Off-price category hot, but newcomers should watch out

New York -- The off-price segment is on fire, but newcomers to the sector should watch out, warns a report by Moody’s Investors Service.



The U.S. off-price apparel and home products segment continues to grow rapidly as consumers who developed a taste for cheaply priced luxury goods during the recession keep up their hunt for bargains, Moody's Investors Service said in a new report.



The off-price segment is expected to outperform the broader apparel and home sector for at least the next five years. Collectively these retailers plan to open 185 new stores this year, following up on the 180 that opened their doors in 2014.



"The off-price segment will continue to do better than the overall apparel and home sector into the foreseeable future," said VP, senior credit officer, Scott Tuhy. "Major incumbents TJX, Ross Stores and Burlington are leading the way at a time when the broader and highly fragmented apparel sector is growing at a tepid pace."



Moody's expects growth in the off-price segment to be in the range of 6% to 8% over the next five years, compared with 4% for the wider apparel and home industry. And the segment continues to gain traction. Macy's will open six Macy's Backstage off-price stores in metropolitan New York this fall.



While there is still plenty of room for competitors, newcomers will face challenges in competing with the established players.



"Consumer appetite for discount luxury is such that newcomers will hardly make a dent in the incumbents' already significant market share," Tuhy said. "While high-end department stores will continue to open off-price stores at an above-average pace, we expect incumbents such as TJX, Ross Stores and Burlington to remain the leaders in the off-price segment."



Those companies benefit from significant scale, flexible purchasing ability, strong vendor relations and adaptable real estate strategies, according to Moody's. High demand for bargains and a lack of supply constraints will continue to boost their growth. Indeed, collectively these retailers plan to open 185 new stores this year, following up on the 180 that opened their doors in 2014.