While a specialty retail or department store must rely on fashion trends and innovative product designs to drive profits, an off-price retailer depends instead on its ability to move high volumes of goods quickly, and on its relationships with designers and distributors who provide the low-cost inventory on which its stores depend. Off-price companies rely on extremely lean cost structures, using their scale along with sophisticated systems and distribution infrastructure to maximize productivity while maintaining the lowest possible prices for consumers.
Nonetheless, the products that off-price retailers sell depend on discretionary income. Clothing, footwear, home products, and the other items that off-price retailers offer are not necessities, for the most part. So consumers must have some disposable income to spend on retail, even at an off-price store. Off-price retailers sell clothing and accessories from major-label brands at a significant discount. They purchase at below-wholesale prices and charge less than retail prices.
Imperfection in the retail industry is what makes the off-price model possible. When a major label like Polo Ralph Lauren (RL) miscalculates consumer preferences and over-produces a product, it will send the excess inventory to T.J. Maxx, one of the biggest off-price retailers at a huge discount. Companies such as T.J. Maxx, Ross Stores, Big Lots, Stein Mart, and others take advantage of overruns, canceled orders, and forecasting mistakes made by their counter-parts in the full-price retail sector. When a major designer produces more clothing than it can sell through specialty retailers or department stores, or a store can’t move all of the items in a particular line, the excess inventory is sold at a 20%-60% discount to an off-price retailer. The company passes these savings onto consumers, marking up goods by a lower percentage than full-price stores and instead building their operating margins by moving a high volume of inventory quickly, at rock-bottom prices.
Apparently, fashion is not the key variable in off-price retail since firms in this industry must make the right decisions about what products to buys and sell, because they operate at such small margins on each individual product. Inorder for the off-price sector to gain profit, these companies must keep in mind three key factors—scale, operational expertise, and vendor relationships. As opposed to the full-price fashion industry in which exclusivity and low supply high demand products are the norm, off-price companies should be able to purchase a huge amount of inventory and distribute it through its chain stores, selling in large volumes or wholesale. Also, companies in this sector must have strong business relationships with wholesalers and designers in order to guarantee continual flow of low-price inventory so designers and department stores would sell their excess inventory at prices low enough to fit the off-price model.
Decision-making and the ability to predict what products will sell quickly are essential parts of the off-price retail success. These companies cannot afford to take major losses on a product because of their lean costs structures. However, as long as buyers remain fickle and selective in their spending habits, off-price companies will continue to fill a need in the marketplace. As long as consumers have to spend more on basic commodities, they will look for cheaper alternatives when they buy non-essential goods like clothing and footwear, which could benefit the off-price sector. When the economy is bad there are a lot of reasons to look for cheap apparel. You want to make some additions to your wardrobe but pay the least amount of money. Finding these cheap clothes takes a little more time than shopping when money is no object but the rewards will be worth the effort. By spending less on individual items you will be able to purchase more with your apparel budget.
In evidence of these, off-price retails is said to be growing faster than its full price counterparts. The two largest firms in the off-price sector, TJX and Ross, have combined to grow sales at a Compounded annual growth rate – CAGR of greater than 10% over the past five years, which is well above the average annual growth rate in the apparel industry of 4%. The numbers indicate that more consumers are looking for value-shopping options, and off-price firms are predicting similar growth in the next five years and looking to expand into new markets.