• by Paul Schrimpf , February 13, 2012

JCPenney will betheretailer to watch this year. The company has launched a major rebranding effort with a full overhaul of its merchandising strategy, and Forbes is already touting it as the most interesting retailer in 2012.

What makes JCPenney's rebranding efforts exciting is that it is breaking out of the outdated seasonal merchandising vortex that destroys so many of its peers that practice a Hi-Lo merchandising strategy. It’s not that Hi-Lo strategies don’t work. They do, as Target (where JCPenney's new CEO Ron Johnson earned his stripes) has shown so successfully. It’s just that the actual decisions on pricing, promotion, and assortment are almost always made at the region and/or product category level with an eye toward quarterly sales targets. Moreover, those decisions are not typically integrated with sustainable, long-term brand-building objectives.

The secret to “brand-building merchandising” is quality analytics that integrate pricing, promotions, and assortment within a well-defined customer experience strategy. Retailers routinely optimize around only one or two of these at a time -- and this is where they fail.

Consider that both Target and Kmart were getting their lunches handed to them in the 90s by Walmart. Target invested in customer experience focused on the “right” assortment and disciplined promotions and pricing, and has been growing consistently for the past 15 years. Kmart just changed its logo a few times and was acquired by Sears, Roebuck and Company.

Here’s why it’s important to analyze assortment, pricing, and promotions in conjunction with each other.

Assortment:    Clothiers such as the “old J.C. Penney” are the worst when it comes to linking assortment efforts and strengthening their brands with consumers. That’s because, instead of focusing on the consumer needs, they get distracted by their competitors across the street. This is why clothing “seasons” are so out of alignment. Each retailer is trying to be first into the season. It’s why you can buy a sweater in August in Chicago when it’s 100 degrees outside “in preparation for autumn.”

Pricing:   As everything at the store and online level is interrelated, poor assortment execution only causes pricing problems. Remember that sweater you didn’t want in August? You can now buy it at half the price when you actually need it in October. And everyone knows this, as customers have learned to be deal-sensitive. To be honest, you would still come back and buy it at regular price in October. But they aren’t paying attention to customers like you. They need to mark down the price to make room for the next season’s inventory…to stay ahead of the retailer across the street.

Promotions:   This shouldn’t be "new" news to anyone -- particularly retailers -- but customers know how the system works. They expect deals when they walk into a store, and most retailers give lots of them. This often turns the store into a claustrophobic environment of stuffed racks, narrow aisles, and obnoxious “x% off” signage. But while this helps jockey for quarterly sales, it destroys retailers’ brands when customers leave their stores talking about the great deal they got rather than their experience in the store. It’s great to see companies like JCPenney recognize this in trying to change the game.

Assortment, pricing, and promotion are intuitively interrelated. So to break this vicious cycle takes a sound analytical modeling of all three, and within the context of a firm’s overall brand-building strategy. Pricing and promotion analytics are often used, but the flaw is that they are focused on sales and margin. Moreover, many of the decisions related to them occur at the department level of organizations -- where individuals are optimizing based on their own quarterly and annual incentives, when top-led decisions would better benefit the brand and business over time.

Only by integrating long-term brand-building efforts along with senior management involvement will retailers arrive at innovative merchandising. This is the balance we’re seeing at JCPenney this year. They will still be running promotions, and will still involve familiar pricing and promotion analytics -- but now they’ll be doing it with a brand-building lens, led by the top.