ben there, done that for Feb. 2, 2022
Off-price retailers, too good to be true?
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Most of us love a good bargain. Price plays perhaps the biggest role in purchasing decisions across nearly all domains. Nowhere is this more evident than in the fashion and apparel industry where many brick-and-mortar stores have been subject to a financial pummeling in the last decade. This “retail apocalypse” has been spurred by the explosive and seemingly unstoppable growth of Amazon. Yet, in a small tucked-away corner, a very specific kind of retail store has been thriving in the otherwise barren landscape: off-price retailers.
First and foremost, what exactly is an off-price retailer? Think of stores like TJ Maxx and Ross, known for carrying an ever-evolving selection of items at very affordable prices. Shopping there feels like a life hack: somewhat inconsistent, but with the potential to discover substantial bargains on name-brand items, primarily clothing. Too good to be true? Are they putting other stores out of business? No, in fact, the opposite is true. Actually, stores like these play an important role in the retail ecosystem and even have a role in aiding other stores. The secret lies in the three strategies these stores use to acquire their peculiar selection of items.
The first and best-known method is purchasing surplus goods from other retailers. This happens when a department store or more premium retailer wants to clear out excess goods to free up funds to invest in new product SKUs. In the retail world, vast sums of money are invested to create new items. Investment is only recouped once the created product sells through. If a given item doesn’t sell well enough, the primary retailer might choose to recover a part of their investment by selling the product, or “dead stock,” to off-price retailers at a very low price. The off-price retailers then sell the items at their famously low prices. TJ Maxx has the most advanced team of brokers who specialize in working directly with other stores to liquidate their dead stock. In the ‘90s when off-price retailers were just beginning to thrive, securing merchandise was primarily done this way. However, the supply of surplus inventory from other areas of the retail system is finite.
As off-price stores flourished, searches began for other ways to secure low-cost inventory to keep their shelves stocked. A second avenue for acquiring wares emerged: factory excess goods. When a retailer places an order with a garment factory, the factory will often produce more than the ordered amount. Why? Re-tool costs between production runs are very high. If a factory is already making 100,000 units for an order, several thousand extras are easy to make. The extra items can cover replacing any defective items, but often much is leftover. The factory will then sell this excess to the off-price retailers, sometimes with the original brand and sometimes with an off-brand. For a while, these first two methods satisfied the demand of off-price retailers. But alas, even this could not fully stock the shelves, leading to a third method.
In recent years, off-price retailers have taken a page out of the other retailers’ playbooks by pursuing their own original product development. To lower costs, such goods are manufactured with low-cost materials and feature unsophisticated designs. TJ Maxx, Ross, and similar stores rely on a mix of all three methods to keep their stores stocked.
With an ever-changing inventory, low prices mixed with strong perceived value, off-price retailers have prospered while most other physical stores have fallen on hard times. Nevertheless, their vital link in the retail world’s intricate ecosystem ensures the excesses of the market are managed. To the average consumer, bargain stores seem almost too good to be true. For savvy consumers, a treasure trove of bargains awaits-by discovering the higher tier retailer’s dead stock.
