Magic Pricing: Why retailers can't pull off a Wal-Mart

New York: Joelle Daddino is making it difficult for stores to make money.

Like many Americans who’ve grown accustomed to deep discounts, Daddino has become so obsessed with sales that she refuses to shop any place that isn’t having one.

“If I don’t have a coupon or it’s not on sale, I just won’t buy it,” says the Yaphank, NY, resident.

During the recession, retailers had more sales to lure cash-strapped Americans into stores. Now, that strategy has backfired. It has bred a group of deal junkies that won’t shop unless they see “70 percent” signs or yellow clearance stickers. They’re a thorn in the side of most retailers because the discounts it takes to get them into stores eats away at profits. In fact, retailers’ annual profit growth was cut in half between 2006 and last year, according to a survey of 122 merchants by Retail Metrics, a research firm.

So, big chains like J.C. Penney and Lowe’s are trying to wean sale-addicted customers off of sales in favor of everyday low pricing. It’s the biggest shift in pricing in decades, but retailers have a long way to go to convince shoppers that predictable pricing is better than the temporary promotions that they’ve grown to love. In fact, early this year, nearly three-quarters of 1,000 shoppers surveyed by consumer research firm America’s Research Group said it would take discounts of at least 50 percent to get them to buy a given item. That’s up from 52 percent in 2005.

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[caption id=“attachment_443130” align=“alignleft” width=“380”]  It’s the biggest shift in pricing in decades, but retailers have a long way to go to convince shoppers that predictable pricing is better than the temporary promotions that they’ve grown to love. Getty Images[/caption]

Paco Underhill, whose company Envirosell studies consumer behavior, says retailers are to blame for the increase. He says their discounting during the downturn created shoppers who think everyday pricing “takes some fun out of” shopping. To help break the vicious cycle of discounting, Underhill says merchants have to think of ways to attract shoppers that can be just as intoxicating as two-hour sales or coupons. That could mean top-notch service or exclusive merchandise, for instance.

“Sales are just like heroin,” he says.

Now, retailers are trying to replicate the success of Wal-Mart Stores Inc., the world’s largest retailer that was founded 50 years ago on “everyday low” prices. Experts say Wal-Mart’s strategy has worked because it built its reputation on being able to offer customers the lowest prices every day.

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In fact, the company’s revenue at stores opened at least a year in its U.S. namesake business fell for two years when it veered away from the strategy in favor of temporary price cuts. The company has since been able to turn around its business in part by renewing its commitment to everyday low prices.

Penney executives say they considered Wal-Mart’s model when they decided to change the retailer’s pricing strategy. It was part of an attempt to turn around the Plano, Tex-based chain, which has had annual sales declines in four of the past five years.

In February, J.C. Penney Co. eliminated coupons and the nearly 600 sales it used to have annually. It lowered prices in its stores permanently by 40 percent. The company’s three-tier price strategy also included monthly sales on select items and clearance sales every other Friday.

“Wal-Mart taught us all in the ’80s when you get a steady sales process, what happens? You can manage the business better,” Penney’s CEO and former Apple executive Ron Johnson says. “All good happened from a predictable sales pattern.”

But Penney, which has 1,000 stores, has learned that it’s not so easy to duplicate Wal-Mart’s magic. Customers have not embraced the new pricing: Penney recently reported its second consecutive quarter of big losses due to severe sales drops. And its stock has lost over 40 percent of its value since early February.

Now, Penney is changing its pricing - again - to add back more sales. Among other changes, the company began eliminating last month its monthlong sales and instead is increasing its clearance sales to every Friday. Johnson acknowledged that Penney made some mistakes, but he’s vowing to stick to the everyday pricing plan.

“Withdrawing from our promotional model to a more everyday model has been harder than we anticipated,” Johnson told investors in August. “But it doesn’t change our conviction that the promotional model had run its course, and we have a far better path forward.”

Wendy Ruud, a former Penney’s customer, isn’t waiting around to see if Penney executives are right. The Boca Raton, Fla. resident hasn’t been back to Penney since the new pricing plan was implemented earlier this year. Instead, she’s gone to Macy’s Inc. and Sears, Roebuck and Co. for clothing.

“When you have a sale, you really feel you are getting a better deal or a bargain,” Ruud, 49, said.

Penney isn’t the only retailer finding that everyday pricing is a tough sale to shoppers. Even merchants who are returning to their roots of offering permanently low prices are finding it tricky.

Like Wal-Mart, Lowe’s, the nation’s second largest home improvement chain, built its business around “everyday” low pricing. But then the company strayed away from that and started offering more sales when the housing market tanked in 2006. Shortly after, the company’s performance began to lag behind its bigger rival Home Depot, which never veered away from its everyday pricing strategy.

Since last summer, Lowe’s flip-flopped. It has been permanently cutting prices on a wide variety of items to better compete with Home Depot. But the strategy hasn’t worked. Lowe’s posted a 10-percent drop in net income amid a 0.4 percent decline in revenue at stores opened at least a year in the second quarter.

Lowe’s Cos. acknowledged that the pricing shift has been a problem. The company says it experienced light traffic over Memorial Day weekend in appliances, flooring, cabinets and countertops because of its reduced discount offerings. So executives say the retailer overcompensated by increasing promotions too much afterward, which hurt profit margins.

Lowe’s is still sticking to its everyday price plan, but it’s re-evaluating to find the right balance between everyday low prices and temporary promotions.

“We knew it was going to be difficult,” CEO Robert Niblock says. “But we may have been overly optimistic.”

Not every retailer is finding it hard to convince shoppers that everyday low pricing is better than fleeting sales. Clothing chain Stein Mart has had some bumps, but it’s starting to see positive results from its pricing shift.

At the end of last year, Stein Mart started cutting back on coupons, which it had relied on for two years. It’s now concentrating on what made the chain successful: offering permanent discounts of up to 60 percent on major brands such as Lucky and Nine West that department stores carry at full price. The company permanently cut prices up to 8 percent on select items, though it declined to offer details.

The 260-store chain, based in Jacksonville, Fla., says it changed its pricing after it found out that coupon purchases accounted for almost a third of sales in recent years, up from just around 5 percent from 2004 through 2006. Its goal is to cut coupon use by 50 percent this year.

Stein Mart says its pricing shift has been successful in part because it has simultaneously focused on boosting its offerings of trendy, brightly-colored merchandise in stores. It says that has helped to offset any backlash from it cutting back on coupons.

In the latest quarter, Stein Mart’s net income dropped 44 percent, dragged down by expenses related to software-related costs. But revenue at stores opened at least a year rose 1.6 percent. It’s a modest increase, but it’s significant because it reversed four straight quarters of sales declines.

“Our strategy is working very well for us,” the retailer’s interim CEO Jay Stein, the grandson of founder Sam Stein, told investors last month. “We’re getting back to our old self, a successful specialty-store environment at discount prices.”

AP