Photos: Getty Images/Sundry Photography; thredUP
What does the promotional climate mean for off-pricers and resale?
In third-quarter announcements, major off-pricers, TJX and Ross Stores, raised their full-year outlooks while expressing confidence in their ability to reposition their mix for an increasingly promotional environment. Apparel resale marketplace thredUP, however, reduced its outlook due to the heightened price competition from traditional retailers.
“The thredUP brand stands for value and that message is being washed out in this hyper-promotional landscape,” said thredUP’s founder and CEO James Reinhart on a mid-November analyst call.
Citing the impact of Amazon’s Prime Day and heavy clearance events by Walmart and Target, he said thredUP’s sales began deteriorating toward the end of the second quarter and continued into the third. Mr. Reinhart added, “What we’re seeing is a combination of demand pullback at a time when retail inventories are overflowing with apparel, and this is resulting in significant price compression in the apparel market.”
On the upside, Mr. Reinhart still sees a “significant opportunity” for resale to gain market share as inventory’s rebalance and promotions lessen. He said, “For a customer that’s been conditioned to expect 60 percent to 80 percent off retail for their clothes, yet still feeling the effects of inflation, resale is going to be a go-to for value.”
Results last week for TJX and Ross topped guidance, and their management expressed upbeat holiday expectations.
Ernie Herrman, TJX’s CEO, told analysts TJX’s holiday mix is being supported by a marketplace “absolutely loaded with quality branded merchandise across good, better and best brands.” TJX also expects to boost its holiday selling with deliveries multiple times a week and a campaign reinforcing the value of its offerings. Mr. Herrman stressed that “the flexibility of our business model has allowed us to successfully operate our business against some level of retail promotion every year for the past 46 years.”
Ross CEO Barbara Rentler said the chain over the third quarter “reset our values” from an assortment perspective and “got them to where we believe they need to be in this very promotional environment.”
Both off-pricers expected share gains in an inflationary and potentially recessionary climate. Ms. Rentler said, “With consumers’ heightened focus on value and convenience, this bodes well for our ability to expand our market share and profitability in the future.”
- thredUP Announces Third Quarter 2022 Results – thredUP
- ThredUp, Inc. (TDUP) Q3 2022 Earnings Call Transcript – Seeking Alpha
- The TJX Companies, Inc. Reports Strong Q3 FY23 Pretax Margin And Earnings Per Share; Marmaxx Comp Store Sales Increased 3% – TJX Companies, Inc.
- The TJX Companies, Inc. (TJX) Q3 2023 Earnings Call Transcript – Seeking Alpha
- Ross Stores Reports Third Quarter Earnings, Updates Fourth Quarter Guidance – Ross Stores
- Ross Stores, Inc. (ROST) Q3 2022 Earnings Call Transcript – Seeking Alpha
Discussion Questions
DISCUSSION QUESTIONS: Do you see the heightened promotional environment being risky for off-pricers and those in the resale market? How confident are you that both off-pricers and resale marketplaces will gain market share in the coming year?
Poll
Loading …BrainTrust
Katie Thomas
Lead, Kearney Consumer Institute
Ken Morris
Managing Partner Cambridge Retail Advisors
Off-pricers are in a most enviable position. The heightened promotional activity amplifies their price positioning and so while other retailers battle it out, the off-pricers continue to deliver great results. While there is overlap in off-price and resale, I suspect that the overlap isn’t as great as one might expect so I think we need to look at the segments differently. That said, I think both off-pricers and resale will continue to be strong post-holiday as inflation continues to be a drag on consumer spending.
Most of the off-price players are performing strongly, especially in apparel. The exception is Nordstrom Rack, but this has more to do with issues at the chain than troubles in the wider market. Our data show that more shoppers are moving to off-price to save money, even in a more promotional environment. This dynamic may not be as pronounced as it used to be, but it is still working to their advantage. Despite the reduced outlooks, resale is also growing in gross merchandise terms and more people are using the channel to save money. However across all segments this is a consumer market and retailers are having to work much harder to secure share.
Off-pricers execute to that highly-promotional market every day. Off-pricers have an almost flat learning curve in the promotional segment of retail while most of the others may have to experiment more to get it right. Additionally, consumers who are already familiar with the off-price stores may feel more comfortable buying there than from resale retailers.
I noticed that both off-price executives quoted in Tom’s article cite assortments as the key to sustaining growth and market share. As ever, product remain the critical path to differentiation. I suspect that both off-price giants will continue to set themselves apart through assortments that remain aligned with their customers, regardless of promos and inventory overages elsewhere.
Consumers cross-shop, so heightened promotional activity shouldn’t have a major impact on off-pricers where consumers know they can get good value. It is worth noting that during Black Friday, our team observed that consumers were more likely to be at traditional malls to take advantage of the deep discounts, rather than at off-pricers or even big box stores.
Ultimately, it comes back to a quality question – where do consumers think they can truly get the best bang for their buck? Discounters? Resale? Or waiting for sales at traditional retailers?
Off-pricers are doing well in a value-oriented environment — as they have done for the past several years. The surprise is that they are mostly flourishing, despite increased price competition from “mainline” retailers who are working through piles of apparel overstocks.
I believe that off-price will thrive in the current economy. Uncertainty generates sales in off-price and we are clearly in an environment with rising interest rates and lower market returns. Look for off-price and resale to thrive in the coming months and perhaps years.
The blip in overstocks for full-price retailers is a holiday bubble. They will heavily discount to move the merchandise but should return to their normal cadence by fall 2023.
In other words, they got in-season merchandise delivered late because of the supply chain disruptions and needed to execute a pack-away strategy, but this should be used up by the end of next year’s fall season.
As for thredUP, we can’t discount (pun intended) the price pressure they’re seeing from other second-life online clothing brands—which now includes Goodwill. Nothing like some healthy competition in a red hot shopping segment to get creative with improving logistics, merchandising, and ways to boost conversions!
The short term (2023) looks rosy for off-pricers. I’m not sure I would make the same bet for 2024 and beyond. Are brands and retailers going to keep making the same over-buying mistakes forever? Are they never going to learn the lesson that creating and managing some occasional scarcity is in their brands’ best interest? The pandemic reminded us about some positive lessons about the role scarcity can play in the supply and demand equation — which everyone promptly ignored. Now abundance is giving us the flip side of that same lesson. Who is taking notes this time?
This would naturally be a tough time for year-round discounters and second-hand. Consumers’ first holiday shopping thought is seemingly to go where they usually can only buy full-price because it’s a rarer moment for deals. This isn’t to say that second-hand and year-round discounting will struggle in other quarters, or even the early months of the fourth quarter, but when the last month of shopping arrives the retailers doing out-of-character deals are the ones taking center stage.
Off-pricers always win.
I have always assumed that off-price and resale customers had different mindsets. The off-price customer is looking for price, above all. They go to TJX retailers with that in mind. As such, they won’t be affected by the promotional activity of major retailers.
The resale customer is looking for something more specific, considering value and quality. The brand name offerings will be much more significant in resale. As such, they are likely to be more affected by the promotional activity of the majors.
The global economic disruptions, heightened inflation, and price-conscious consumption, combined with the over-inventoried full price retail market, is precisely the climate in which off-price retailers and resellers will thrive. While full-price retailers are going through aggressive promotional cycles, their price points are still relatively higher than the off-price retail market, dominated by TJX and Ross Stores.
The off-price retail operating model was built for this moment. They can extend significant value to consumers with an abundance of quality merchandise available at reduced costs. Their loyal customers will be able to take advantage of all the amazing offers to be had in the next few months while full-price retailers look for outlets for their out-of-season inventories. Additionally, the resale market is becoming increasingly prominent as consumers seek value and sustainability matters in the era of conscious consumerism.
Off pricers are able to shift quickly based on pricing in the current market. They can easily stamp new pricing as needed. Store managers have more flexibility to manage liquidation inventories and markdowns. Assortments are usually selected for treasure hunters and move fast. The higher frequency and inventory turn makes it unlikely to be driven by promotional factors in the broader apparel market. Most operate with EDLP anyhow. As to gaining market share, this would be more dependent on store traffic. With higher promotional incentives, there should be limited change in shifting to off-pricers, other than a trickle of inflation driven bargain hunters. Some market share gains, but not an inordinate amount.
Off-price retailers have their regular/repeat customers, always looking for the bargain. In economically challenging times, such as what is happening today, there is an opportunity to gain new customers looking for value. The smart off-price and resale brands will take advantage of this to build their customer base and increase market share.
Cheap and new vs. cheap and used … er “pre-owned.” Just on similarity alone, I would say “off-price” has the bigger threat, but we’re talking about shades of difference here: ultimately a reduction in spending affects everyone (even if the relative advantage shifts to low-cost providers).
Comparing off-pricers, resale markets and traditional retailers is quite irrational. Let’s see how:
1. Customers who shop from traditional retailers want to bag the latest trends and newest styles. Price is usually not a top concern while making a purchase decision.
2. Customers who look for better deals shop from off-pricers. However, it’s highly likely that the assortment would consist of lower-quality and outdated products.
3. Customers in search of unique, vintage finds prefer shopping for second-hand items. Resellers foster a treasure hunt-like atmosphere with a good number of high-end goods at low prices.
Furthermore, traditional retailers offer periodic markdowns in order to clear out inventory. Off-price retailers, on the other hand, offer discounts all year. Lastly, resellers typically stock higher-end products and offer them at a discounted price. As a result, the distinction is quite obvious. All of these retailers cater to a specific customer segment and plan their merchandising strategies accordingly.