Off-price retailers were among those that analysts expected to fare particularly well in the wake of the COVID-19 pandemic as they have been known to thrive in times of market uncertainty. Economic downturns “work in favor” of discount retailers, Fortune asserted in the wake of the Great Recession, noting that the 2007-2009 financial crisis “turned millions of Americans on to shopping at T.J. Maxx, Ross, Burlington, and Marshalls, and they never looked back.” Reflecting on the success of the segment during the striking market slump almost 15 years ago, the Wall Street Journal reported that “the S&P 500 lost more than 14 percent of its value from December 2007 to December 2010,” and yet, “TJX and Ross Stores gained 55 percent and 147 percent, respectively.”
Like others, these largely brick-and-mortar dependent chains suffered significantly during the pandemic, with full year 2020 revenue for TJ Maxx’s parent TJX Companies, for instance, declining by about 23 percent to approximately $32.1 billion. Even with access to mounting volumes of others’ unsold inventory, off-price retailers floundered, as widespread store closures were especially hard-hitting for these companies, which pride themselves (and their largely off-line success) on the in-store treasure-hunt shopping experience that they provide for consumers.
Falling sales for off-price retailers have turned around as the economy has reopened and as pandemic-fueled digital sales surges continue to normalize and discount-seeking consumers return to stores. And while off-price chains may be faring much better than this time a year ago (TJX, for one, reported revenues of $12.53 billion in net revenue for Q3, up 20 percent on a year-over-year basis), the potential post-pandemic boom for these chains looks a bit different than what many had previously imagined.
Due to the impact of global shopping delays and supply shortages, companies whose wares have traditionally found homes in TJX and similarly-situated entities’ outposts have less to offer up to the likes of off-price retailers. “Supply chains are choked off and brands do not have as much, if any, extra stuff to dump,” CNN Business reported recently. “Since inventories are lean and customer demand is red hot, brands do not have as great a need to discount merchandise — they can easily sell items at full price,” prompting companies like Under Armour, Ralph Lauren, and Steve Madden, for instance, to do just that and pull way back on the off-price front.
The potentially diminished flow of supply from certain brands to discount chains is not only the result of the sweeping supply quagmire that brands and retailers are finding themselves in, though. Amid enduring efforts by brands to adjust their pricing practices to offset some of the costs and loss imposed by the pandemic (and in some cases, raising prices to increasingly position themselves more upmarket), many companies have been reevaluating their relationship with the off-price segment in order to prioritize full-price sales and boost margins.
An Emphasis on E-Comm
Ralph Lauren – which has “‘significantly reduced’ the amount of inventory it is sending to discount chains,” a spokesperson for the 54-year-old fashion brand told CNN – is a good example of what brands have been doing. In connection with its decreasing reliance on off-price sales, the New York-headquartered brand is focusing on its own retail sales – over wholesale and off-price avenues – by way of a growing network of brick-and-mortar stores and an emphasis on e-commerce. The company has also been working on its pricing in reason years, most recently revealing that for Q1 and Q2 of this year, the average selling price of its goods was up by 17 percent and 14 percent, respectively.
Its efforts to move away from discounting – and to raise prices in markets across the globe – pre-date the pandemic, with CEO Patrice Louvet revealed in 2019 that Ralph Lauren had started “raising prices slightly at its North American outlet stores in late September, and [had] planned targeted price increases with its wholesale partners and at its own full-line stores starting with its spring 2020 assortments.” However, in much the same way as the pandemic has served as an accelerator of other pre- existing market trends, it has also kicked into high gear brands’ efforts to bring various elements of their businesses in-house, whether it be key suppliers, resale activities, or how it they will manage previously off-price merchandise.
All of this comes as brands continue their attempts to claim increased ownership over the channels in which their products are distributed, as oftentimes, products even up on off-price retailers’ shelves and/or e-commerce marketplaces thanks to the gray market and not as a result of an authorized vender relationship. In light of the rising importance of e-commerce as a core sale channel, efforts by brands to exercise greater control over their carefully-curated network of sellers are commonly coming in the form of lawsuits over the unauthorized sale of their wares on marketplace platforms like Amazon (both in the U.S. and internationally) and resale sites, such as Crepslocker.
The larger push to shore up distribution both in the initial and off-price capacities is proving to be an increasingly important priority for brands, as according to Vorys partner Daren Garcia, a brand’s ability to control its sales “is critical to its ability to maximize profitable growth, particularly when it comes to e-commerce channels; preserve brand equity; and prevent damaging e-commerce conflicts with its brick-and-mortar business.” As such, distribution channel management is “the first of four pillars of online sales control, along with stopping unauthorized sales; pricing and promotional activities; and brand protection,” per Garcia, who notes that it is “often the first pillar that we recommend brands tackle in their online sales control journey, as the root cause of online sales disruption regularly resides in channel management practices.”
Against that background, he says that brands “should educate internal stakeholders on this reality, implement an authorized reseller program to mitigate channel chaos, and then work to understand – and eventually, mitigate – the root cause of their unauthorized sales as much as possible.”
Even with such multifaceted crackdowns in mind, the likes of TJX are faring well. “We are extremely well-positioned for the holiday selling season,” TJX CEO Ernie Herrman said in an earnings call this month. “We are in an excellent inventory position, with most of the product needed for the holiday season either on hand or scheduled to arrive at our stores and online in time for the holidays.” As for what brands’ efforts mean for off-price chains going forward, it is not yet immediately clear how things will play out. Susan Anderson, a retail analyst at B. Riley Securities, is not necessarily optimistic, saying “off-price is a last resort,” and thus, “discount stores could suffer in the long term if brands keep their inventories tighter.”
The good news for off-price sellers, of course, is that getting a handle on inventories is something that many companies have long struggled to do.