Disaster at JC Penney: How Apple Guy Messed With Customer Hormones

If JC Penney (JCP) Chief Executive Ron Johnson still thinks customers someday will be grateful for his “everyday low pricing” strategy, he ought to look at new research suggesting that by tossing out coupons, he’s throwing away the key to their hearts.

A new study, soon to be published by the Center for Neuroeconomic Studies at Claremont Graduate University, measured the hormone levels, heart rates, breathing and perspiration of subjects who received a $10 coupon while grocery shopping online compared with those who didn’t get a coupon.

The result: Levels of oxytocin, a feel-good hormone linked to love and happiness, were an average 38% higher for people who got a coupon. Their breathing and heart rates were slower. They reported better moods.

“The study proves that not only are people who get a coupon happier, less stressed and experience less anxiety, but also that getting a coupon -- as hard as it is to believe -- is physically shown to be more enjoyable than getting a gift,” said Paul Zak, an economics professor and the study’s lead researcher.

Johnson -- spoiled by his experience running Apple (AAPL) retail stores, where customers would camp overnight to snag the latest iPhone -- wasn’t expecting such severe withdrawal when he called coupons “drugs” and said he would wean JC Penney shoppers off them.

But the withdrawal symptoms keep worsening. JC Penney’s same-store sales fell an average of 20% in the first two quarters of 2012, then dropped 26% in the third quarter. Last week, PiperJaffray analysts predicted November same-store sales could plummet 32%, according to Barron’s.

JCP Revenue Quarterly YoY Growth Chart

JCP Revenue Quarterly YoY Growth data by YCharts

Shares of JC Penney, up slightly in the past month, are still down more than 40% this year, a discouraging stock chart.

JCP Chart

JCP data by YCharts

Johnson would have to double JC Penney just to restore sales to last year’s levels. By taking away coupons, he’s made his task even harder.

Research going back to the 1970s shows that when you give a customer a coupon for a product, then take it away, sales fall below the level before the coupon was introduced. Like spurned lovers, JC Penney customers have moved on to Kohl’s (KSS), Macy’s (M) and other rivals wooing them with discounts.

JCP Revenue TTM Chart

JCP Revenue TTM data by YCharts

At times Johnson undercuts his own strategy: In October, JC Penney sent customers a $10 coupon the company called a “gift,” and last week it emailed an offer for 20% to 30% off outerwear, according to the Wall Street Journal.

Yet in an interview Monday with Women’s Wear Daily which named him “Newsmaker of the Year,” Johnson stuck to his no-coupon policy. “We knew this year sales would go backwards as we established, if you will, a high-integrity pricing model,” he said.

But until happy customers -- hopped up on coupon-induced oxytocin -- start finding bargains in JC Penney stores again, sales aren’t likely to bounce back, and the stock won’t look like such a good deal, either.

Amy Merrick, a contributing editor at YCharts, was a staff reporter at the Wall Street Journal for more than a decade.



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