Off-Price Retailers, the Secrets to their Success
Who doesn’t want a bargain? That’s what the founders of off-price stores like T.J.Maxx and Burlington Stores thought when they first opened their doors. Whether times are good or bad consumers flock to these stores in search of designer goods at low prices. If you are curious about how these stores continue to lure customers in then consider these five elements of their strategy.
1. Store expansion. While many retailers are struggling in the face of high inflation off-price retailers are expanding. Several off-price retailers are opening more stores this year. This includes T.J.Maxx which is opening 150 stores, Burlington Stores which is opening 70 to 80 stores and Ross Stores which is opening 100 stores. “We now operate a total of 2,034 Ross Dress for Less and dd’s Discounts locations across 40 states, the District of Columbia, and Guam. As we look out over the long term, we remain confident that Ross can grow to 2,900 locations and dd’s Discounts can become a chain of 700 stores given consumers’ ongoing focus on value and convenience,” said Gregg McGillis, group EVP of property development at Ross Stores.
Off-price retailers are benefiting from troubles retailers higher up the value chain are facing. "Historically, any time there's retail bankruptcies, that's provided us opportunities for new store locations," said Ross Stores’ President Michael Hartshorn. Another tailwind for off-price retailers is the decline in eCommerce sales in the United States since the COVID-19 pandemic has eased and consumers have returned to stores. Visits for the major off-price retailers are now above pre-pandemic levels.
Source: Placer ai
Amongst the three largest retailers in the off-price space, the TJX companies (T.J.Maxx, Sierra Trading Post, HomeGoods, Marshalls, and Homesense) have the largest market share at 68%, followed by Ross Stores (Ross Stores and dd’s Discounts) at 22% and Burlington Stores at 10%.
Source: Bloomberg Second Measure
Burlington Store's forecast for 2023 is the "most attractive in our coverage," said analysts at Morgan Stanley. "As the business likely benefits from freight normalization, better inventory buys, trade down, as well as improved execution.
2. High quality merchandise at low prices. Over the past year or so most retailers have struggled to clear out their inventories presenting an opportunity for off-price retailers to scoop up brand name merchandise at low prices. Typically off-price retailers sell products at a 20% to 60% discount from the full retail price. Within the current economic environment "off-price retailers have a major opportunity to take share" away from full-priced retailers, said Michael O'Sullivan CEO of Burlington Stores.
For example, last September inventory in clothing stores in the United States was 24% higher than the previous year. “The availability of goods in the marketplace remains significant,” said John Kernan an analyst at Cowen & Co. “Our checks suggest large shipments from ‘key’ athletic apparel/footwear vendors ramping in the spring with inventory balances in apparel and footwear reaching new highs.”
Not only is more inventory available but the quality of that inventory has improved. “Branded content is really going to be at a new level here going forward,” said Ernie Herrman, CEO of TJX. High quality branded merchandise at low prices is what made off-price retailers such a draw in the first place. If you are cash strapped but can score a Gucci bag at 50% off then you might stretch your budget to make it work. Another benefit of the off-price model is that eCommerce is not a large part it. That reduces the risk of branded merchandise surfacing on the internet with deeply discounted prices, something that can harm a brand’s image. “They don’t want the clearance to cannibalize the full-price sales of those fresh products,” said Lorraine Hutchinson, a retail analyst with Bank of America. “They would rather take the hit, move it through a channel where it can’t be compared to their full-price items and do the best they can with the new fresh product that’s arriving.”
3. A haven for low income consumers. If you can win with low income consumers then your chances of succeeding in retail have just gone up. Many of the retailers that target low income consumers, think dollar stores, are amongst the best performers in retail. About half of Ross Stores’, Burlington Stores’ and TJX’s customers are low income consumers making around $50,000 or less. But as most consumers feel the squeeze from inflation more consumers are likely to trade down to off-price retailers. That places off-price retailers in the right place at the right time with the current economic woes continuing to work in their favour.
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4. Limited advertising. Off-price stores typically don’t engage in pricey advertising campaigns. Instead, low prices and well-located stores lure customers in. Off-price stores have essentially created a model that drives frequency of visits. Customers on a regular basis go on their own accord to their favourite off-price store in search of the deal of the day, eager to tell their friends what they have found while they were rummaging through the racks. Avid off-price consumers even know which days of the week new merchandise arrives so they don’t miss out since a lot of the merchandise in off-price stores is not re-stocked. This limited supply also creates a sense of urgency.
Creating a model that drives frequent visits shouldn’t be underestimated, it’s the envy of the retail sector. That’s why stores like Walmart sell groceries. Walmart didn’t start out selling groceries but it added the category after several years in business because it knew it was a way to get consumers into their stores on a weekly basis. Once consumers have finished shopping for bananas and milk at Walmart they can buy a higher margin general merchandise item before they leave.
5. A treasure hunt shopping experience. With around 85% of retail sales happening in-store the best retailers have figured out what customers are looking for when they shop offline. Spending hours in a store trying to find the perfect dress or throw pillow may not be for everyone. But many consumers love what has come to be known as the “treasure hunt.”
The “treasure hunt” is the shopping experience pioneered by off-price retailers. If you go to a T.J.Maxx store on a Saturday afternoon it may look like a tornado ripped through it but customers love shopping at these stores. These retailers tap into basic human needs such as a craving for novelty and a fear of missing out. The red dress you looked at on Tuesday may not be there when you go back to the store on Saturday to buy it. The success of off-price retailers shows that a store doesn’t have to have to be fancy to be successful.