09:33 am
19 March 2018

The Rise of Off-Price Retailers

The Rise of Off-Price Retailers

The Stores Replacing the Traditional Department Chain

A mega-trend that has shaped the retail industry over the last several years has been the successful growth of off-price retailers like TJMaxx, Nordstrom Rack and online flash sale sites like Gilt and Rue La La. H&M and Forever 21 are gaining more and more ground and backfilling anchor spaces, while American retail icons J.Crew, the Gap, and department store mainstays like Ralph Lauren and Michael Kors are flailing. According to the National Retail Federation, the turmoil in apparel retailing manifests itself in the negative year-over-year sales performances of clothing dependent retailers as Macy’s, Gap and Dillard’s, while even Target, Kohl’s (No. 24) and Ascena Retail Group (No. 87) saw gains of 1 percent or less.

Meanwhile, TJX Companies, Nordstrom Rack and Amazon are citing record sales numbers.

Revenues at department store chains Macy’s, Nordstrom and Kohl’s in 2015 were down $640 million from the prior year, while Amazon reported a $6.4 billion sales gain. So what exactly is accounting for this disruptive change in consumer buying habits from full-priced, well merchandised stores to off-price and online? Analysts say there are two major factors, starting with the fact that brands have conditioned shoppers to expect a sale of 30-40% the retail list price. Second, the demographic with the most buying and trend-setting influence is looking for something far different from prior generations.

The millennial mindset is interested in custom, curated, American-made quality products at affordable prices. If Baby Boomers and Gen X were label conscious with Gucci and Burberry logos, millennials want a pair of jeans from a micro-fashion start-up in L.A. that are produced in small and sustainably sourced quantities. Equally, they value experience over amassing product, despite still needing to make everyday personal and home product purchases. Enter Amazon, TJMaxx, and the proliferation of online flash sales and luxury consignment sites where the 25-44 year old crowd is likely to be found.

Department Stores vs. Their Off-Price Counterparts

Off-price conglomerates like Amazon and TJX Companies have become the go-to for consumers looking for a Calphalon skillet, new sheets or a pair of sneakers at half the price they would pay at Williams-Sonoma or Macy’s. By 2020, Nordstom Rack is positioning to add 120 more stores to their current 300 in operation. Part of the lure of a visit to TJMaxx or Saks Off Fifth is the treasure hunt; the magic of which is their constantly refreshed inventory. TJX Co. sources from more than 16,000 vendors in over 75 countries, allowing customers to experience constant surprise and discovery over what they may find.

The psychology behind what some consider the rising and steady popularity of the off-price retailer is that when the cost of goods appears to be less, shoppers end up buying more. The excitement of the find disrupts the rational decision making as to whether the item is a worthwhile or necessary purchase. Part of what constitutes the low prices at TJMaxx comes by way of a direct from manufacturer supply chain strategy employed by the company.

While the last several years have seen the demise of off-price stores like Daffy’s, Loehmann’s and Filene’s Basement, TJMaxx, Nordstrom Rack and European discount chains are soaring in popularity and sales numbers. TJX shares have risen over 200% since 2010.  Nordstrom Rack now has more stores than its full-price equivalent, and has opened 27 new stores in 2014 alone. Last year Macy’s launched its Backstage off-price store, with six brick and mortar locations, hoping to replicate some of the success seen with Nordstrom Rack.

Consider the number of off-price luxury brand outlets, compared to their full-price counterparts. Off Saks has 82 locations, compared to 31 full-priced department stores, while Neiman Marcus has 43 off-priced stores compared to 41 full-priced. Nordstrom Rack makes up 40% of overall sales for the company, a 10% increase from three years ago. According to Buzzfeed, Nordstrom Rack brought one million new customers to their full-priced stores and in the last year, and reported 26 straight quarters of double-digit gains; further cementing plans to add new Rack locations in the U.S. The news was not so good for the full-priced stores; with recent reports of a 5.4% drop in business, and less than predicted gains in online sales.

Another argument by retail analysts on the success of off-price retailers is that they are typically not located in traditional mall settings, but rather in strip mall, and urban centers where customers are likely to be shopping or running errands.  And the Economist reports that fast evolving trends and fickle consumers make it harder for brands to predict which clothes will sell, “leaving more inventory for TJX and Ross to buy at discount.”

Alternatives to Off-Price Department Store Brands

Online auction and flash sale sites specializing in both discounted designer ware and consignment have exponentially increased over the last five years. The rise of Tradesy, Gilt, Nordstrom’s HauteLook, Vestaire Collective, Yoox, FarFetch, the RealReal and ThreadFlip have lured shoppers toward the thrill of the hunt, as well as the thrill of the deal where a twice-worn $700 Isabel Marant jacket goes for $95 on Tradesy.

The news that off-price is king in America has made its way to Europe. Strong sales numbers for low price international chains like Primark, Aldi and Lidl have allowed them to expand further into the U.S. market. Irish apparel and home goods retailer Primark has announced 10 new stores in the U.S. for 2016 alone, and by 2018, Aldi and Lidl will each have 2000 new stores in the U.S. According to the Local Data Company and BBC, the UK’s Poundland, along with supermarket chains Aldi and Lidl have grown 48% over the last five years.

From the sales declines at Saks Fifth Avenue, Barney’s and Nordstrom, and the rise in reach and popularity of off-price retailers, one thing is markedly clear. Today’s consumers are keeping increasingly close tabs on their purse strings; they’re making online and mobile price comparisons an American sport, and are unwilling to pay full price for moderate quality. The brands that are able to compete in the 2016 marketplace are offering an experiential atmosphere in their brick-and-mortar locations and brand-name product for lower than market prices. They keep their inventory fresh and inventive; and have diverse, high quality products with fair and transparent pricing in exchange for the quality, curation and construction of goods. As the universe of national retailers continues to shrink, the next evolution of brands cannot totally fill that vacuum, so the question remains, will the retail footprint continue to contract or will there be enough new retailers that grow in size and customer base to fill the void?