauder’s scientists say Asian women want most in a skin care product — “natural radiance.”  

Already known for such brands as Bobbi Brown, Clinique, MAC, Origins and La Mer, among others, Estee Lauder’s decision to launch a whole new brand — rather than simply a new product — suggests the company is confident that an initiative begun more than five years ago will expand Estee Lauder’s footprint not just in China, but throughout Asia. The Osiao product line is expected to sell for between US$45 and US$190.

The venture is not without risk. Osiao — which is being introduced this month in only two department stores in Hong Kong and on some Cathay Pacific Airways Hong Kong flights – already faces competition from other Asian skin care products. In addition, its success depends to some extent on continuing strength in the high-end luxury market, despite weakening in the Chinese economy overall. And some observers question whether a hybrid product like Osiao will appeal to Chinese women. According to a New York Times article, Osiao will use English labels but its formulas will contain such ingredients as ginseng, Asiatic pennywort and ganoderma.

Wharton faculty familiar with the Chinese market are generally optimistic about Estee Lauder’s venture, while also noting the challenges that any new brand faces. “As part of the Estee Lauder family, Osiao can and should leverage the high brand equity of Estee Lauder in the Chinese market, at least in the initial stage,” says marketing professor Qiaowei Shen. “Brand name is still a very important element when Chinese consumers are choosing their skincare products.” While it probably won’t be hard “to convince some consumers to try the new brand, the difficult part [will be] to convert them to loyal customers. The true quality of the product is ultimately the key.”

The concept of using Chinese herbs as ingredients in skincare products is not new, Shen adds. “A brand that claims to specifically cater to Chinese or Asian skin types does not necessarily win market share. Many brands originating from Korea and Japan, which are designed for Asian skin by nature, already have products with ginseng or other Chinese plants as ingredients. How is Osiao different from these?”

The market “is there [and] the brand will enjoy a glow from the [reputation] of the parent company,” says Shen. “But in the end, whether consumers are going to repeat their purchase and spread positive word of mouth depends on whether the product quality lives up to their expectations.”

A More Sophisticated Market

Estee Lauder, founded in 1946, is experiencing strong growth in China. The company reported a rise in fiscal fourth quarter earnings of 25% and a 9.2% increase in revenue, to $2.25 billion. According to an article in The New York Times, fiscal 2012 is the first year that sales in the Asia Pacific region exceeded $2 billion. The company sells its products in more than 150 countries and territories mainly through limited distribution in, for example, high-end department stores and perfumeries, and specialized retail stores. China, with sales of $500 million, is its third largest market, behind the U.S. and Japan.

Wharton marketing professor Barbara Kahn gives Estee Lauder high marks for “understanding how important skin care is to the Chinese consumer. One of the key differences between China – and Asia, in general — and the U.S. is the importance of skin care products. If you look at a typical drugstore, even a Sephora in Asia versus one in the U.S., you will see a larger percentage of the store devoted to [those items].” Kahn also points out that Chinese consumers think of the skin care process “as a multi-step regime, and they take it very seriously. They are generally more sophisticated in this category than the typical American consumer.” Given the importance of the skin care category “and the amount of money consumers are willing to spend, this strategy of developing a new local brand makes a lot of sense.”

Estee Lauder’s initiative is “brilliant [as well as] risky,” according to Wharton marketing professor David Reibstein. In China, he says, a number of trends come into play: “A strong desire to be beautiful, with a heavy concern about skin care; a desire to be on the leading edge of fashion and skin care [as shown by] designer clothes, shoes and cosmetics all coming from other parts of the world; and a desire for, and intrigue with, foreign brands [as shown by] the popularity of some of the most visible fashion brands.”

The fact that Estee Lauder understands “the Chinese market, the skin care needs of the market, premium positioning and branding, and how to gain distribution” suggests the new brand will be a “winner,” Reibstein adds. The risk for Estee Lauder is that “it’s a crowded market…. The big question is whether there is room for both La Mer [another premier skin product from Estee Lauder] and Osiao.”

Wharton operations and information professor Marshall Fisher – who was in China recently teaching a global supply chain management course — breaks the scenario into two questions: Will a high-priced product sell in China, and how much should the company adapt the product to Chinese tastes?

The answer to the first question “is clearly ‘yes,’ if you look at the number of successful luxury brands that have entered the country,” Fisher says. “The reason is that even though average disposable income in China is below [that in] the West, it is such a big country that the top of the income pyramid is huge. This has made China a prime target for luxury brands.”

Products entering China have adapted to varying degrees, Fisher adds. “Nike changed little, but KFC changed almost everything; their comment was, ‘All we brought from the U.S. was the picture of the Colonel.’ Both have been highly successful in China. Evidently, people who buy Nike buy it in part because it is a Western brand, and adapting it too much would destroy that value. I would guess that Estee Lauder is more like Nike than KFC.” 

At a dinner on the last day of their course, Fisher discussed this second question with the head of Starbucks in China. The Starbucks executive noted how the company eventually “tweaked Starbucks’ menu and flavors enough to make them appealing to Chinese consumers,” says Fisher. “His remark was that they finally figured out that consumers in China who buy Starbucks are looking for a Western experience, but one that is tuned to their taste buds.”

Competition from Other Brands

Fisher’s co-instructor in the global course was Edwin Keh, CEO of the Hong Kong Research Institute for Apparel and Textiles. He recalls a presentation at Wharton earlier this year in which he learned two things: First, that “Chinese consumers like lightly scented products and think a lot of Western products are too strong and overpowering. And second, that the Asian market sells [more] skin protection, skin tone lightening and moisturizers than the West, probably because the Chinese market is dominated by urban professionals who work in crowded and polluted environments.” Also, he noted, “light skin tone is considered a sign of beauty.”

Osiao “looks to be a very exclusive high-end niche brand” being launched at a top Hong Kong department store that is equivalent to Saks or Neiman Marcus in the U.S., Keh says. “The line can command a higher price point and probably will have fairly small volumes for the immediate future. This may be a good way to test the market and tweak the product.” But Keh, like others, points to the “significant brand competition from Japanese and Korean beauty brands, [which] align very well with the Chinese consumer and have near-market advantages.”

Beauty products and next-to-skin apparel “are tough to sell and expensive to market, especially in China,” Keh adds. “So a new brand will be high risk, high return. It will be interesting to see how this plays out.”

Although some observers express concern that Osiao could cannibalize Estee Lauder’s other brands in China, Shen does not see this as likely. “Given its pricing and positioning, it is targeting a different consumer segment from the average consumers of Estee Lauder and Clinique,” its two best-known brands in China. Instead, “the introduction of Osiao seems to explore the market opportunity with the ever-growing wealthy class in China. There is a segment of affluent Chinese consumers who are willing to spend a lot on skincare products. The economic downturn of China has little impact on the behavior of this segment.” Keh concurs: “The timing of the release could have been better, given the recent doom and gloom, but the rich Chinese consumer is still spending and there are still lots of rich Chinese. So I don’t see [the current economy] as an issue.”

Wharton marketing professor John Zhang describes why he thinks Osiao represents “a very far-sighted strategy. Up to this point, Chinese consumers worship anything Western, especially in cosmetics. However, at some point in the future, Chinese customers will become more rational, they will want to go back to their roots, they will value their own heritage and they will want the things that are good specifically for them. When that day comes, pure Western brands will lose their luster,” but Osiao may not.

Building a new brand from scratch is clearly expensive, he adds. “For that reason, starting in Hong Kong is a good way to test the water. In addition, it is also a good way to establish the high-end positioning. I believe that the success of the brand will depend on two things. First, there has to be solid science behind the new formulation. Without it, the brand will not succeed in China for long, and ginseng alone will not carry the brand for sure. Second, good marketing must balance modernity, tradition and science, especially in cosmetics.”

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Is Burberry the Canary in the Luxury Coal Mine?

Posted on September 24, 2012

When Burberry recently reported that sales at stores open a year or more were flat, and suggested that profits are likely to be on the disappointing side, some people began to wonder if Burberry might be the canary in the coal mine – a harbinger of lower sales in the luxury sector over the coming months.

A Wall Street Journal article today supports that theory, noting that diamond sales in China are expected to grow more slowly this year than last, while Daimler AG has announced that its Mercedes-Benz division would miss its profit target in China and expects lower sales for its Porsche division.

Is London-based Burberry indeed an example of what we will see in the luxury goods market? What are the implications for the global economy and, equally important, for the upcoming holiday season?  

Burberry suggests that its slowdown is “a sign of an upcoming trend in the luxury segment,” says Wharton marketing professor Barbara Kahn. “Although it is hard to know for sure, there is some indication that this might be a correct analysis.”

Much of the ability of the luxury segment to maintain steady growth has been due to strong performance in China, she adds, and “recently, this growth has slowed down for several reasons. First, as the Chinese luxury consumer gets more sophisticated, [his or her] need for purchasing high-end visible status symbols slows down. Many of Burberry’s products are high status — and visibly so, due to the famous ‘check’ [design].” Now that consumers are gaining more confidence “in their own positions of wealth, these types of purchases may decrease.”

In addition, Kahn says, China’s economy is slowing down, “and there are indications that the government will not provide substantial stimulus mechanisms, as they have in the past, to keep up the growth levels.”

Burberry, a luxury fashion house that sells accessories and clothing for men, women and children, has approximately 235 stores and outlets, and can be found in more than 200 upper-end department stores worldwide.

An article in The New York Times noted that Burberry’s main customers, “known in the industry as traveling luxury consumers, [include] just over a third in Asia, a quarter in the Americas and a little less than a third in Europe.”  The article, published shortly after the disappointing figures were announced by the company, quotes Burberry CEO Angela Ahrendts acknowledging that “the external environment is becoming more challenging,” and suggesting that Chinese consumers may be slowing down their luxury purchases only temporarily, waiting to see how the upcoming leadership changeover in China affects their purchasing power. 

Wharton marketing professor Z. John Zhang has a slightly different take. “I don’t believe that the overall consumption of luxury goods in China is going down, and even if it is, it will not last for long,” he says, adding that economic downturns typically do not affect many luxury goods consumers, “especially in a country where the income disparity is huge. If anything, in a downturn, you need to look even better to impress your peers.”

Burberry’s lower sales could be due to a number of reasons, according to Zhang. “First, more and more people in China are going abroad for shopping. The people who could afford to travel abroad are those who could afford to buy luxury goods, and there will be a substitution effect. Second, there may be more fake luxury goods in the Chinese market. After all, during a downturn, you do what you must to survive. The supply of fake goods may have increased considerably now that the economy is getting tougher.”

The worst outcome for Burberry in China, he adds, is that “it is no longer on the top of the Chinese customer’s list of luxury goods [to purchase]. These consumers are constantly looking for new ways to distinguish themselves and to stand out in a crowd. It is an arms race [among] luxury brands to find new ways to provide exclusivity to their customers.” The disappointing news from Burberry could reflect the fact that the company “is losing favor with exacting Chinese consumers.”

So what’s ahead for Burberry and other luxury goods retailers?

“The luxury retail sector was the first to recover after the recession, partly due to strong demand from China,” says marketing professor Stephen Hoch. “Maybe they are now at a pausing point.” Any weakness that is evident, he adds, “would be due to Europe and China rather than the U.S., where the rich seem to be doing just fine relative to everyone else.” In China, if the new stores — where you would expect the biggest increase in same store sales since they are new — showed any weakness, “then this could be a big contributor,” he points out. “It is hard to predict whether Burberry is a harbinger of anything else. I tend to doubt it, but we will see.”

Kahn notes that the continuing uncertainty in Europe is definitely a factor in lower luxury goods purchasing. In addition, she has read reports suggesting that the new Chinese leadership team – expected to begin transitioning as early as next month – “is not likely to provide as much stimulus to the economy as they have in the past.”  Finally, if Burberry’s slowdown is indeed a general trend, and not unique to Burberry, “I would expect to see similar slowdowns in other highly visible status luxury purchases, such as LVMH and Chanel.”

And the outlook for the luxury goods sector during the all important holidays? “As usual, it is hard to predict the upcoming holiday season,” Kahn says. “The back-to-school season was reasonably strong — relative to our new, more moderated expectations — so people are cautiously optimistic. I think the current thought is that we should see a holiday season fairly similar to last year – which is reflecting the slow but steady growth patterns.”

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Is Back-to-school Spending Making the Grade?

Posted on August 30, 2012

A recent report from the National Retail Federation (NRF) predicts that back-to-school sales will be higher this year than last. “The average person with children in grades K-12,” the report states, “will spend $688.62 on [his or her] children, up from $603.63 last year. Total spending is expected to reach $30.3 billion.”

Is the NRF report overly optimistic, or will the back-to-school market (retailers’ second most important season, behind the winter holidays) struggle along with the rest of the economy? Which stores – and products – will be the most popular?

”Preliminary indications seem to [suggest] a moderately good season,” says Wharton marketing professor Barbara Kahn, director of the Jay H. Baker Retailing Center. “There are certainly needs that won’t change. Kids out-grow their clothes from last year and need new ones. New school supplies are required every year. These are necessities – so to that degree, they probably [take precedence] over other purchases. But recession and economic difficulties can certainly influence the total budget spent.”

Wharton marketing professor Pinar Yildirim cites “the staggering economic numbers and high unemployment,” and suggests that consumers are probably “conscious of how much they are spending and will hold off buying items unless they have to.” She also notes, however, that “education is important to most parents, and they are less likely to cut back on items that are fundamental to schooling. In some sense, one can say that back-to-school shopping is an area where spending cuts cannot be drastic.”

Erin Armendinger, managing director of the Baker Retailing Center, points to indications suggesting that “parents are spending more than they did last year, despite the fact that consumer confidence is at a nine-month low and gas and food prices are up.” There is “the same bifurcation that we have seen through the last few years — where ‘well off’ consumers are okay, but lower-income ones are not.” 

Kahn notes that Target and other mass merchandisers, along with Macy’s, will see healthy sales this season, and that the Gap has “shown an uptick” as well. As for the higher-end segment, “for the last year, we have seen stores such as Saks, Neiman Marcus and Nordstrom hold their own fairly well; however, just recently we have seen a slight softening in the luxury market.”

Mass merchandisers like Target, adds Armendinger, “have an advantage in that they are ‘one-stop shops’ for back-to-school shopping, but consumers, especially the ones with the money, do like going to department stores such as Macy’s for fashion items. Macy’s has made a conscious effort in the last couple of years to attract younger shoppers.”

Meanwhile, recent articles in the media have pointed to shoppers’ increasing use of mobile apps to hunt down the best bargains, whether online or in brick-and-mortar stores. As good as this sounds for consumers, does it also mean that the only stores left standing will be those – like Target and Walmart – that offer the lowest prices on a broad range of items?

Not at all, says Kahn. “There have always been segments of consumers who differ according to price sensitivity, service and convenience, and I don’t see that changing. I think there will be a role for specialty stores as well as for the Walmarts. Location of the retailer will also matter. Further, there are some shoppers who shop in advance and others who wait until the last minute.”

Yildirim agrees. “We always had consumers who are price sensitive and want to pay the lowest price to get what they want,” she says. “In the past, such consumers would visit a couple of stores before they actually purchased something. Today, it is easier for price sensitive consumers to make a comparison, but the opportunity cost of time is also higher. And they have to buy a basket of items, so there is a limit to how much they can take advantage of these price comparison apps.”

In addition, some consumers are driven by the quality of a product rather than its price, she adds, including those “who prefer certain brand names, or consumers who simply don’t have the time to compare prices. High-end stores are less likely to target extremely price-sensitive consumers. Similarly, specialty stores compete on assortment rather than price. So the availability of price comparison apps has a lesser impact on these stores.”

As for the types of purchases made by parents and their school-age kids, news reports cite the increasing popularity of tech items – some reports suggest that one third of all back-to-school dollars is spent on computers, mobile phones and tablets – and note that mothers are taking a bigger role than ever before in choosing and buying these products. An ABC News Consumer Report quotes Tina Wells, CEO of Buzz Marketing: “Technology is the hot item for back to school this year,” she says. “Ten years ago, it was always fashion trending more than tech.” Mothers, she adds, are the “chief technology officer” in many families, although the kids take an active role in tech purchases. And while the older generation is paying the bills, they aren’t reaping the rewards. As Wells notes, “Parents are being handed the older technology, and kids are getting the cooler” stuff.

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When Retailers Make Strange Bedfellows

Posted on July 13, 2012

The Neiman Marcus luxury retail chain announced a new partnership this week with discounter Target that will offer a limited collection of items from 24 American designers. According to an article in The Wall Street Journal, the items – ranging from clothing and accessories to leather goods and stationery — will be sold for the same price in both stores, and carry both company logos on their labels.

Neiman Marcus and Target are not two retailers one typically talks about in the same breath. But Wharton experts generally applaud the initiative and suggest it takes advantage of several shopping trends that have gained momentum since the economic downturn.

These days, “you can’t pigeonhole a customer into one store or type of retail experience,” says Wharton marketing professor Barbara Kahn, who is director of Wharton’s Jay H. Baker Retailing Center. “Neiman shoppers may also shop at Walmart or Target. People who stay at the Ritz Carlton for business may stay at Marriott when they are traveling with family. People who routinely shop at Walmart or Target may splurge for a special occasion at Neiman or Saks.”

Target has been partnering with many luxury brands “in hopes of continuing their own cache as a design-oriented retailer,” Kahn adds. “This partnership with Neiman Marcus follows in that stream. For Neiman Marcus, the idea is to lure customers who may not usually shop in Neiman to come into the store – particularly the younger consumer. Even Neiman’s core customer may buy at lower price points from time to time in other channels or retailers.”

Wharton marketing professor David Bell notes that shoppers are going to multiple retailers “and might be prepared to spread their patronage across seemingly very different types of stores. Segmentation is no longer completely ‘cut and dried.’ Target already has been able to attract a clientele that is more upscale than the stores’ product mix would imply. I doubt Neiman Marcus would do this kind of deal with J.C. Penney.”

According to the Journal article, the new collection will be available December 1 for three weeks at Target and Neiman stores and on-line. Target will be producing the 50 items being offered at a price range of $7.99 to $499.99 (with an average price of $60) and will feature such designers as Diane von Furstenberg, Derek Lam, Rodarte and Tory Burch, the article adds.

All this raises the question of what each store – and the individual designers – will be getting out of this partnership. For Target, the advantages are clear, says Erin Armendinger, managing director of the Baker Retailing Center. “It will bring a high-end feel and great designer brands to their customers – who tend to care about these things: Look at the Missoni deal last year.” As for Neiman, “it is hoping to bring in a new customer.”

Wharton marketing professor Stephen Hoch sees each retailer “borrowing brand equity from the other. Target borrows luxury and exclusivity from Neiman, and Neiman borrows affordable chic and democratization from Target.”

As for the designers themselves, they clearly stand to benefit from this deal. “It broadens their appeal and gets their name/designs better known,” says Kahn. “Although there was some reluctance earlier on by some designers, the Target promotions have been so successful and fun, and have not seemed to dilute the appeal of the designers who have participated, so I think people are less risk averse.” Hoch notes that “the designers want scale and more exposure beyond the cloistered world of haute couture. There have been many successful attempts like this one and I know of no disasters for the designer.”

And for whom does this experiment post the greater risk? “Definitely for Neiman Marcus,” says Armendinger. “They risk diluting their brand. The worst thing that could happen is that their customers perceive this as [the store] moving ‘down.’ On the other hand, in the best case, they will seem hip, young, fresh and a little bit more accessible.”

The biggest risk overall, adds Bell, is “brand dilution and erosion of positioning. Each store already has a pretty strong image, along with unique strengths and weaknesses, and the positioning could be disrupted by a ‘blending’ of the two stores. In addition, the risks and benefits might be asymmetric: Neiman could be seen as ‘cheap’ – or, in a better case, ‘good value’, while Target might be seen as ‘expensive,’ or, in a better case, ‘upscale.’”

The Journal article notes that the median household income for Neiman Marcus shoppers is $150,000 to $200,000 versus $64,000 for Target, while the median age is 48 at Neiman versus 40 at Target. Neiman has 77 stores versus 1,763 for Target.

Meanwhile, are there other retailer-combinations out there for whom such an experiment could work? Saks and H&M? or Nordstrom and T.J. Maxx or Walmart? According to Wharton marketing professor Leonard Lodish, “Target is different than the above retailers because Target has used design as part of its positioning since it was started. It will be harder for Walmart or T.J. Maxx to pull something like this off successfully.” Kahn, too, cites the design appeal that both chains have typically focused on: “The connection between Neiman and Target is that they both pride themselves on high-end design appeal, and they execute consistently to their own missions. They don’t try to be what they are not. That protects their brand when they experiment.”

Other “odd couple matchups” are possible, adds Hoch, although Target and Neiman “have a first mover advantage and a novelty effect.”

What could Neiman and Target do to ensure that this experiment is a success? “If they start doing things with these items that are not consistent with the designer image, it will mess things up — like sending out coupons or having temporary price reductions,” says Lodish. “They also need to very clearly differentiate the Target-Neiman [merchandise] from the Neiman-only [merchandise].”

One possible downside for Neiman, adds Kahn, is if the partnership “encourages too much traffic into their store at a busy time, which might chase away core customers. A temporary leave is bearable, but one hopes [customers] don’t translate this into never coming back. The other problem is if [the two retailers] haven’t put the collection together well and if it does not appeal to anyone, then there is excess inventory to get rid of.”

In the end, says Hoch, “the risks seem very minimal. It is an in-and-out promotion with minimal inventory commitment, like a flash sale. I am sure that they will produce [small] quantities and run out quickly. It is all about the buzz.”

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J.C. Penney’s New Strategy: Consumers Aren’t Buying It, Yet

Posted on May 18, 2012

J.C. Penney lost $163 million in the first quarter, compared to a gain of $64 million a year ago; sales fell 20%, while comparable store sales dropped 18.9%, and the store is discontinuing its quarterly dividend. 

This is despite a new approach to pricing recently announced by CEO Ron Johnson that relies less on discounting and the ever-present coupons, and more on everyday prices and special value offers. But given the figures announced this week, it seems that consumers aren’t buying into the new strategy – at least not yet.

KnowledgeToday asked two Wharton marketing experts for their views on the new strategy, and what Johnson, a former executive at Apple, should do moving forward.

Wharton marketing professor Barbara Kahn, faculty director of the Jay H. Baker Retailing Center, says she was initially excited about the new strategy. “In theory, it makes a lot of sense. It is not only about the pricing strategy, which is basically a return to everyday low prices, but it is also a merchandising strategy – including new brands in a store-within-store setup designed to create excitement.”

But she cites two problems with the pricing strategy’s implementation. The first is that customers don’t understand it, and may have trouble grasping it in the future as well, because “they have become addicted to high/low pricing in which a high price is listed to communicate the value of the good, and then a coupon or price discount is issued to signal a ‘good deal.’” Under the new strategy, Kahn says, consumers have “no reference price to signal what the ‘fair’ price should be. They [are not used to] buying on absolute price figures, but on relative price figures, and they are having trouble adapting.”

The second problem, Kahn says, is that the new look/new brands part of the strategy will take “a long time to fully implement. I think Ron Johnson said close to five years. So the consumers are not seeing the new JCP [J.C. Penney] in the stores yet. The employees who are there are the old employees for the most part, and they don’t really know how to [explain] the new strategy.” Unless JCP does a better job of communicating to the consumers that the prices in the store are fair and “low,” the strategy will not work, she notes.

Kahn also points out that before Johnson joined Apple, he worked with Target, whose approach to merchandising is similar to Penney’s. “Target has been doing well, so it is clear this type of strategy can work. But JCP is a different store, and department stores have a different relationship with consumers than do mass merchandising stores.” Macy’s, which was the subject of a recent Wall Street Journal article describing its new on-line sales distribution centers, is also doing well. “The real competitor here, though, is probably Kohl’s,” says Kahn. “Kohl’s responded in part to the JCP strategy by offering new discounts and coupons, which, at least initially, were well received by the customers.”

If Kahn were Ron Johnson, what would she do in the coming year? Perhaps offer “new cues so that the customer understands the low price,” Kahn says. “For example, follow some sort of ‘low price guarantee’ strategy, or do promotions that [list] the price at JCP and the comparative price at a competitor’s store, and then show how it is cheaper at JCP. The customer is looking for in-store cues that these prices are indeed low.” The commercials are not effectively communicating that fact, Kahn adds, “and the message is not being reiterated in the store.”

In addition, she says, “the faster Johnson can get some merchandising excitement into the store, the better. He might use events – such as the Target Missoni campaign, which was a huge success – to draw traffic.”

Wharton marketing professor Jagmohan Raju offers a general look at pricing strategy. In theory, he says, “not discounting essentially means you will not do any price discrimination. If done well, price discrimination can lead to higher profits and sales [by offering] discounts to people who would not have bought otherwise. In practice, however, discounts are often used by people who would have bought the product anyway. This is where the dilemma comes in.”

Discounting can also be used as a loss leader strategy to get people in the store who will then buy other items, he adds. So even if people “who would have bought the product anyway buy it on discount but buy many other things also, the strategy can work. Discounting also allows one to advertise prices and create an image of good prices, which always helps, especially when your clients are short of money or not rich to begin with.”

The problem with the strategy is sequencing, Raju says. “For the strategy to work, one should not be able to compare prices across stores, which means you must have products that only you sell — or if others sell it, they sell it at the same price. This requires a strong brand, what we might call [in the apparel category] ‘private labels’… But people like variety in apparel, so relying solely on your brand is often not easy, especially when you are catering to the mass market.” If retailers rely on multiple brands to offer variety, and these brands sell in other stores also, then “price comparisons are easy,” Raju notes. “Discounting, therefore, [is offered as a way] to attract the other stores’ customers.”

As for Johnson’s strategy for Penney, “it might work,” Raju says, “but then JCP might become a smaller niche store with a strong brand – smaller, but profitable.”

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What Keeps the Oreo 100 Years Young

Posted on March 6, 2012

The same year the Titanic sank and a second party of explorers reached the South Pole, a grocer in New Jersey spent 30 cents a pound on packages of a new cream-filled chocolate sandwich cookie known as the Oreo.

That first sale, made on March 6, 1912, marked the beginning of what would become a cultural icon — and touched off a century-old debate about the best way to eat them: Whole? Cream center first? Or dunked in a glass of milk? Today, cookie lovers in more than 100 countries can participate in that discussion, including consumers in Poland, Germany and India, where the Oreo was introduced for the first time just last year.

Oreos have managed to outlast any number of food trends — and even bested the product’s closest competitor, the Hydrox, which was actually introduced first, in 1908. So what has helped the Oreo remain popular? “For a product to stay relevant, it should address a basic need that doesn’t change over time,” says Wharton marketing professor Barbara Kahn. “Also, products that are classically styled rather than fashion forward are almost by definition more likely to become iconic. For example, Burberry’s traditional raincoat is a classic style that has reached iconic status; [same for] the VW Bug.”

Although the packaging has been modified, the distinctive design of the Oreo cookie hasn’t changed much since 1912. Over the years, different countries have put their own spin on the product — a green tea ice cream variety is available in China, for example, and blueberry ice cream Oreos are sold in Indonesia. And the product line in the U.S. has expanded more than once, including the introduction of the Double Stuf Oreo in 1974 and a trademarked brand of cookies and cream ice cream in 1983. Product owner Kraft Foods is selling a limited edition “birthday cake” flavor to mark the cookie’s anniversary.

But Wharton marketing professor J. Wesley  Hutchinson wonders if Oreos are part of a dying breed. “There are fewer and fewer ‘cash cow’ multigenerational products,” he notes. “Kellogg’s Corn Flakes, along with Post Grape-Nuts and General Mills’ Cheerios are the archetypes. They satisfied a basic but modern human need and use excellent brand management to maintain their positioning in a competitive market.”

Kahn also acknowledges that successfully introducing a product that appeals to a broad audience is tough in today’s crowded marketplace. “But if a product really hits the right note, it can become a classic overnight — think of Apple’s white earbuds,” she says.

As for the Oreo, Kahn thinks the “consumption traditions” that grew around it have helped the product stick around for so long. (According to Kraft, Oreo eaters are split down the middle on the issue of whether to eat the cookie whole or to pull it apart, although women “twist” more often than men.)

And Hutchinson adds that one part of the Oreo’s winning strategy is pretty simple: “Have you ever had an Oreo and milk?” he asks. “‘Nuff said.”

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Mobile Payments: Not a Game Changer Yet?

Posted on February 14, 2012

In March, PayPal will enable its users to pay through their mobile phones, tablets or iPads at 2,000 Home Depot stores across the U.S., and by the end of the year at 20 other national retailers. Mobile payments are rapidly gaining popularity, but large scale adoption will depend on consumer perceptions of security and the pricing of such services, according to Wharton faculty.

A subsidiary of online shopping portal eBay, PayPal last year exceeded expectations with $4 billion in mobile payments volume, and the company predicts that figure will reach $7 billion in 2012, company spokesperson Anuj Nayar told Knowledge@Wharton Today. Last November, mobile payments were 538% higher on Black Friday than on the same day in 2010, according to PayPal. The firm’s latest encouragement comes from a pilot program it launched in January at 51 Home Depot stores, mostly in the San Francisco Bay area.

Mobile payments are a small fraction of the net payments of $118 billion that PayPal put through in 2011. Even so, Shawndra Hill, a Wharton professor of operations and information management, finds PayPal’s mobile initiative “exciting,” although she doesn’t think it is “a game changer just yet.” Before wide scale adoption occurs among consumers, “mobile solutions need to prove that they are as secure as paying with credit cards or cash,” she says. Also, consumers will need to trust the brands offering these services, just as “they have had a long time to learn to trust credit cards.” Further, mobile payment options need to be more convenient and possibly cheaper than other avenues, Hill adds.

According to Wharton marketing professor Barbara Kahn, pricing of mobile payments will determine their popularity, especially when conventional credit cards also move to mobile formats. “The issue from the consumer point of view will be which form of mobile payment to use, just like we now decide which type of card to use,” she says. “Right now, the end user [usually] pays list price for the item regardless of what kind of card is used; sometimes there is a cash discount, or in some countries a fee for using a credit card. I would imagine all of these pricing issues are on the table now.”

Hill suggests that mobile payment processors could expand their market opportunity by offering lower transaction fees than credit cards. Also, the requisite infrastructure and standards for money transfers have to keep pace, she notes.

PayPal’s mobile payments option is part of its recently launched PayPal Wallet, which includes a card that allows offline payments at stores. With that, “consumers will choose if they want to swipe a card, use an app or tap their phone,” says Nayar. Others in the mobile payments space include Google Wallet, which stores customer credit card information on smartphones, and so-called NFC devices that can be used for electronic payments. (The Near Field Communications Forum is a group of companies — including Nokia, Sony, Samsung and Microsoft, among others — that is developing mechanisms for payments and other services across devices.)

Mobile payments are just one of many new options consumers will see this year, according to Scott Dunlap, PayPal’s vice president of emerging opportunities. “In 2012, we will see a rise in virtual currencies and the ability to use them to pay for ‘real’ goods,” he wrote recently in the online magazine Gigaom.com. “Imagine paying for groceries at Safeway with Facebook credits or using extra frequent flyer miles for that cup of coffee at Starbucks.”

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