Should Online Matter to Off-Price?
Last week, Burlington announced that it would be exiting the e-commerce business. It might seem a strange and counterintuitive announcement, were it not for the category that Burlington operates in: off-price. While nearly every other retail vertical has moved online in some way, shape, or form, off-price hasn't made online its focus in any significant way over the past decade.
"Why's that?" you might ask. To start, off-price has continued its upwards growth trajectory powered almost entirely by off-line sales, ringing up quarter-over-quarter, year-over-year sales growth for the key players including TJMaxx, Ross Stores, as well as Burlington. (For example, only 0.5% of Burlington's sales came from online.) The continued focus on off-line is clear from the key players in the US who continue to open up new store locations. In fiscal year 2019, TJMaxx alone added 223 stores to its store count, bringing it to a total of 4,529 stores.
So back to the question of whether online should matter to off-price. There are other pertinent reasons behind Burlington's move. Its new CEO, Michael O'Sullivan, noted the following reasoning for pulling out of online during the company’s fourth quarter earnings call, "We’re a moderate off-price retailer. Our average unit retail is about $12. E-commerce, when you fully account for the cost of merchandising, processing, shipping and accepting returns, it’s very difficult, impossible really, to make at those price points in the businesses that we compete in. He also added, “There are also very significant constraints on recreating the off-price treasure hunt in an online environment.”
All reasonable and sound points, right? On the one hand, the category's fiscal discipline and laser focus on an off-line experience is to be applauded. On the other hand, isn't this mentality just asking for an outside challenge?
If I were an off-pricer, rather than dismissing e-commerce entirely, I'd be looking at alternative commerce models, and not just those in the apparel space. For example, a "limited" customer service model, that perhaps discourages returns and exchanges, might help alleviate some costs related to e-commerce. What about segmenting what's sold online - perhaps higher ticket categories - where cost of selling can be offset and the learnings filed away for a broader e-commerce roll out? In addition, I'd be exploring ways to quickly list products, whose quantities are often limited, onto my site. And as to creating that sense of treasure hunting, I'd suggest looking at selling memberships where as a core benefit, the customer gets first access to new products. Etsy, ThredUp, and The Real Real are all, in their own ways, doing some element of the above.
But let's not leave today without talking about the department store off-pricers like Saks Off Fifth, Last Call, and Nordstrom Rack. There's a distinct difference between the TJX's of the world and the department store version. For the department stores, off-price is not only a way to reach new shoppers at a lower price point, but it's also a means to rid themselves of products that didn't sell using regular pricing and promotional strategies. (They also source product specifically made for off-price.)
For department stores, there's been a mixed bag of strategies for off-price. As it was announced today, Neiman Marcus plans to close its Last Call outlets to focus on full-price selling, while plans for online is not yet clear. On the other side, Nordstrom sees its Rack stores as an important part of its strategy, as the Rack stores brought in about one-third the revenue last year.
Either way, many department stores are increasingly looking to off-price as a way to offset softening demand for their full-price products. In fact, our data shows that from one year ago, the average number of products available at department store off-pricers has increased by 13%. The biggest increases at the category level have included men's footwear and accessories including jewelry. Moral of the story is that while off-price shouldn't be a crutch for department stores, the off-price model can be a nice complement to their full-price businesses to the extent that it doesn't cannibalize full-price sales.
Is off-price bucking the malaise of other areas of retail? Yes. Is is immune from disruption? Well, retail has a funny way of recycling hubris, and as Jason Goldberg, Chief Commerce Strategy Officer at Publicis puts it, "Every category thinks they are unique until they are disrupted."