Bargain hunters on the prowl: Off-price retailers are gaining ground in the retail apparel industry

Shoppers roam the Las Vegas Premium Outlets on south Las Vegas Blvd. for Black Friday deals, Nov. 23, 2012.

How are retail apparel businesses catering to the consumers who insist on paying as little as possible?

It’s a weighty question in outlet-rich Las Vegas, where some express surprise that the share of off-price buyers isn’t higher.

Among the frugal, surprisingly to some, are affluent consumers, who enjoy the valley’s variety of discount shopping experiences, from Ross to Premium Outlets and Nordstrom Rack.

Consumers who purchase at off-price retail outlets are a growing group, according to NPD Group Inc., a global information company based in Port Washington, N.Y. Now representing two-thirds of all consumers, off-price buyers are hardcore apparel purchasers and account for 75 percent of apparel purchases across all retail channels, according to the firm’s receipt mining service. Not a particularly loyal group, off-price apparel buyers shop at multiple off-price retailers as well as other retail outlets.

NPD’s Checkout Tracking report, which analyzes receipts and follows consumer purchasing behavior over time, found that consumers age 45 and above represent over half of off-price apparel buyers.

“Off-price retailers are resonating with fashion- and cost-conscious consumers alike, and are stealing department store business for good reason,” said Marshal Cohen, NPD’s chief industry analyst. “Off-price is second only to the online channel in terms of growth rate.”

Shopping visits made to off-price retail stores — whether a consumer made a purchase or not — increased 4 percent in the year ending April 2016 compared with same period the previous year.

“Consumers are clearly looking for better deals and they know if they shop at an off-price retailer, they will get them,” Cohen said. “Apparel shoppers are finding just what they want at off-price retailers at the right time and at the right price, and that isn’t always the case with department stores.”

Growth Story

“Many of department stores are also in the outlet business,” said Stephen Brown, an economics professor at UNLV’s Lee Business School. “Neiman Marcus, Sak’s Fifth Avenue and Nordstrom all have outlet stores, as do Coach and Guess. They use the outlets to get rid of out-of-season and discontinued merchandise. They also have seconds, or lower quality products, in the outlet stores.”

At their full-line locations, Brown said, the department stores provide a higher level of service and cater to more affluent customers who want the most current and highest-quality merchandise.

“They can build loyalty through maintaining the quality of the merchandise and service,” he said. “They can avoid using their flagship stores to compete with the discount stores.”

Off-price “may not have the sex appeal of high-end designer boutiques, but off-price stores have been the growth story for the past few years,” says Andrew Asch, retail editor for California Apparel News magazine in Los Angeles. “Just think about Nordstrom Inc.’s recent growth strategies. For more than a decade, Nordstrom has been held up as a blue chip example of what a department should be. But it announced this year that it was going to open around 13 of its off-price Nordstrom Rack stores ... compared to opening just one full-line Nordstrom store, albeit a big one in New York City’s Columbus Circle.”

More retailers are jumping into the off-price game. Macy’s Inc. made headlines in 2015 when it announced it would open off-price Macy’s Backstage. Many manufacturers are cutting special labels to be sold as off-price goods.

The growing popularity of off-price, Asch said, has made the business tougher.

“There are more businesses seeking a shrinking supply of off-price goods,” he said. “The public’s demand for off-price clothes also has created a pressure on mainstream retailers to drop prices. It is a big challenge for them, since many have been offering generous discounts in sales and promotions. Many Wall Street analysts have criticized retailers’ seemingly permanent discounts and sales as eating into their endangered margins.”

Analysts and consultants have advised retailers to make brands and collections that are unique and have a popular following — think high-end sneakers — because consumers won’t mind paying extra for them. But, Asch said, “off-price might be a new normal. Consumers can get brand names at rock-bottom prices at off-pricers. It’s a hard deal to beat.”

“You have to recognize that consumers shopping at off-price retail outlets are driven by the price/value relationship, and most are aware that they are buying excess inventory — items that have not sold elsewhere or last season’s merchandise,” said Susan Nichols, brand director for Apparel magazine. “Oftentimes, goods that are made exclusively for the off-price environment could mean lesser quality or style components.”

Other types of retailers compete against the off-price environment by focusing on “a different type of value equation,” Nichols said, “such as deep assortments in style and size of national brands, exclusive private label, personalized service, truly unique niche products, multiple options for shipping and delivery and, in some cases, advanced fit and styling services.”

Again and Again

“The key to attracting and keeping customers in the off-price segment is to consistently wow customers with great deals, again and again,” said Ken Morris, principal of Boston Retail Partners. “The ‘treasure hunt’ excitement is what will continue to keep customers coming back.”

Another interesting approach, he said, might be to adopt the dynamic pricing strategy, where the shopper gets a greater discount based on a higher basket value. “Or the old Filene’s Basement automatic markdown cadence, where the price automatically drops 25 percent every 15 days until it is sold or sent to Goodwill.”

Loyalty is “a challenging goal for retailers in a segment where consumers are almost entirely driven by price,” Morris said.

Although some off-price retailers offer loyalty programs, none seems to stand out as especially compelling.

“Some offer 1 percent rewards based on combined purchases, and others offer special promotions or sweepstakes,” Morris said. “However, none of these appears to be enough incentive for consumers to be loyal to an off-priced brand.”

Morris said he would like to see a retailer offer a program with greater rewards.

“If consumers knew that they would be getting extra discounts based on how much they spend,” he said, “maybe they would spend more or shop the same brand more regularly.”

The biggest mistakes for off-price apparel retailers, Morris said, are stale assortments, unorganized and messy stores, and too much focus on price.

“If consumers see the same merchandise every time they visit your store, they will lose interest,” he said. “They will be even more turned off if the store unorganized, cluttered or dirty.”

Regarding price, he adds, consumers know they are going to get low prices at off-price stores “so retailers should focus more on the quality, style and assortment they offer.”