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After Decade of Growth, When Will Off-Price Hit Saturation Point?

Struggling retailers continue to place bets on off-price, which is expected to grow between 6 and 8 percent by 2020. But how much is too much?
A Nordstrom Rack off-price retail store | Source: Shutterstock
  • Lauren Sherman

NEW YORK, United States — Fifteen years ago, shopping the off-price market meant two things: a weekly trip to a local discounter like T.J.Maxx, or a seasonal pilgrimage to a premium outlet mall, typically located an hour or so outside of a major city. Both options, while radically different in terms of product offering and consumer experience, delivered on the desire for special deals.

But that was then. “The outlet mall was a place that you would go to on a field trip,” says Sucharita Mulpuru, chief retail strategist at Shoptalk, a retail and e-commerce conference. “It has evolved into a place where people go when they need their everyday things.”

In recent years, consumers have increasingly turned to off-price channels, especially in the wake of the financial crisis and ensuing recession, prompting more and more retailers to join the fray. To be sure, the off-price market is much more crowded today than it was a decade ago, as retailers continue to invest in a channel that appears to be growing with no end in sight, hoping that off-price will make up for the on-going decline in full-price sales, brought on by overstocking, margin-shrinking discounting, general market fragmentation and the rise of e-commerce. And while full-price retail continues to suffer, off-price stores saw foot traffic increase by 4 percent in the year ending April 2016, according to market research firm NPD.

“It’s the thrill of the treasure hunt; the right price-and-product equation,” says Dana Telsey, chief executive of Telsey Advisory Group, an equity research and consulting firm. “Vendors now see these off-price retailers as a go-to, top-10 channel.”

While traditional brick-and-mortar stores are scrambling to conceive new and innovative ways to bring customers back into the fold, Moody’s expects sales of off-price apparel and home goods to increase 6 to 8 percent between 2015 and 2020, outpacing the growth of the overall market, which is projected to expand by just 4 percent during the same period. Today, two-thirds of US consumers shop off-price channels, according to NPD.

In the face of this trend, just about every major American department store has put forth a plan to capture as much of the off-price market as it can, including Kohl's (a cheap-and-cheerful competitor to Sears and J.C.Penney), Macy's, Bloomingdale's, Saks Fifth Avenue, Nordstrom and Neiman Marcus.

For the most part, the strategy is working. Nordstrom, which operates a whopping 215 Nordstrom Rack stores in the United States and Canada, saw off-price net sales increase 10.1 percent in the third quarter of the 2016 fiscal year, with sales at stores open at least one year up 3.9 percent. In 2015, HauteLook and Nordstrom Rack made up 29 percent, or $4 billion, of the company’s $14.1 billion in net sales. And one need look no further than T.J.Maxx-owner TJX Group, one of the largest fashion and apparel off-price retailers in the US — which saw year-over-year net sales increase by 6.9 percent to $8.29 billion in its most recent quarter, and by 6 percent to $30.9 billion in the 2016 fiscal year — to see that the demand for off-price retail remains strong.

But how long can it last?

Hudson’s Bay Company, which owns off-price players Saks Off Fifth and Gilt, saw comparable store sales in the off-price channel decrease by 8.4 percent in its most recent fiscal quarter, indicating that the channel is not a cure-all for retail’s woes. Recently, accessories brand Kenneth Cole also announced that it would close all 63 of its outlet stores in the US and focus its efforts on full-price stores, most of which are located outside the country.

Off-price is where you see a lot of the growth for retailers. But I don't know what the saturation point is, as there has been growth [in the off-price channel] for a decade now.

To be sure, full-price — sometimes referred to as full-line — retailers that open off-price stores within close proximity of one another run the risk of cannibalisation. “It’s a slippery slope, to be competing so closely with oneself,” Andrea Weiss, founder of the consulting firm the O Alliance, told BoF in September 2016. “Many consumers are choosing the outlet store over the full-price store. That can have a detrimental impact on the core business. It’s dangerous times when you start using off-price as the growth strategy.”

For many of these retailers, off-price will become their core business, if it isn’t already. Nordstrom operates far more Nordstrom Rack locations than full-price stores; the Neiman Marcus Group’s assets are split in half. “There’s no question that off-price has cannibalised full-line retail,” Mulpuru says. “Off-price is where you see a lot of the growth for retailers. But I don’t know what the saturation point is, as there has been growth [in the off-price channel] for a decade now.”

While off-price may offer a quick solution at physical retail, there are challenges to making the approach work online, where the segment has struggled to create as much of an impact. Hudson's Bay Company attempted to remedy that with its February 2016 acquisition of Gilt, which was once valued at over a billion dollars. HBC paid the bargain basement price of $250 million — less money than the company raised — acquiring its valuable technology and customer data. But the costs of managing, displaying and marketing inventory online can cut deeply into what are already low off-price margins, which can sometimes be just a little over 20 percent. "There are huge, huge challenges in bringing off-price online," Mulpuru says. "It adds costs that didn't exist before."

What’s more, as more off-price retailers emerge, it will become increasingly challenging to find quality product to fill stores. While brands and retailers have been cutting product specifically for the off-price channel for years, even tighter inventory control on mainline product means that many brands are shipping underperforming items out of full-price stores mid-season, indicating that full-price and off-price stores could well be carrying the same exact product.

Inturn, a marketplace for retailers and vendors trading in off-price product, is meant to help better manage this process, allowing smaller brands to quickly turn over underperforming product, while helping retailers discover product they might not have had access to in the past. “It’s not just a means to sell inventory,” says Inturn chief executive Ronen Lazar. “Stores and vendors are using the platform to create a consistent process.”

Whether or not we are approaching a ceiling to the growth in the off-price market in the US “remains to be seen,” says Mulpuru. “Companies like Amazon are so dominant, making it easy for consumers to find anything they want for a good price.” For retailers only now entering the sector, “It may be too little too late,” she continues. “The right time to have done it would have been five years ago.”

But there is certainly still opportunity abroad. TJX International, which includes the company’s European and Australian stores, reported net sales of $4.2 billion in 2015, up 3 percent from the year previous. While the off-price concept is most developed in other western countries, Asia is another growing sector for Inturn, which currently works with buyers from 35 different countries.

“The US is heavily built out, Canada is heavily built out. Everything has a limit,” Lazar says. “But size of the retail market is enormous. And this shift in consumer behaviour, that’s something we believe is here to stay. It’s not a fad that will disappear tomorrow.”

Related Articles:

Can American Retailers Kick Their Discounts Addiction?
Does Anyone Expect to Pay Full Price Anymore?
With Gilt, Hudson's Bay Company Bets Big on Off-Price

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