Commentary: The off-price opportunity: Are retailers ready?
In recent years, off-price retailers have successfully gained precious market share from traditional retail channels.
The growing demand for designer trends at deep discounts coupled with shorter-lead times and agile buying within off-price has propelled retailers like T.J. Maxx, Burlington, and Century 21 to grow and increase profitability in the most challenging retail environments.
Today is no different. With unprecedented levels of available inventory, immense bargaining power and value-conscious customers potentially hungry for the thrill of something new, all indicators point to the off-price sector as being well-positioned for success. However, scrutinizing the market realities sheds light on the complexity of the opportunity.
E-commerce will be more important than ever due to social distancing
Historically, off-price retailers have driven minimal sales through e-commerce channels. Their value-driven customers have preferred the ‘treasure hunt’ experience that comes with in-store shopping. In addition, the off-price business model of buying smaller quantities per style has not translated well into an online ecosystem where deep inventory is necessary to maintain a strong web presence.
These factors, amongst others, have led major retailers to downplay this part of the business...or not play in it at all. It was thus no surprise that Burlington announced its plan to exit its e-commerce business in early March 2020 to focus entirely on brick-and-mortar.
The decision to downplay e-commerce within off-price made sense in the past, but what about now? Consumers are becoming increasingly comfortable with their new ways of life. In a recent survey conducted by Sourcing Journal, nearly 66% of shoppers surveyed said that they believed they will maintain many of the consumption patterns they have taken on with their “remote lifestyle,” including shopping from home.
Off-price retailers might get access to the inventory they want, but without e-commerce they may be unable to capture the consumer in the space they are shopping as stores remain closed and behaviors adapt. With brands shifting focus to their e-commerce channels in hopes of recovering some revenue at a higher margin, e-commerce will continue to be the fastest-growing channel in retail and a critical touchpoint for consumers.
Even as stores open up, there may be a wariness to go in store, with a shopping preference to rely on e-commerce to obtain needed supplies. Should off-price consider partaking in e-commerce, they must do so strategically in a way that stands out from the competition.
Can they recreate a dynamic bargain-hunting experience online? Can they offer their customers a more personalized shopping experience? Provide access to better products? Rue Gilt Group was born out of the last recession. Could a new digital format emerge from today?
Finally, are off-price retailers technologically prepared?
Once things begin to reopen, brands will be eager to get inventory off their books so that they too can bring in new lines. Traditional retailers on the verge of bankruptcy will likely offload merchandise for pennies on the dollar. Off-price buyers will have to make quick purchasing decisions without key historical or benchmarking data for a situation comparable to today. Even the most savvy and seasoned planner will be at odds. The risk? Too much inventory, or just as bad, not enough of the right inventory.
Off-price organizations are historically known for being fast and thrifty. However, that was when inventory offers were presented in a more predictable and cyclical manner. A challenge tied to the good fortune of inventory availability will be the capacity for buyers to actually manage the influx of offers coming through from brands as they begin to reopen.
Coming into March, inventory levels were already high within off-price. While most larger retailers were able to cancel open orders, there was still plenty of inventory (seasonal and evergreen) that retailers had to absorb. That inventory is now sitting in stores, distribution centers and layaway facilities losing value by the day and tying up the firm's capital. Managing committed inventory, on-order and future inventory needs will be an immense challenge, especially with their current systems and processes.
The process of buying is cumbersome and manual even for the most successful off-price retailers. Transactions and decision-making often happens using antiquated systems, frequently on spreadsheets, and usually with the reliance of institutionalized knowledge. Buyers are accustomed to in-person meetings with vendors with the ability to sift through samples before making key purchases.
These practices are not realistic going forward and investments in smarter tools and systems, especially those that leverage cloud-based processing, predictive analytics and allow for greater efficiency and time savings could provide immense benefits for buyers as they prepare for this historical opportunity.
While off-price retailers should not lose sight of what made them so successful, adopting new strategies, exploring new channels of distribution, and investing in technology will only make them stronger and ensure long-term success.
Rebecca Goldberg is director of client success, buyer network at INTURN.