J.C. Penney to keep holiday sales

• Will hand out millions of holiday buttons that include codes for prizes
• Despite getting away from sales, will preserve Black Friday and Cyber Monday deals
• Sales down 26% in third quarter

J.C. Penney (JCP) is banking on buttons this holiday season.

Starting Black Friday through Christmas Eve, Penney's employees will be handing out more than 80 million small, holiday-theme circular buttons to customers. Each has a code on the back that, when entered on J.C. Penney's website, reveals whether a customer has won prizes such as a trip to Disneyland, tickets to Ellen Degeneres' show or J.C. Penney merchandise or gift cards.

"Instead of mailing out millions of coupons, we'll be handing out millions of buttons," said CEO Ron Johnson in an exclusive interview with USA TODAY, touting the retailer's new strategy, which downplays sales and promotions. "We believe in acts of generosity."

News of the holiday promotion comes as pressure mounts on Penney's to improve sales almost a year into overhauling its pricing strategy, which so far has confused consumers more than it has excited them. Johnson, 54, hopes the buttons will entice shoppers, who have been dwindling since the retailer got rid of the heavy markdowns that used to bring people through the door.

And the holiday season, the biggest time of year for sales, might prove to be the ultimate test for a strategy that has mostly done away with them.

"It's the time of year when promotions are generally thought of as being the most important to really stimulate consumer response," says Anthony Bruce, CEO of Applied Predictive Technologies, a software firm that helps retailers test sales strategies. "The square deal, the everyday approach can work ... but the transition so far hasn't been tremendously successful (for J.C. Penney)."

If anyone can turn things around, though, it's thought to be Johnson, who came to Penney's last year from Apple, where he headed development of the tech giant's wildly popular retail stores and the Genius Bar concept. When his appointment to CEO was announced last November, Penney's stock soared along with hopes for the kinds of changes the retail guru would bring to the outdated department store.

It's clear that his experience at Apple has influenced the strategy he's championing for Penney's 1,100 stores -- a new retail interface such as the one Steve Jobs created for consumer electronics, and selling goods without sales and at consistent prices.

Retraining deal-crazed customers

Though he denounced the hundreds of sales the retailer once had in a given year when he introduced the new strategy at the beginning of the year, Johnson says Penney's will preserve two holiday traditions: Black Friday and Cyber Monday, which this year, he says, promise "the lowest prices ever in the history of our company."

Johnson says items will be priced lower than they were on sale for last Black Friday.

But Penney's is struggling to help customers realize they're still getting a good deal without the obvious markdowns they're used to seeing.

The company already revised pricing once. In August, the retailer simplified its original three-tier pricing approach of "everyday, month-long and best" values to focus only on having everyday low prices to make it easier for customers to understand. Penney's calls it "fair and square," and signs with the phrase hang throughout the store.

For Black Friday, at least, newspaper inserts and store signs will indicate the difference between an item's Black Friday price and the regular "everyday" price. Other days though, it may be hard to tell.

"This is the issue between everyday low price and putting things on sale," says Ken Nisch, who heads retail brand and design firm JGA. "Psychologically, (customers) think they're saving money. The question is, can Penney's, over time, retrain the customer to be so intelligent that they see through all the false promotion?"

Those so-called false promotions, as Johnson explains it, mean marking goods up just to mark them back down to make it seem as if the customer is getting a great deal. It's something that Penney's is trying to distance itself from.

"We, along with others, trained Americans to perceive value through an illusion," he says. "Mark goods up to create the illusion of savings. We are trying to break that."

It's proving to be no easy task.

But given his successful background in retail -- he also once headed merchandising at Target before going to Apple -- Johnson is perhaps getting more leniency than most while he figures it out, Nisch says.

"They have a big credibility chip through Ron Johnson," he says. "They will get more time to work this out than probably any other team with any other retailer would get right now."

It still comes down to convincing the customer, though. That remains to be seen.

"It's hard to transform the shopping mindset of a consumer broadly with any single brand or retailer," Bruce says.

Whether customers will start to accept Penney's everyday prices is a waiting game. So far, Penney's has yet to translate its new strategy into sales, which were down 26.1% in the third quarter ending in October, the retailer announced Friday. That's worse than the close to 22% drop they saw in the second quarter, though Johnson said in a meeting with investors Friday that the lost sales between the two quarters are due mostly to getting rid of month-long values.

"They're going to hit some bumps during this transition," Nisch says. "They have a rough year ahead of them."

But Penney's really didn't have a choice. With the majority of its stores situated in malls, it was "reinvent or die," Nisch says.

"An awful lot of activity has moved off-mall to places such as Kohl's and Target, T.J. Maxx, Marshalls," he says, citing retailers known for their discounts on everyday and designer goods. He questions whether Penney's strategy may ultimately be too complex for customers whose alternatives are the obvious deals at other stores such as these.

Johnson says they're learning as they go, and that it's too early to judge the success of the transformation.

"You have to earn their trust," he says of customers. "In the short run, our business will be a little lower as we retrain the customer to understand value."

He insists, "What we're doing is actually not unusual," citing retailers such as Starbucks, where drink prices are consistent across stores. "It's a change from the department store recently. But it's not that Americans don't shop that way for most things all day long."

The challenge comes in persuading a department store customer to shop that way, says Barbara Kahn, director of the Jay H. Baker Retailing Center at University of Pennsylvania's Wharton business school.

"The department store customer has been trained to look for the sale or coupon," she says, explaining that customers expect a high price at department stores and use cues such as sale signs or markdowns on tags to figure out if they're getting a good value. "When you tuck away the cues ... there's a lot of confusion."

The strategy though, which Johnson says restores integrity to pricing, could end up resonating with a new dominant consumer.

On the heels of a presidential election that saw the emergence of a new electorate made up of more minorities and women, Nisch says Penney's is in a position to benefit from the changing demographics of the country and the country's shoppers.

"A lot of the things they're trying to do are really playing well to what that customer wants," he says. "A general sense of fairness, transparency, value for money, all these big trends."

Pricing aside, though, it may be the more often overlooked part of their strategy that ends up putting Penney's back on top.

The retailer's plan to make itself into a mini-mall, with 100 individual shops eventually within about 700 of its stores, is meant to encourage a more social experience among shoppers. Brands including Levi's, Martha Stewart and Joe Fresh are on board, and in 2013, Penney's will start developing "streets" -- pathways that will connect the stores -- to include lounge areas with iPads and Wi-Fi and stands with snacks and coffee available.

Kahn says it's the kind of thinking brick-and-mortar retailers need to adopt to survive.

"You have to recreate the environment so it's really enjoyable and people want to do it, and that's a lot of what the J.C. Penney strategy is," she says. "You need to think out of the box like that, because you are getting serious challenges from online shopping."

Online sales still only make up about 10% of all retail sales, but are growing at a rate much faster than brick-and-mortar retail sales. That, along with the practice of showrooming (using physical stores as showrooms for products, then buying them for less online), has made it increasingly important for stores to figure out how to keep customers coming in.

So far, Penney's stores only have about 10 shops each, making up about 10% of the store. But next year, that will grow closer to 40%, Johnson says.

"That is our future," he says of the shop concept.

Sephora shops, which Penney's implemented pre-Johnson, are some of the most popular areas in its stores.

Ultimately, it's about creating a new way for customers to view the shopping experience, something Kahn says steals a page from retailers such as Starbucks and Apple, two retailers Johnson cites often himself.

"What was really innovative at Apple was that they fundamentally changed the way the consumer interacted with these electronics," she says. "And it's that (Johnson's) trying to do."