Off-Price Retailers Were Exploding Pre-COVID — Why Many May Not Survive the Pandemic

In the years preceding the pandemic, off-price retailers had consistently bucked industry-wide trends. Digital disruption and shifting consumer preferences did little to stymie the growth of chains like The TJX Companies Inc., Ross Stores Inc. and Burlington Stores Inc., whose significant markdowns and treasure-hunt shopping experiences almost consistently led to robust sales.

However, insiders suggest the COVID-19 outbreak has been dealing a massive blow to off-pricers, which, like many of their peers, were forced to shutter their doors for weeks or months due to government mandates on nonessential retail. Unlike other chains that were able to leverage their omnichannel models to offset some of the negative impact of store closures, many discounters had a limited or even no online presence — and their comps subsequently plummeted. Even for those with e-commerce, the “thrill of the hunt” proved difficult to replicate online, meanwhile, many were ill-equipped to handle an influx of virtual demand.

According to experts, such retailers now face a long and bumpy road to recovery as many consumers remain reluctant to visit brick-and-mortar stores amid a surge in coronavirus infections.

“The reality of the situation is there are a lot of off-price brands that really rely on their physical footprint as their core differentiator,” said January Digital CMO Sarah Engel. “They didn’t put the work in before the pandemic had hit to create an experience that delighted customers in a digital format.”

She added, “If a brand wasn’t already on the digital path before the pandemic came, it almost immediately lost a lot of customer loyalty. They really did allow their core customer base to erode because they didn’t have the digital capabilities in place when people were stuck at home.”

In early March, just as COVID-19 was making its way into the U.S., Burlington announced a new retail strategy that was largely centered on cutting back on inventory and reducing its online presence. In its fourth-quarter conference call, CEO Michael O’Sullivan explained that e-commerce accounted for only about 0.5% of the chain’s total sales and stepping back from digital would allow the company to focus on its physical expansion.

“In our business, which is a moderate off-price business, the nature of the treasure hunt and the average price point that we operate at mean that brick-and-mortar stores have a significant, competitive and economic advantage over e-commerce,” he told analysts at the time, predicting that the company would see results from its diminished online presence come 2021 and 2022.

That decision has now left Burlington in a bind amid coronavirus-induced store closures and the further acceleration of digital. A month after releasing its Q4 2019 results, Fitch Ratings downgraded the retailer from stable to negative. In its most recent Q3 2020 earnings report, for the period ended Oct. 31, its comps fell 11%, and the company warned that a spike in new COVID-19 infections — which has occurred in many parts of the country — could further impact its overall performance.

“Unfortunately, the outlook remains uncertain and unpredictable — in fact, the situation across the country with COVID-19 appears to be deteriorating,” O’Sullivan said in November. “The fourth quarter has gotten off to a weak start with November month-to-date comparable store sales running down in the low double digits.”

Experts are just as — if not more — concerned. According to Jessica Ramirez, retail research analyst at Jane Hali & Associates, a limited e-commerce presence, combined with the broader downturn in discretionary spending, could reverberate across off-pricers’ balance sheets.

“E-commerce has been booming, and if you want something at a more economical price, the options are online,” she said. “People aren’t spending their dollars on off-price apparel, and they don’t want to be in stores right now. That could change depending on COVID vaccines, and if we continue to get stimulus checks, there’s likely to be pent-up demand, but we’re cautious because they rely so heavily on actual footfall, and it will take time for the consumer to return to stores to relive that experience of a physical hunt. That’s something that won’t happen overnight.”

What’s more, off-pricers are currently facing heavy competition from their online counterparts: Resale marketplaces like ThredUp and The RealReal are able to provide a similar treasure-hunt experience online as well as deliver cost savings on branded merchandise in a clutter-free — and, more importantly today, COVID-free — environment. While millennials used to make up a larger portion of resale consumers, insiders suggest that such marketplaces are now gaining ground across all demographics.

“I think the ‘thrill of the hunt’ from a consumer behavior perspective is absolutely still there, but it has shifted to other avenues, other brands and other opportunities,” Engel said. “People are much more open to the resale market right now than they’ve been in the past, and that’s going to be threatening to off-price that relies on physical interaction.”

But it’s not all bad news for off-pricers: While the fashion apparel and footwear categories in general have seen declines due to a lesser need for new clothing and shoes, home-bound consumers appear to be spending their dollars on decor and furnishings for their houses and apartments. This shift has boosted retailers like The TJX Companies Inc., whose Marmaxx division — comprised of Marshalls and TJ Maxx in the U.S. — saw a 10% decline in sales in Q3 2021, while HomeGoods delivered another quarter of double-digit comps, growing 15% in the period ended Oct. 31.

“On the clothing front, it’s going to take a long time to see that ship right itself. But if you look at off-price stores with home products, you see lines around the corner because people are really investing in home goods,” said Dara Busch, president of consumer practice at 5WPR. “It’s all about merchandising and looking at what people are buying right now, but off-price apparel brands have a tough road ahead of them for sure.”

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