J. C. Penney Company, Inc. Equity Valuation and Analysis As of ...

Differentiation and Switching CostsThe products and services offered by firms in the department anddiscount segment of the retail industry are often similar in quality and price;therefore, customers have a very low switching cost. Switching cost is theexpense, whether time or money, that a consumer must expend in order tochange from one firm to the next. Most consumers are indifferent betweenshopping at one department store as opposed to another. In order for a firm tobe profitable it must find ways to differentiate its products and services from itscompetitors. This is accomplished by creating private labels, signing exclusivitycontracts with various brand name manufacturers, and creating a moreenjoyable shopping experience. Another way this is accomplished is throughregular sales and discounts.Economies of ScaleTotal Assets2002 2003 2004 2005 2006JCPenney $17,867 $18,300 $14,127 $12,461 $12,673Kohl’s $6,315 $6,698 $7,979 $9,153 $9,041Dillard’s $6,675 $6,411 $5,691 $5,516 $5,408Stage Stores, Inc. $532 $659 $686 $731 $824Stein Mart, Inc. $410 $393 $474 $519 $480*in millionsThe size of a firm and its operations is important to the success of acompany within a particular industry. In order to be competitive within thedepartment and discount segment of the retail industry, a firm must be large.Large companies have more influence with suppliers giving them the ability tolock in lower prices and prevent intrusion by smaller competitors. Furthermore,large companies have less difficulty attracting customers because they are15