Impact of COVID-19 on Off-Price Retailers: A Mix of Headwinds & Tailwinds
For many years retailers have raced to bolster their eCommerce capabilities fearing that if they didn’t Amazon would eat their lunch. Nordstrom, which generated 33% of its sales online in 2019, has said that buy online pick up in store is: "the single fastest-growing part of our business" and the most profitable.
Off-price retailers have gone against the grain, using a formula that largely does not include eCommerce. At the beginning of March 2020, before the pandemic became widespread in the United States, office-price retailer Burlington Stores announced it was exiting its eCommerce business. eCommerce sales made up a negligible part of Burlington Stores’s total sales at only 0.5%. Instead Burlington Stores decided to focus on expanding its physical store presence. “In our business, which is a moderate off-price business, the nature of the treasure hunt and the average price point that we operate at mean that brick-and-mortar stores have a significant, competitive and economic advantage over e-commerce” said Burlington Stores CEO Michael O’Sullivan.
TJX generates less than 10% of its sales from eCommerce and Ross Stores does not even offer eCommerce. But the formula these off-price retailers use, a combination of low prices plus a treasure hunt has been widely successful. TJX has only one year with a comparable store sales decline in the company’s 40-year history. Over the past decade Ross Stores’ stock has generated a very impressive 1,095% return.
But without eCommerce these retailers are caught in a precarious position during the pandemic. Even if the online sales they could generate now were significantly less than their bricks and mortar sales, generating even minimal sales is better than none. “Most companies right now are operating a dual strategy of defense first but still thinking about offense” said Simeon Siegel, a retail analyst at BMO Capital Markets. “Ensuring that they survive and have liquidity, but at the same time using eCommerce to drive revenues. Off-price doesn’t have that. Off-price today is simply in defensive mode.”
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Off-price’s successful treasure hunt in-store shopping experience may also be in question, at least in the short term. The first question is how quickly will consumers feel comfortable returning to stores? The second question is will consumers want to dig through racks and bins of clothing that have been rummaged through by other consumers? Perhaps not right away. A recent survey by First Insight found that only 33% of consumers feel safe shopping in a mall and only 45% feel safe shopping at big box retailers like Target or Walmart.
But safeguards put in place by retailers may help to alleviate fears. In China in some stores clothing is disinfected after customers try it on and so are fitting rooms. Customers also wear masks and social distancing is still in place, limiting the number of people that can shop in a store at one time.
But there may be a silver lining within this turmoil for off-price retailers. As department stores and other retailers are forced to get rid of inventory they were unable to sell while stores were closed they will turn to off-price retailers to unload their inventory at steep prices. Credit Suisse says this could turn out to be the “greatest buying environment for off-price in a decade.” Buying deeply discounted merchandise could also improve the margins at off-price retailers by the second half of 2020. But in a year where sales have taken such a big hit off-price retailers will be cautious with how they spend their money.
No one should count these retailers out. Off-price retailers are amongst the most resilient in the retail sector. After the last recession in 2008 and 2009, in 2010 TJX’s sales increased by 8% to reach $20.3 billion. Consumers whose wages did not keep pace with the economic recovery flocked to discount stores. And as department stores struggle and some ultimately fail off-price retailers will be beneficiaries.
Despite the dire situation analysts believe that TJX, Ross Stores and Burlington Stores have enough liquidity to weather the storm.