Off-Pricers in Demand
By Tom Ryan
Off-pricers seem to have it all these days. Consumers are heading
to chains such as T.J. Maxx and Ross Stores to save money while more premium
brands are dumping their goods into the channel in order to flush inventories.
Not that off-pricers aren’t feeling
the impact of the rocky economy. On Wednesday, T.J. Maxx and Marshalls
parent TJX Cos. reported fourth-quarter profit fell 17 percent partly because
of the stronger dollar. But adjusted results still managed to top analysts’
estimates due to higher-than-expected margins, according to Bloomberg
News.
While also announcing
cost-cutting moves to trim about $150 million in expenses this year, the
company said it believes it is well positioned to weather the recession.
"Today we are gaining
market share in a challenging environment with the strength of our value
proposition," chief executive officer Carol Meyrowitz said
on a conference call with analysts. "Value is where you want to be
in this economy. In 2008 our comp sales were at the high end of the retail
industry and our customer traffic remains healthy. We believe that our
momentum will continue."
Ernie Herrman, senior executive vice president and president of
The Marmaxx Group, said that the environment is giving
T.J. Maxx and Marshalls access to brands they’ve rarely received in the
past.
"The most exciting
opportunity to me is new customers," said Mr. Herrman.
"If we have customers walking in the door now that perhaps did not shop
us before, when they see some of these brands at the values we potentially
will have, I think that will be a key strategy for us, even longer term,
to gain market share there."
Brian Tunick, an analyst at JP Morgan, told USA Today that
stores such as T.J. Maxx are becoming outlets for apparel designers who
are sometimes shut out at full-price retailers. That
"plays up the consumer perception" that off-price stores are a
place they can get high-quality merchandise, often at "30 percent to
40 percent below department store prices," Mr. Tunick says.
Mr. Tunick added that while Macy’s could be potentially seen
as grabbing customers trading down from luxury chains like Saks and Neiman
Marcus, he believes many traditional department store customers are heading
to off-pricers.
"You can clearly
argue that the mid-tier department stores have no pricing integrity," Mr. Tunick said. "Nothing
goes out the door at full price, and that plays right into what the off-pricers do."
Discussion Question:
How do you think off-pricers are positioned
for the short and long term? What are some challenges to the channel’s
continued growth?
The down economy is sending consumers down the food chain from luxury to discount out of necessity. The big question is, will they move back up once the economy bounces back? I believe a significant number will continue to stay price conscious in the short- and medium-term. Long-term, we’ll return back to normal equilibrium. In the meantime, discounters will out-pace the high-end.
Short term, these channels are in great shape. Many retailers are overstocked on spring and summer clothing lines, which will create more discounted inventory in outlets like T.J. Maxx. However, come the Fall, mid-tier and higher-end retailers won’t have the volume of inventory to shed. They have wised-up. By winter, prices will start to escalate again and the shopper’s price-value relationship with brands will begin to reassert itself.
The off-pricers are positioned well for the short term and need to start positioning for the long term. Other retailers may want to evaluate their strategic messaging to retain the customers, leaving them for off-pricers. The customer would rather stay at their name brand store, so how do they position themselves to retain customers? Long-term, I’m not sure if the off-pricers are looking at this possibility and positioning themselves for it.
The challenge for continued growth is customer service, inventory selection and overall feel of the store. Some T.J. Maxx and Ross stores have a feel of a messy garage sale. Product scattered everywhere, dirty and everything in disarray. Inventory must turn; they also must be better at turning the slow inventory meaning being more responsive to markdown opportunities.
Off-pricers like TJMaxx, Ross Stores and others are benefiting from some key trends right now:
1. Value-oriented retailers in general are gaining share at the expense of higher-priced stores. The best examples right now are Walmart and the dollar stores, but the trend is also leaving more aspirational luxury retailers behind.
2. Off-price stores stand to gain when department stores find themselves with a glut of inventory and open orders they can’t use. This product needs to go somewhere, so the vendor community finds off-pricers a more viable option than in the past.
3. Many national chains (Macy’s, Target, JCPenney as examples) are devoting more open-to-buy and floor space to exclusive and private labels. National brands are being squeezed out and their own outlet stores can only absorb so many goods.
Do these short-term changes represent long-term shopping behavior changes? Not necessarily: At some point both retailers and vendors will learn to ratchet down their inventory levels (if they haven’t done so already) in response to slow demand, making access to product more difficult for off-pricers. And the off-price stores themselves need to make sure they are differentiating from each other–otherwise you can foresee a wave of contraction and consolidation in this segment just as in so many other areas of retailing.
They are positioned well for at least the near and mid-terms. The only real challenge they face is prolonged deep discounting by other chains. When you can routinely get 60 to 70 percent off at a traditional store, how far do off-price retailers have to go to demonstrate a superior price position?
If the off-price retailers want to retain any new shoppers, they are going to have to work a little harder on merchandising and keeping the stores clean. In my recent visits to the channel, and I do shop it regularly, I have noticed a lot of inventory just laying around or not in its appropriate places. Shoppers may be seeking deals, but if the experience gets too messy and the stores are trashed, the “icky” feelings will quickly overtake the bargain mentality for many.
I also agree with Liz on the inventory management issue, but one point I will make is that the mall stores jump the seasons so darn early that by the time most of us are ready to buy summer, they’ve shipped it out and are showing fall!
The off-pricers are positioned really well for the short and middle term. People looking for value will certainly find the off-pricers attractive. New consumers may even be attracted to these stores which could position the stores for future IF they can create loyalty. If new consumers are coming to the stores now, the managers need to make sure they get to know these new consumers and determine whether or not they are similar or different from their traditional consumers.
Off-price chains are very well positioned for success in both the current economy and the post-recession economy. These chains are currently benefiting as consumers continue to switch their spending to value merchants. And that includes both first-try shoppers (those who are giving the off-price channel a first try), as well as shoppers who dabbled in the channel prior to the recession but are now shopping their more often. It’s because of these new shopping behaviors that the channel is well-positioned to benefit during the post-recession era since the behaviors being adopted now will harden.
As for challenges, in this competitive environment, there are challenges aplenty for every merchant. But one that this channel will need to work on is refining the shopping experience, e.g., customer service, merchandising and tidy stores. Off-price chains should also work on telling their story better, especially the thrill-of-the-hunt type of experience these chains offer.
The real question here is whether American consumers are changing their buying habits out of necessity, for the short term, or whether they are facing a fundamental shift in the ways they purchase apparel and household items. The real threat to department stores may be that their customers may discover that the designer jeans they buy for $20 at Loehmann’s are just as satisfactory as the $160 jeans at the department store.
Americans began to drive more when gas returned to $2 per gallon. When the recession eases, will customers go back to paying more at department stores?
The near term is easy, yes they are positioned well, it is the longer term that is of question. Consumers are trading down and buying stable apparel. There is less buying in all of retail lately, as nothing has sparked the need to have. Just like the current increase in Private Label, some of the new customers will stay with the off-price and some will leave. Some consumers just want a better shopping experience and will pay for it.
The expectation that off pricers will run out of merchandise to sell is a myth. While they do buy take-backs, they also are getting product right off the line.
I agree with, and must echo, all the other commentators — In the short term the off-pricers are well positioned and have a strong hand. They are also benefiting from relatively large product stock at present, which companies and stores are continuing to “dump”.
In the longer term, however, the position of the off-pricers is much less secure for multiple reasons, which have been detailed above. I also agree that attention to the customer experience will go far to maintain new customer patterns of shopping in, and possibly coming to “rely on,” the off-pricers. I agree that the danger of being seen as messy is a real problem and the “ick” factor could go far in losing customers to “old” shopping patterns once the economy brightens. As always, it comes down to knowing your customers and, importantly in this case, executing well.