Follow the Leader: Off-Price Gets Crowded

Sourcing Journal – Off-price is on fire. And with little else sparking consumer interest these days, it’s no wonder that more and more value outposts are cropping up everywhere.

In April, Moody’s called out this sector as one of the few bright spots at retail, along with dollar stores, home improvement and automotive. In fact, the ratings service expects this segment to represent 10 percent of apparel sales by 2018, up from 8.8% in 2015.

And like moths to a flame, retailers are opening off-price concepts as quickly as possible. TigerTrade, a wholesale platform for off-price transactions, reports the number of off-price stores increased by 12 percent in 2016. And as traditional mall-based stores continue to crash and burn, the original off-price chains like Ross and TJ Maxx are seeing increased competition from department stores hoping to heat up lukewarm sales performance.

Not only do the new stores jumping on the off-price bandwagon not have the experience, they could also fall prey to a pitfall that took another beloved store down. Filene’s Basement, the off-price division of Filene’s department store in Boston that closed in early 2012, ultimately became a victim of its own success.

Ken Morris, a founder and partner at Boston Retail Partners, worked for Filene’s in the 80s before moving onto May Company and Lord & Taylor. Initially, he said, the department store’s off-price arm was a subterranean treasure trove, where shoppers could expect to find items from the full-line assortment on deep discounts. Think fur coats from the mainline assortment that cost thousands of dollars marked down handsomely.

But it wasn’t just the deals that drew customers in, it was the markdown model. “Filene’s Basement was a bargain hunter’s mecca. They had automatic markdowns every 15 days, which kept people coming back all the time. People knew the cadence,” Morris said. “It’s all about the product mix and creating excitement. I’m amazed that [other retailers] haven’t used the automatic markdown component.”

Over time however, the Filene’s Basement model got watered down, and turned shoppers off.

“Filene’s Basement expanded and went to manufacturing product for the Basement, which ends up not being clearance, and they were getting full-line department store prices for product and you can’t fool people for too long like that,” Morris said.

The more than 4,000 doors that are scheduled to close in the U.S. adds up to huge potential, Jamieson agreed. “With the stress in the regular consumer sector, those dollars will be redistributed somewhere,” he said.

And TJX is getting ready to absorb department store’s loss. TJX, which operated more than 3,800 stores across nameplates and borders in 2016, told investors it sees “significant opportunity” for expanding its store base by 50 percent to 5,600 over time. And that’s just for current store concepts in current markets.

“It used to be that [off-price performance was] tied to the economy. When things were good, these guys didn’t do so well,” Morris said. “But that’s no longer the case. Everyone is looking for a bargain now no matter their economic circumstance.”

It’s a mindset that Morris said will spread to other countries, and when it does, those off-price players that have made investments there will win big. TigerTrade estimates that the global market for off-price is $280 billion, of which the U.S. only represents $90 billion.

While conquering Europe is already on the agenda for some of these retailers, China and India hold the biggest promise. “As the middle class grows in these countries,” Morris said, “they’re going to want to stretch their dollars like everyone else.”

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