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

Shamanth Shankar

By Shamanth Shankar

On June 3, 2017

Compared to full-price retailers, off-price 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].

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 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.

Source: Google Finance

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 off-price 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 retailers, 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