Off-price retailers have been readily embraced by American consumers, but they still face fierce competition for the discount dollar. And while some in this sector are flourishing, others are struggling to stay afloat.
Ill-fated retailers like Syms and Filene’s Basement grew catering to the “educated consumer” — those who knew what brand name apparel cost but did not want to pay full price. They were also more conveniently located than warehouse stores or far-flung outlet malls.
These days, though, cost-conscious consumers can pull into even more conveniently situated outlet centers whose store names and locations rival the best malls: Last Call Studio by Neiman Marcus, Bloomingdale’s The Outlet Store, Saks Fifth Avenue–Off 5th. Of course, TJX’s TJ Maxx and Marshall’s stores, Ross, and regional off-pricers like Daffy’s and Annie Sez are also calling out to the budget fashionista. Add to that online flash sale sites like Gilt, Rue La La, Ideeli and more, and consumers have “fashion for less” every which way they look.
This is great for American shoppers, since 68% of them buy apparel on sale, according to the Cotton Incorporated Lifestyle MonitorTM survey. This goes for women (69%) and men (65%) alike.
As discounts at regular stores, flash sales and the off-price stores have become commonplace, consumers have steadily been spending less on apparel. On average, consumers spend about $53 on clothes each month, down significantly from $58 in 2010, $63 in 2009 and $73 in 2008, according to Monitor data.
But Syms and its subsidiary Filene’s Basement recently filed for bankruptcy, perhaps due in part to the overcrowding in the off-price landscape. And Gilt Groupe, one of the architects of flash sale sites, recently announced it cut 10% from its staff of 900, most heavily in its daily deal division.
James Dion, founder and president of the Chicago-based retail consulting firm Dionco Inc., says it could be a sign of the times.
“There’s 20% of the population that will always chase price,” Dion says. “But 80% of the population is getting deal fatigue.”
In the case of Syms and Filene’s Basement, Dion says, they also succumbed to the strength of TJ Maxx.
“Syms was East Coast and didn’t have the magnitude of stores,” Dion explains. “TJ Maxx is larger than Syms ever was. Syms was men’s and women’s apparel, and TJ Maxx had apparel plus home. Additionally, the ability of consumers to get the same prices at department stores that were discounting so much sealed Syms’ fate.”
To be sure, even though price is a top factor for 92% of consumers, far more consumers shop at chain (24%) and department stores (13%) than off-price stores (8%) and factory outlets (2%), according to the Monitor survey.
BDO USA’s Stephen Wyss, a partner in the firm’s retail and consumer products practice, says the successful off-price stores have to take more than price into account.
“Retailers will look at their brick-and-mortar locations as a chance to enhance brand and build customer loyalty, rather than just drive sales,” Wyss explains. “They’ll leverage that into other distribution channels like mobile and online. ”
JC Penney’s recent move to lower all prices by 40% may just make it an off-price department store located in regularly-priced mall locations.
“It will be interesting to see how JC Penney works with their branded partners,” Wyss says. “They have two significant concepts they’re doing — 40% off and designer shop-in-shops. The shops give them an opportunity to provide exclusive merchandise from designers and brands. How do you work with them on one side of store, and then on the other side it’s 40% off every day?”
Seven percent of consumers shop at off-price stores, and perhaps surprisingly, that percentage holds steady regardless of household income levels, according to the Monitor survey. But consumers who cannot afford to shop at the regularly priced stores — like those making less than $25,000 per year — are significantly more likely than those earning $75,000 or more to expect off-price stores to offer high-quality merchandise (19% versus 5%).
Dion says that is because higher income shoppers know the difference between what is offered in a department store and what shows up at the outlet, and they adjust their expectations.
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“Most of the merchandise you see at stores like Nordstrom Rack has never seen the inside of Nordstrom,” Dion says. “It’s bought specifically for the Rack. That’s because stores like Nordstrom Rack and Saks Off Fifth were originally designed to avoid the second and third markdown in the department stores.
“That was good when they only had 15 Rack stores,” Dion continues. “But then the close out division was doing so well, Nordstrom opened more Racks — and they needed product to feed those units. So now they get it made for the off-price stores. And many consumers who shop the Rack have never been in Nordstrom, so they don’t know the difference.”
If shoppers do know the difference, they are not letting on: nearly six out of 10 disagree that “the lower the price of a clothing item, the lower the quality,” the Monitor survey finds. And 50% of all shoppers are willing to sacrifice quality to get a better price.
Wyss says the “made for off-price” product serves its own purpose.
“These consumers don’t want to realize the Calvin Klein they buy at a discounter isn’t the same as what’s sold on Fifth Avenue,” he says. “It satisfies their need to say, ‘I got a Calvin Klein dress at a great price.’ And remember: Fashion is fickle. Quality is fantastic, but a lot of women don’t want to wear clothes from two years ago. Even if they realized the apparel was different from tier to tier, I don’t think it would have an impact because they’ll still get the look they want at the best available price.”