The Off-Price Model, a Bright Spot in The Retail World

The Off-Price Model, a Bright Spot in
The Retail World
Compared to full-price retailers, offprice
retailers (OPRs) have specialized
in selling high-quality brand names
and designer goods at significantly
discounted prices. Certain nationally
recognized OPR brands like
Burlington Stores can offer up to 70%
off other retailer’s prices for apparel
items [1]. They appeal to the ones
who enjoy the emotional thrills of a good treasure hunting experience. It’s
worth noting that during 2016 OPRs have managed to capture almost a
fifth (19%, compared to 15% in 2012) of the overall US clothing and
accessories market [2].
OPRs have appeared during the ‘70s as a response to the customers’
demand for nationally recognized brands and designer-name merchandise
because these goods gave the impression of a higher social status. More
recently, in the face of the 2008 economic recession, consumers had
started to look for quality items at a price that could match their
diminished purchasing power. An OP retailer will sell closeouts,
discontinued items, irregulars, and canceled orders. Some manufacturers
will sell the extra stock through their factory outlet to reduce losses and
improve their profit margins while independent store and members-only
will carry inventory from multiple producers [3].
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A No-frills Approach
OPRs have designed their business
model in a very similar fashion to the
no-frills players. They acquire goods
which are mass produced and aim to
maximize the efficiency of their
operations by streamlining their
portfolio of brands, cutting down
the operational costs and pursuing a
very aggressive marketing strategy
to maximize profits and dominate the market with a price leadership [4].
There are four core players who are leading the pack in today’s market: T.J.
Maxx, Ross, Burlington Coat Factory and Nordstrom Rack.
So far, in the midst of store closures, they seem unaffected by the growing
trend of the international eCommerce. OPRs have derived only a slight
percentage of their total profits from online operations because they
promise an unparalleled bargain hunting experience in-store and a
constant flow of fresh merchandise. For example, the market leader, T.J.
Maxx has earned only 1% from eCommerce in 2016 (financial results as at
28th of January 2017)[5].
Replacing Traditional Retailers
The off-price chains and even full-price retailers with an off-price business
branch have been consistently expanding, and, in the process, have started
to replace traditional retailers like J.C. Penney, Macy’s and Sears who have
been struggling to innovate their operations and maintain a healthy market
share.
The market leader, T.J. Maxx reported net sales of $33.2 billion, during
2016, which represents an overall growth of 7% over 2015 and opened up
198 new stores. The company brands itself as a “global sourcing machine”
and they leverage products and information from a network of 18,000
vendors in more than 100 countries. Similar to Walmart, T.J. Maxx is
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developing their distribution network, IT systems (to support opportunistic
buying and stock management between different branches) and the global
supply chain. Furthermore, the business has big plans to grow their store
base by 50%, up to 5600 worldwide.
The other OPRs report similar encouraging results and are prepared to
open new stores and optimize their online operations. For example for
Burlington Stores, the net sales increased by 9.2% during the 2016 fiscal
year. The Ross Stores have a similar success story in their latest annual
reports: their sales grew from $11.9 billion in 2015 to $12.9 billion in 2016
[7].
And they don’t seem to be the exception on the market. Even for luxury
retailers like Nordstrom the off-price segment of their business (Nordstrom
Rack and HauteLook) has been more profitable than their full-price lines.
In 2016 the full-price channel saw a 2.7% decrease in sales, while the offprice
lines increased by a good 4.5% [6].
The devil is in the details: Data Management Challenges
Still, despite the raging success of the off-price retail strategic model, these
companies struggle with issues that are all too familiar to full-price
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etailers, namely putting together product data from a large number of
systems (and managing vendors and inventory lines) and building up a
competitive and attractive product package which includes informative
specifications and visuals that are useful to their consumers and could be
quickly disseminated across all the business platforms and marketing
channels [8].
At the end of the day, it doesn’t matter how much time and effort you put
into streamlining supply chain, optimizing inventory and building a
balanced offer if your customers can’t find right product with right content
when they need it.
A product information management (PIM) solution improves customer
experience, loyalty and reduces returns. You can create, update, and
synchronize your product information within your enterprise ecosystem
and your eCommerce platform in a way that brings consistent, updated
and relevant information to your customers.
Read more about leading PIM Solutions in the Forrester PIM Wave.
The Forrester Wave: Product Information Management Solutions, Q4
2016
References
1. https://www.thestreet.com/story/14132077/1/burlington-storesinc-announces-first-quarter-2017-earnings-release-dateconference-call-and-webcast.html
2. http://www.nreionline.com/retail/eight-expanding-price-retailers
3. https://hbr.org/1985/05/dont-discount-off-price-retailers
4. http://www.mckinsey.com/industries/retail/ourinsights/perspectives
5. http://www.nreionline.com/retail/eight-expanding-price-retailers
6. http://investor.nordstrom.com/phoenix.zhtml?c=93295&p=irolreportsannual
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7. http://phx.corporate-ir.net/phoenix.zhtml?c=64847&p=irolreportsAnnual
8. https://nrf.com/news/price-point
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