In February, after a prolonged battle with the marketplace and multiple bouts of bankruptcy, Payless Shoesource chose to liquidate. The franchise that was once a mainstay in malls and commercial districts across the country was no more—and the battle to gobble up what was left of its customer base began.
Beth Goldstein, executive director for the NPD Group, industry analyst for accessories and footwear and author of a report detailing the Payless bankruptcy, told Sourcing Journal that since Payless’ doors were closed, retailers have been putting together plans to capitalize on whatever white space was created by the liquidation.
“I believe that many retailers are currently developing strategies to grab some of the Payless business, not only those I mentioned in the article with strong Payless cross-shopping, but also those in the off-price and discount space,” Goldstein said.
Goldstein’s report, using NPD data, found that while Payless was ranked 17th in terms of dollar sales—a two percent market share—it was the sixth-largest retailer in terms of units sold as recently as 2018, accounting for 4 percent of the total market. Obviously, this is not a particularly sizable chunk of the overall pie, but there are still retailers out there that certainly wouldn’t complain about that added business.
In her report, Goldstein was able to make a few educated guesses about which existing retailers would have the best chance at pulling in the Payless customer. For example, almost half of Payless’ customers also purchased footwear at Walmart in 2018 and 20 percent shopped at Target. Kohl’s was also able to lure in cross-shoppers despite having nearly double the price point.
“The obvious answer based on price-point alone is that major mass merchants, such as Walmart and Target, will pick up the bulk of the business,” Goldstein wrote.
Indeed, at around $17 per pair, Payless’ price point puts it into a familiar competition. Payless long has battled with both Walmart and Target for the lowest of the footwear price points. Jan Kniffen, a retail consultant who was the former head of Payless’ board of directors until 2005, explained to Sourcing Journal that Payless’ particular business model produces a very specific customer.
“When I was at Payless, we were 20 percent of the industry by volume and the average price was $9.99. The cost to bring the shoe in the country was $3.62. There were 4500 stores, opening a store every third day,” Kniffen, who also was an expert witness in the Nine West and Sears bankruptcy proceedings, told Sourcing Journal. “During that process, Walmart, Kmart and Target adopted the Payless style. It was racked and arranged by pairs, you could try them on yourself and you didn’t need help. Nobody had ever put pairs on the shelf before and just let you try them on. Yes, our theft rates were high but our price points were so low we learned that it was cheaper to let people steal them than to put an extra person in the store to watch people.”
Kniffen says the Payless model has been more or less the same since then. This complacency was almost definitely the cause for its demise after Kniffen moved on—but it is also the reason why an online retailer like Amazon is not exactly well positioned to take over the business any time soon (Amazon declined to comment for this story). Less than 10 percent of Payless’ business in 2018 came from e-commerce, well below the industry average of 29 percent, according to NPD.
“You’re talking about a price point that is too low for Amazon,” Kniffen said. “There’s no efficacy for Zappos to take that marketplace. Zappos has a hard time making money on a $50 pair of shoes.”
Quite simply, Payless’ price point was so low that it precluded the retailer’s ability to transition to online sales, hastening its eventual demise. As a result, Kniffen said that Walmart is the most likely beneficiary to the Payless bankruptcy, as it boasts some of the most robust physical distribution in the country and will more closely match the ease and cost of a trip to Payless Shoesource. Goldstein agreed, writing that a retailer’s proximity to a closed-down Payless location would have a lot to say about how it benefits from the liquidation.
However, Kniffen also believes Walmart is somewhat at a disadvantage when it comes to appealing to the fashion of the “upscale discount kind of person” that Payless attracted.
“The customer at Payless, oddly enough, actually looks more like a Target customer than a Walmart customer,” Kniffen noted. “The model of the customer is more like Target and the price point is more like Walmart.”
However, Sourcing Journal also spoke to Matt Kaden, a managing director at MMG Advisors. Kaden denied the idea that any one retailer would be able to benefit directly to the retailer going out of business.
“My overarching feeling is that the U.S. is still over-inventoried and over-stored. Whenever there is a GOB (going-out-of-business) everyone looks to the market for retailers that will pick up the lost sales volume. However, the retailer went out of business for a reason. Sure, Walmart, Target and Amazon may see a small uptick in unit sales, but it is just as likely that the customer’s closet is full and will not look to a retail replacement,” Kaden told Sourcing Journal. “Perhaps that customer was persuaded one too many times to purchase a BOGO at deep discounts that were excessive to the customer and dilutive to Payless. Those sales should never be replaced.”
Goldstein, on the other hand, still believes there is market share to be earned. However, like Kaden, she thinks that retailers should try to expand on what Payless offered, as it would be folly to follow in the footsteps of the defunct retailer.
“Based on what we have seen happen in the sports business with The Sports Authority, and more recently in toys after Toys “R” Us went out of business, we can expect most of the sales to be picked up by other retailers, while some will simply vanish, in part due to the loss of impulse purchases and those driven by targeted advertising or promotions (Payless has historically been well known for its BOGO events),” Goldstein agreed. “However, Payless under-indexes the market in terms of pairs bought on impulse, making it more of a destination for specific footwear purchases. This suggests that most sales will be picked up by others and less will disappear.”