How long can the off-price retail party go on?
The discount sector is still hot, but a good economy, the pressure to sell online and the decline of department stores bring new challenges.
Off-price retail is nearly as old as the department store that spawned it — it was Edward Filene, son of the Boston department store magnate, who thought of selling excess inventory at bargain prices in the basement of the downtown store. A little later, Frieda Loehmann collected garment overruns from top labels and sold them at deep discounts from her Brooklyn apartment, establishing the earliest version of the beloved American retail format.
Eventually, most department stores had their “bargain basements,” and factories held their own special sales of defective, over-produced or canceled orders. But other enterprising retailers joined Loehmann over the years in selling such items in addition to seconds, close-outs, returns and last season’s leftovers from other apparel and footwear companies.
For shoppers, it meant an opportunity to grab top labels at basement prices, and that remains an essential lure to the likes of Ross, TJX Cos.’ Marshall’s and TJ Maxx, Nordstrom Rack and Macy’s new Backstage effort, which the company hopes will be its growth concept. (The originators, Filene’s Basement and Loehmann’s, have since folded.)
Thanks in part to solid fundamentals like a robust merchandise pipeline, a healthy consumer base and plenty of runway for brick-and-mortar expansion, the segment is on pace to reach $18 billion to $19 billion of incremental sales by 2021, according to a September note on the sector from JPMorgan analysts. Around the same time, Moody’s Investors Service released a note saying much the same thing, crediting the retailers’ significant scale, flexible purchasing, strong and expanding vendor relations and adaptable real estate strategies, for their endurance.
But does a century-old retail concept, in the age of instantaneous price-checking, the rise of e-commerce and a glut of apparel sellers, really have staying power?
‘The last of the online holdouts’
So far, most off-price retailers have given digital sales short shrift — indeed, NPD’s Cohen calls them “the last of the online holdouts.” For one thing, the discovery-based treasure hunt seems predicated on going to the store.
“I do think these stores offer something in the physical environment that is difficult to imitate online,” Barbara E. Kahn, professor of marketing at The Wharton School, said in an email. “I think the idea of the ‘treasure hunt’ – and finding something special amongst the racks in a physical store is a compelling shopping experience for some people. The physical in-store experience is definitely part of the allure.”
Plus they’re doing pretty well without it, including with younger consumers. Indeed, while many see millennials as less brand-loyal and therefore less easily seduced by good deals on premium labels, that’s a misinterpretation, according to Matt Sargent, senior vice president of retail at consulting firm Magid. While older generations grew up with binary choices for their loyalties — Coke/Pepsi, Colgate/Crest, Skippy/Jif — millennials are offered a wide array.
“Millennials really care about brands — they love brands, as most young generations do. But they fall out of love really quickly,” Sargent said in an interview. “The love of brand choice and the bargain hunting ethos puts off-price stores in a sweet spot right now.”
With rising traffic and sales at stores, it’s hard to argue that off-price retailers should invest much in their online channel. “Do you spend money on a theoretical when you doing so well right now?” Sargent said.
Still, NPD’s Cohen believes they will have to revisit that stance. “Online does provide an entry point for many new consumers to become aware of the products,” he said. “The challenge is the model of selling close-outs are hard to manage online compared to planned purchases. But, keep in mind, more and more of off-price shopping is now planned.”
Hudson’s Bay Co. threw in the towel in the online off-price space, last week selling off its Gilt Groupe flash sale site to rival Rue La La, whose CEO, Mark McWeeny, says the model is “all about discovery. Certainly storytelling is core to what we do. It’s great storytelling and great use of data and analytics,” he told Retail Dive of the opportunity for off-price sales online. “I’ll never say never, but the opportunity is just so large in e-commerce. Brick and mortar is not our current focus.”
But the jumble, the increasingly dubious merchandising from designers and the “compare to” pricing that often inflates the worth of an off-price deal may not fly so easily online, and that could be a bigger e-commerce challenge for these retailers, according to Sargent. The level of detail about products and the plentiful reviews don’t compare to the transparency found at Amazon, for example.
“Off-price has brands you want at less than you expect, that’s both the sweet spot and the threat,” he said. “I think there’s more opportunity for them if they were to engage more extensively online. Amazon has created this really strong social engine and community — that creates a huge amount of good will. People trust them, they know who they are, they know what they stand for — they stand for unbiased choice and they offer the transparency to validate that. Once you go in the digital space, you become transparent. If you own that and do it as well as Amazon, it can be a great asset.”
While NPD’s Cohen sees the space getting maxed out, Columbia’s Cohen, sees no end in sight for off-price retail, at least not for the companies like TJX, Ross and Burlington that are consistently called out by analysts as solid and growing. Department stores’ efforts however, could be a different story.
“I don’t think anything but carelessness is going to stop TJX or Ross, and there is no sign on the horizon that they are going to get careless,” he said. “As for Macys, Saks, Nordstrom, Neiman Marcus, etc. I don’t think there is going to be any happy endings.”
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