Why is "Off-Price Retail" so Successful?

WHY is "Off-Price Retail" so Successful??

I receive calls from investment advisors and analysts regularly and they are astonished at the continued success of the "Off Price Retail" category. They are frustrated beyond measure because they don't understand HOW some retailers in this category can continue to churn out increases in same-store sales, improved margin, reductions in expenses, and grow their shareholder equity month-after-month, season-after-season, and now year-after-year even in the midst of the financial malaise.

Ø  "Will the Off Price Retailers have difficulty finding enough product to sustain growth??"

Ø  "Won't they suffer reduced margins soon, since the glut of merchandise that was on the market last year has now been consumed??"

Ø  "How can these retailers expect to continue to grow profits when they come up against the prior year's terrific successes??"

Ø  "Why are Off-Pricers able to retain and grow their customer base even when consumer confidence is so weak??"

There are scores of answers to these questions; some simple and some complex.  Here are just a few answers I would bring forward based upon my decades of experience within the industry:

1.     The business model for Off-Price is perfect for times of uncertainty.  Customers from Mid-Range retail like Sears, Penney's, Kohl's, and even some Department store chains found them trying Off-Price for the first time during the recession.  They liked what they found, and the premium Off-Price Chains (Ross, TJX) learned how to RETAIN this customer.

2.     Suppliers have learned that Off-Price is "not a dirty word".  In fact, it's a huge "insurance policy".  Historically, suppliers have a huge gamble when planning production; they must produce enough product to sell every possible unit to the full price department stores (where their profits are), while at the same time not OVER-producing which will drain margins.  With the success of the Off-Price category, suppliers know that they have a ready market for their excess production, even though they will have to sell it at a greatly reduced price. which allows them to product more product to sell to the full price department stores.

3.     The premium Off-Pricers have simply managed their business better than most of the rest of retail.  When the recession began, they sat around tables in their Board Rooms, and "hunkered down" just like the rest of retail.  But they soon discovered that by operating like they were in a recession (reducing inventories, increasing turns, watching headcount, etc) they would not be impacted in the same manner as most other retailers.  Because they are "street fighters" by definition, they didn't return to their old ways..... they continued to operate as though it could fall apart at any moment.  They allowed only CAPX projects that could demonstrate a ROI in the first 24 months.  They watched headcount.  They challenged every expense. They rewarded innovation and problem-solvers within the organization.

4.     They were  not burdened by unproductive locations.  The premium Off-Pricers have made it a practice to close locations every single year, in good times or bad, if those locations are not contributing EBITDA.  The "old line Department Stores" are burdened even today with scores of locations that have to be carried by the rest of the organization because Sr. Management didn't have the vision, foresight or guts to simply recognize the cancer and cut it out.

5.     They know what they stand for, and their customers do too.  I believe however, that there is one large dynamic that is a huge driver in the success of the premium Off-Pricers as WELL as premium full price retailers.  Here's the easy way to understand what I'm driving at:

a. Ask ANYONE you know to tell you what Nordstrom's stands for.  They will likely say, "Wow, well, excellent customer service, broad selection, the BEST designer labels and major manufacturers."

b. Ask ANYONE you know to tell you what TJMaxx, Marshall's, and Ross stand for, and they will likely say, "Treasure Hunt! Great designer labels and major manufacturers at fantastic prices!"

c.  Ask ANYONE you know to tell you what Wal-Mart stands for and they will likely say, "Great prices, friendly associates, clean stores, LOW prices, great selection!"

d. Ask ANYONE what Sears or JCPenney stand for and they will most likely say "Kenmore, Craftsman, Penncrest, Towncraft, and... uh..... I don't know." 

There it is.  If you have not clearly defined yourself to the customer and made obvious what you stand for, you LOSE.  Most of the retailers "in the middle" that are struggling have a huge list of problems with which to deal, but I submit there is one central concept wherein they've failed; customers just don't know what they stand for.  They have huge brick-and-mortar stores filled with categories which the shopping public does NOT recognize or give them credit for.  Let's face it..... when you say "Fashion" or "Fashion at a great price", or "Fashion broad assortment", or "Designer labels", customers just don't name those "stores in the middle".
  

You'll notice that I referred to "Premium Off-Pricers", because just like all categories, there are some operators in this segment that simply cannot get out of their own way, and they will be part of the continued consolidation.

2012 will be another exciting year of growth for the Off-Price sector, and I know why. 

1. The customer knows what they stand for, (and so does their Sr. Management)!  They don't stray from the model.
2. They know how to control inventories.
3. They know how to manage real estate.
4. They know how to manage expenses.
5. They know how to manage headcount and payroll.

Please leave me your comments!  I'd love to hear from you!