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America On Sale: The End of Full-Price Selling

A teen specialty brand features a promotional program of activewear items at opening price points for Back-To-School. A major department store puts out a prominent floor set of special order holiday sweaters for Black Friday. A mid-tier chain needs a sharp retail on a basic men’s cargo pant, but to compensate for razor-thin margins, rewards its vendor with huge quantities.

Unlike a few years ago, when these programs represented a small share of product at retail, today it’s a big piece of the business. And these programs aren’t just used as loss leaders to drive traffic at holiday seasons, they now seem to be happening all the time.

Welcome to apparel retailing’s new normal. As the U.S. industry comes face-to-face with the sweet spot of the holiday sales season, it’s facing a stark reality. Rising retail inventories, over-expansion of store selling space, slowing brick-and-mortar store traffic and an increasingly apparel-indifferent consumer are putting tremendous pressure on prices and sales in all channels of the market, particularly at the country’s largest traditional retailers.

Add to that the intensified competition from pure-play e-commerce (Amazon), off-pricers (TJX and Ross), and fast fashion players (Forever 21 and H&M), and the result is steady apparel price deflation that will almost certainly result in a dramatic decline in sales and earnings and the rationalization of the traditional retail footprint in 2016.

The situation has the collective U.S. retail C-Suite scratching its head. Unveiling third-quarter earnings results over the past couple of weeks, one large retailer after another delivered lackluster sales results.

Macy’s reported a 5 percent decline in total sales and missed its earnings target. CEO Terry Lundgren, in what sounded like the prediction of another recession, said “We believe that the retail industry is going through a tough period that we seem to experience every five years to seven years or so.”

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On the Kohl’s third quarter conference call, CEO Kevin Mansell, citing the “soft macro demand environment,” actually seemed pleased that sales managed to eke out a 1.2% increase in the period.

Target crowed about its 1.9% revenue increase, and J.C. Penney’s 4.8% sales jump was a cause for celebration – though comparisons to last year’s flat growth were pretty easy, and the company continues to bleed red ink.

The clear winners in the quarter? The off-pricers. TJX, operator of TJMaxx, Marshall’s and HomeGoods, clocked a third quarter sales increase of 5 percent, and Ross Stores revenues were up by an impressive 7 percent. Both beat Wall Street third-quarter estimates on both the top and bottom lines.

Nordstrom CEO Blake Nordstrom told analysts during the company’s third quarter earnings conference call that the consumer is “voting with his wallet.”

Nordstrom, like many of its competitors, is adopting the ‘if you can’t beat ’em, join ’em’ growth strategy of accelerating the openings of its off-price Rack stores, which now number more than the company’s full-price stores. The impact on sales growth has been considerable: revenue at the Seattle-based upscale department store company rose by 6.6% in the third quarter, carried by a 12 percent increase at Rack. Full-line Nordstrom department store sales actually fell by 1.9%.

The company plans to have 300 Rack stores open by 2020, compared to 123 full-line stores.

In the last five years, sales at its full-line stores have declined from 73 percent of total sales to 58 percent. The company claims that Rack is now its number one source of new customers.

Nordstrom also claims that consumers introduced to Rack ultimately trade up to their full-line brand, a notion that Robin Lewis, retail consultant and CEO of The Robin Report, considers wishful thinking. “Over time,” he said, “consumers will perceive the flagship brand and the discount store brand to be one and the same. Sadly, they will happily continue to shop in the brand’s discount store where they can get it cheaper.”

A similar scenario is playing out at HBC, parent of fellow luxury department store Saks Fifth Avenue, whose Off Fifth off-price division added 8 new stores and enjoyed double-digit top line growth last year. Its full-line store count dropped by one. The company plans to accelerate the pace of new store openings over the next several years.

Macy’s is taking an even more drastic approach. During the most recent earnings conference call, the company confirmed plans to close 35 to 40 department stores in early 2016 and to accelerate its entry into the outlet space.

Lundgren told analysts, “Over the next two years we intend to open approximately 50 free-standing Backstage stores. In addition, we’re going to pilot Backstage stores within up to 10 existing Macy’s store locations, creating a new hybrid model and we believe that these stores within our stores can help bring new vendors and new categories, which will appeal to existing customers, but also attract new customers to the full-line store. We are finding that Backstage is definitely attracting a younger consumer. And assuming these pilots work, we’ll be ready to roll this concept out as a hybrid model quickly.”

The net effect of all of this, Lewis told Sourcing Journal, is that “the flagship brand devalues itself.”

The plan at Kohl’s, already the most promotional mid-market department store in the market, is apparently to sharpen prices even more within the existing four walls. Mansell said: “…We’re embarking on an initiative under our incredible savings pillar that I truly believe long term has massive value for us to drive revenue growth.”

While Kohl’s has always been a destination for great value, Mansell said, the company feels it’s “not getting full credit with consumers,” so is now analyzing multiple years of Kohl’s data. He said, “We plan to use data-driven insights to make our value much more apparent to customers. We’ll focus intensely on the categories and items that create the greatest impact on value perception.”

In addition to doubling down on its efforts to provide value in its flagship stores, Kohl’s also said it would begin to test an outlet concept under the Fila nameplate next year.

How will this all play out? It’s hard to imagine consumers going back to paying full-price after becoming used to—actually, addicted to—getting discounts. Right now, price promoting seems to be the weapon of choice in these apparel market share wars.

According to Lewis, retailers need to upgrade their offerings. 

“Unless and until retailers and brands add real value to what they are peddling, value that consumers will pay full price for, they will never get out of the vortex of discount madness or the race to the bottom,” he said. “It is the path of least resistance to growth. And, grow they must, or be punished in the Wall Street casino.”