Good News, Bad News Times for Off-Price Retailers

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For off-price stores it is a Dickensian Dilemma: the best of times and the worst of times.

When physical stores start to reopen over the next few weeks and months, the nation\’s off-price retailers will have access to more merchandise than perhaps at any time in their history. And they will be able to buy much of it at just a fraction of its cost. Feeding frenzy would not be too strong a phrase to use.

[callout]After all those years on the offensive – gaining customers, market share and revenues – off-price retailers suddenly find themselves in that most unfamiliar position of being vulnerable to the new realities of shopping.[/callout]

But at the same time, they will be greeted by a shopping population that more than ever has embraced e-commerce for virtually everything they buy, pushing the share of e-commerce to potentially as much as double its pre-coronavirus levels. The problem is that none of these off-pricers will have the capabilities in place to take advantage of the massive shift to online retailing in the PostPand era. It is a good news-bad news joke that is nothing to laugh about.

Stuff Glut

The National Retail Federation estimates that $430 billion in retail sales will disappear over a three-month period, stretching from the start of store shutdowns in mid-March. Taking a general retail markup rule of thumb, that means as much as $215 billion worth of merchandise, at cost, is stuck somewhere in the supply chain pipeline; perhaps in unfinished goods still back in Asian factories but much of it in containers at ports in Hong Kong, Shanghai, Long Beach, CA and Charleston, NC — and all points in between.

\”There\’s going to be a ton of inventory once we get through this, and I think a lot of that is going to be funneled through the off-price channel,\” Jefferies analyst Janine Stitcher said. \”We just had such a sudden and sharp drop off in demand, just something I\’ve never seen before.\” Credit Suisse has predicted that this could make for the \”greatest buying environment for off-price in a decade,\” although it has the potential to easily pass that time cut-off. The British newspaper, The Telegraph, estimated it would take up to 18 months for the backlog of unsold merchandise to work its way through the retail selling process.

They\’re Playing the Off-Price Song

All of this is, of course, music to the ears of off-price retailers like the TJX group of brands – TJMaxx, Marshalls, Home Goods and HomeSense – as well as Ross Dress for Less, Burlington and the smaller players in the channel. While these stores have transitioned to more conventional merchandising mixes where much of what they sell is programmed out and no longer the opportunistic buys of the past, they still depend on excess inventories for the flashes and pop of certain brand names and fashion goods. With tight cost structures, good balance sheets and savvy buyers, they will be well-positioned to swoop in and claim the choicest merchandise looking for a retail home. No doubt that process has already started.

When those stores – thousands of them in prime retail real estate – do reopen they will be stocked to the rafters with goods bought for just a percentage of their original cost? And while traditional retailers like department and specialty stores will also be promoting heavily to clear out excess inventory, shoppers have been conditioned to turn to off-pricers first and foremost in situations like this. The jury is out on how safe the value shopper will feel in these crowded stores.

But Not Online

Where they won\’t be doing any buying is online. The TJX brands have tiny e-commerce businesses that were only started relatively recently and have nowhere near the scale and scope of more entrenched online sellers. TJX has never broken out its e-comm share but it\’s believed to be in the single digits…at best.

That still puts in way ahead of its two biggest competitors. Ross has no online operation at all and Burlington, in a decision that has to be both regrettable and embarrassing, announced in January right before the coronavirus crisis took stride that it was discontinuing its online business as it represented less than one percent of its overall sales and was not consistent with its physical store selling model.

That has always been the reasoning for the entire off-price sector when it came to online: there was no way to replicate the treasure hunt shopping experience digitally and, besides, coordinating inventory levels online and in-store was impossible. And while both of those arguments might have been valid a few years ago, one can argue they no longer hold water. The flash-site sellers, like Gilt and HauteLook, based their entire business model around events with limited inventory and timed selling periods. If they were ultimately unsuccessful it had more to do with lack of capital and access to goods than their basic selling model.

More recently, retailers like Rent the Runway are finding ways, albeit at a scale much smaller than 1,000-store operations, to manage inventory available both in-store and online. It\’s still a work in progress but the basic concept would seem to be doable. Given giant off-pricers\’ budgets and resources, it\’s hard to believe they can\’t make online work for them. This could be even more critical as shoppers remain spooked by close-in shopping environments that are decidedly social-distancing unfriendly…like the typical off-price store.

It may be why S&P Global Ratings recently downgraded TJX and Fitch revised its outlook for Burlington to negative. Simeon Siegel, a retail analyst at BMO Capital Markets, recently was quoted in the Dallas News saying, \”Most companies right now are operating a dual strategy of defense first but still thinking about offense. Ensuring that they survive and have liquidity, but at the same time using e-commerce to drive revenues. Off-price doesn\’t have that. Off-price today is simply in defensive mode.\”

After all those years on the offensive – gaining customers, market share and revenues – off-price retailers suddenly find themselves in that most unfamiliar position of being vulnerable to the new realities of PostPand shopping. And at a time when they should be the kings of the merchandising hill. Dickens couldn\’t have written it any more suspensefully.

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