Which off-price retailers will withstand the test of time?

Photo: Nordstrom
Dec 05, 2017

Many off-price retail chains are reporting same-store sales declines for 2017. Nordstrom Rack recently reported a sales decline of 0.9 percent and Hudson Bay’s off-price concept, Find @ Lord & Taylor, reported a 4.6 percent drop in sales in the past six months. In addition, Neiman Marcus closed 10 of its “Last Call” stores last year, leading MarketWatch to question whether off-price retailers are beginning to “cannibalize themselves” as a result of declining customer interest in the segment.

While on the surface the TJX machine appears to still be thriving, its consolidated same-store sales were stagnant in 2017. Compare this to a five percent increase in same-store sales last year and it looks like not even TJX is immune to the shifting retail tides.

And Nordstrom Rack? Despite the cautioning by retail analysts that the off-price segment is over-stored, CNBC reports that Nordstrom Rack is planning to open additional stores in both the U.S. and Canada in the coming year.

Many of the aforementioned retailers blame their sales declines on the recent hurricanes. Keeping cataclysmic weather events in mind, then, how these off-price retailers perform in Q1 of 2018 will give analysts conclusive evidence of whether the off-price segment’s heyday is coming to a close.

This begs the question of whether consumer interest in off-price concepts is indeed, on the decline. And, if so, which off-price retailers will be the last ones standing.

DISCUSSION QUESTIONS: Has consumer interest in off-price shopping waned? How can off-price retailers differentiate themselves in light of increased competition for market share? If there’s a shakeout in the segment, which chains do you expect will continue to do well?

Please practice The RetailWire Golden Rule when submitting your comments.
"Retailers operating off-price stores need to take another look at their target demographic and figure out if they need to shift their strategy."
"I think the idea of “off-price” is more of a retail idea than it is a consumer one."
"I believe this is due to increasing income inequality. There are stores for the 1 percent, the 0.1 percent, then there are stores for the rest of us."

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28 Comments on "Which off-price retailers will withstand the test of time?"

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Bob Phibbs

With secret Facebook swapping and buying groups and sophisticated apps for reselling your own stuff, how much demand is out there for leftovers?

Georganne Bender

I belong to one of those secret Facebook groups that’s run by an indie retailer. It’s brilliant.

Dick Seesel

Every time a retail segment gets overcrowded with “me too” brands, a shakeout is inevitable. Between the key players like TJX and Ross, the luxury retailers’ outlet brands, and the new entries like Backstage and Off/Aisle, the market is ripe for consolidation. It’s no different from the waves of brand closures that swept the department and discount store industries, but I do expect TJX and Nordstrom Rack to be among the survivors.

Meanwhile, off-pricers keep expanding their brick-and-mortar footprints (often in other retailers’ closed sites) at the same time that most other big chains are working on omnichannel initiatives. You can argue that the “treasure hunt” appeal of off-pricers doesn’t lend itself easily to e-commerce, but this segment of retail needs to figure it out in a hurry.

Debbie Hauss

I think retailers operating off-price stores need to take another look at their target demographic and figure out if they need to shift their strategy. It’s definitely not the off-price market of the ’80s and ’90s today. As we talk more and more about how important the “experience” is to new generations of shoppers, the off-price segment could fall behind if it doesn’t gear up. The fastest-growing segments of younger shoppers just might not be enamored with the experience of searching through racks of clothing squeezed tightly together in the effort to find one great sweater deal.

Neil Saunders

Consumer interest hasn’t waned and off-price as a whole continues to grow and to take share from other parts of the market. However, growth is most definitely slowing – especially in off-price apparel.

The problem is twofold.

Firstly, increased supply due to store expansion and more traditional players like Macy’s trying to grab a slice of the market. That means spoils are spread more thinly than they once were.

Secondly, more moderate growth in demand – at the end of the day, there is only so much clothing consumers can buy (no matter how great a price it is being sold at) and many shoppers are already pretty saturated with apparel.

Will there be a shakeout? Probably, but I expect the big chains like TJX and Ross to be just fine. It will likely be the department store off-shoots that will be most affected.

Cathy Hotka

Off-price retail isn’t going away, but mediocre off-price retail is. The success of TJX prompted a slew of competition, but not all understood the formula, which requires unpredictability and skilled merchandising. Companies that want to compete in this area should look carefully at what makes TJX so compelling.

Phil Masiello
Even off-price retailers need to provide value other than a cheap price. When the selection becomes stagnant and redundant, they lose consumer interest. The original model of off-price retail was a buying group scouring deals around the world and providing discovery for the shopper. There were different and unique products all of the time. So it made the trip worthwhile. I compare this to the center of a Costco store which changes on a regular basis and the customer is surprised by some of the deals. But today, it is a model of building products for these off-price stores. So the selection becomes the same. For example, the Last Call stores have built-in branded sections for jeans, shirts and shoes. As a customer, that signals that these are not a deal and they will always be there. I have no reason to visit the store because I know what items they have day in and day out. And I know the price. This kills the discovery aspect. TJX, on the other hand, seems to have… Read more »
Meaghan Brophy
Meaghan Brophy
Senior Retail Writer
4 years 7 months ago

Agreed, Phil. Any retailer can have cheap prices, and they can do it online. True off-price retail is hard to execute well, and many retailers are missing the mark. I think TJX will withstand the shakeout. Nordstrom Rack will survive too, if only by sheer will.

Art Suriano

I think there are two reasons why off-price sales have been slipping. First is the intense competition that continues to increase both online and in-store. But a second one is that the economy is showing definite signs of growth and improvement with three consecutive quarters of 3 percent GDP, the highest consumer confidence in 17 years and the lowest unemployment in over 16 years. These reasons may mean that those customers who were shopping off-price not by choice but by necessity may now be in a position to go back to the retailers they prefer. If this theory is correct, other retailers will begin seeing better comp store sales and online sales growth, which for some is already the case.

Bob Amster

Off-price works when the product is comprised of recognizable brands at a perceived value. It is easy to over-store the segment and difficult to determine how many outlets is just enough, especially when one has been successful in the past. The trick is to pinpoint how much runway there is in one’s category. I agree with Dick Seesel. There is going be consolidation.

Kiri Masters

The question in my mind is how well off-price can or will translate to an online environment. Beyond daily deal-type sites and online consignment stores, there doesn’t seem to be a lot of traction in this category. Does the limited inventory and thrill-of-the-hunt experience of off-price shopping mean that its destined to be offline forever? That would be good news for incumbent off-price retailers who will be able to scoop up low rents in vacant retail spaces left by beleaguered department stores.

Jennifer McDermott

I agree Kiri, I think the experience encompassing the off-retail shop is a big factor for consumers. I think it would be drowned out online where coupon comparisons, eBay, et al reign supreme. The thrill of the hunt would be greatly lessened through tabs and clicks.

Liz Crawford

Hurricanes are a factor in retail sales declines. Amazon is another factor in off-price store sales declines. But differentiation from “full price” retailers is the biggest underappreciated factor. While TJ Maxx has a clear selling proposition, other off-price retailers aren’t so clearly distinguished. J.C. Penney, for example, is struggling.

Department stores which have a high-low proposition (Nordstrom/Nordstrom Rack; Macy’s/Macy’s Backstage) do seem to be cannibalizing themselves … compressing their own margins.

I believe this is attributable to increasing income inequality. There are stores for the 1 percent, and even the 0.1 percent, and then there are stores for the rest of us. The differences between the middle quintiles of income is less dramatic than the delta between the top 5 percent and the top 1 percent. That means that stores (and e-commerce outlets) need to “normalize” to accommodate a more homogenous, and lower, disposable income bracket than in the past.

Lee Kent

Off-price shopping is not going away. Today’s consumer is much more cost conscience than past generations have been. They just aren’t as focused on the same things. They don’t get excited to see designer labels at 40 percent off like we were. They want basic but sustainable pieces alongside trendy accessories that can easily make many outfits and not cost the farm. Are the big time labels out? No, but that is the niche Rent the Runway is cornering, isn’t it? Smart retailers have to keep rolling with the tide. For my 2 cents.

Gene Detroyer

Once upon a time “off-price” was good stuff for less. But consumers have figured out that “off-price” has evolved into less than acceptable quality for less. One can only fool the consumer for so long.

Adrian Weidmann

Where is the innovative and strategic thinking? Brands need to take the time to understand who they are and who their customers are — then implement a strategy that connects the two using the most frictionless methods. Just because it is successful for TJX doesn’t mean it’ll work for your brand. The brave new digital world in retailing requires brave new thinking for out-of-date marketing and merchandising tactics. Here’s one foundational fact — Retail IS a consignment business! When are brands and retailers going to admit it and design and implement solutions to help shoppers with new business models and workflows enabled by new technologies? This would be far more successful than opening yet another box to merchandise retail hand-me-downs.

Chuck Palmer

I think the idea of “off-price” is more of a retail idea than it is a consumer one. While many consumers are motivated by a bargain or a value, more sophisticated merchandising systems result in less supply for this category. So we see a saturation of goods made specifically for off-price and consumers understand that.

With the exception of TJX, most companies are falling flat on the in-store experience, which should be about authentically good products at deep discounts.

Lee Peterson

Don’t forget that all boats are floating at the moment so it doesn’t seem like “discount” is top-of-mind vs. value (value is what you get, price is what you pay). I mean, unemployment is super low and we haven’t had a recession in almost 10 years. Also, everything is on sale all the time now so the very definition of a deal has changed.

Regardless, I think what we’re seeing is that there’s a limit to the off-price market and we’re running into it. How many Racks can you have or how many off-price centers can you build before people start to figure this out: the “regular” price stores aren’t that much more expensive! The end of the fake growth vehicle is here, time to look elsewhere for that.

Joy Chen

Most of the off-price retailers are brick-and-mortar and department store-focused, with both of those formats in decline. It’s difficult to say if off-price’s decline is driven by those trends or suffers from only positioning.

An off-price retailer chain can do well if they can 1.) provide appealing products through online and 2.) offer products that cater to a specific consumer group (such as Millennials). There are many examples of successful off-price retailers in the beauty and apparel space. Additionally, value is provided by many of the regular retailers so the competition is much more fierce.

Among the existing off-price retailers listed above, Nordstrom Rack has the best chance of succeeding, because I believe their positioning for “good value” is most appealing to Millennials.

Peter Luff

When a concept starts it’s exciting; it’s full of surprises which is great for the consumer. Everyone sees the success and piles in for a slice of the pie, it’s an inevitable life cycle. So are the next stages which are maturity, stagnation and oversupply of a format. Market economics will then inevitably come to play and there will be market fall out. The ones that survive will be the ones that still keep the surprise element for the consumer, with great buying and the better in-store experience. For me TJX is best positioned for this but it is a maturing market, so don’t expect huge growth.

Edgar Alverson

Some of the off-price retailers that are doing well despite the industry headwinds, like CitiTrends, are somewhat protected from e-commerce because so much of their sales are in cash (60 percent in CitiTrends’ case).

Brian Kelly
4 years 6 months ago
Michael Silverstein published “Treasure Hunt” in 2006. In it he recognized a shift in shopping behavior of middle class shoppers. “Their tight budgets force them to make tough choices and tradeoffs. Middle-class consumers are also fundamentally smart. They are usually careful and analytical in their purchases.” Out of that came TJX, Costco among others. Newly minted, these alternative retailers satisfied an unmet need. Like all of retail, boring is death. The great swath of “off price” retail pales in comparison to those who created “off price.” These wannabe retailers are dismal. They do not offer treasures, regardless of the price. Most of these retailers sell “dreck,” the goods that didn’t move in clearance. And so they will fail. A lot has changed since 2006; that was the year of Lehman Brothers fall. Mid-tier retail and department and specialty stores are fading because they’re no longer relevant — aka, have become boring. The years of the great recession of recapitalizations and depressed shopping made many retailers extremely cautious — they too became boring. The “OP” sector… Read more »
Ken Morris
Ken Morris
Managing Partner Cambridge Retail Advisors
4 years 6 months ago

I don’t think that consumers’ interest in off-price has changed, but same-store sales are declining due to a more crowded category. Off-price retailers have continued to open more stores and more luxury brands are extending their brands by opening off-price stores.

It seems like the off-price stores that are performing the best are the off-price branded retailers that are focused exclusively on the off-price category: TJX, Ross Stores, Burlington, Five Below, and the dollar stores. The stores that will thrive are the ones that continue to surprise shoppers on their treasure hunt. Having the right products at the right prices and a shopping environment that is clean and organized goes a long way in maintaining customer loyalty.

The cycle used to follow the economy when the economy was dipping or stagnant, off-price retail increased. Lately it hasn’t mattered if the economy was up or down, these stores thrived and I believe that trend will continue. Never underestimate the power of a bargain!

Craig Sundstrom

L&T has an off price segment … who knew? Anyway, with the move to online sales — yes, here I go again beating the drum about the increasing irrelevance of traditional metrics like “same store” and an explosive growth in the number of brands (it seems like it anyway) — I’m reluctant to attach too much meaning to small declines over small periods. Yes, we may see declines in the individual companies, but the segment itself I think will be stable … we don’t have much movement in full price, so what’s left?

Kate Munro
Far from it. From our perspective, the off-price retail segment is still growing and is still a bright spot in the overall retail segment. According to IHL, mass merchants and discount stores sales were up 4.5 percent in the first seven months of 2017. ACTION, an off-price store chain based out of the Netherlands, is growing sales by more than 30 percent year over year and is expanding into Europe. In the US, Ross Stores is another one doing well: Sales last quarter jumped 8 percent year over year on a 4 percent comparable-store-sales increase. And Dollar Tree store sales increased 5 percent last quarter while Family Dollar sales increased 1.5 percent. A few contrarians have predicted the demise of this segment, but increased competition, in my opinion, does not mean consumer interest is waning, it means more stores are jumping into the category because it’s one targeted at the future – millennials. IMHO, ACTION, Dollar Tree, Ross Stores, among many others, will continue to do well. The thrill of the hunt — shopping and… Read more »
Georganne Bender
Consumers still like shopping off-price because everyone likes to save money – nothing brings us together like a deal. My Millennial kids frequent certain off-price retailers, but they also shop Zulily and some of the other brands that offer pop-up deals every day on Facebook. Have you shopped in an off-price store lately? And I don’t mean HomeGoods because it offers a variety of cool merchandise and no one cares if it ever graced the aisles of a department store. Most of these retailers buy specifically for their off-price stores, so as a consumer you have to wonder how many items in Nordstrom Rack actually ever saw sales time in a proper Nordstrom store. Much to the horror of other participants, a fashionista in one of our recent consumer focus groups pointed out that the Michael Kors handbags sold at off-price stores are not the same bags sold at Macy’s. The logo is different, she said, so the status isn’t the same. The lure of off-price used to be that you were getting a great… Read more »
Min-Jee Hwang

Off-price retailers are not just competing on price. They also have to offer a good selection and an excellent customer experience. Newcomers to the off-price segment are realizing that this is not a “set up shop and shoppers will flock” situation. Just because you offer discounted items, it does not mean that shoppers will necessarily want what you’re offering. Nordstrom Rack is a leader in the space because they have a great website and arm their associates with mobile devices to make any area of the store a checkout stand. The off-price retailers that continue to advance the shopper experience and embrace tech advances will remain the winners for years to come.