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Is Off-Price Out of Luck When it Comes to Inventory?

The off-price sector is performing stronger than ever. Even with the U.S. enjoying strong consumer confidence, shoppers continue to be enamored with the attractive pricing and “treasure hunt” model that’s a staple for this sector. In response, the top players in the off-price market are expanding, while their full price competitors continue to shed doors. TJ Maxx, for instance, intends to expand from 4,000 locations to 6,100 outlets in 2018, while Burlington is planning to open 35 to 40 net new stores this year and Ross Stores will welcome 100 more retail locations.

And for now at least, the demand seems to support the growth, especially if other tiers continue to cede ground. A recent report from Foursquare shows that in 2017 when Macy’s closed its doors, Dillard’s is typically the biggest winner, gaining 88 percent of that foot traffic. Marshall’s and Kohl’s are in the mix though too, gaining 29 percent and 20 percent of those abandoned shoppers. Similarly when a Kmart closes, TJ Maxx typically attracts 44 percent of its former customers With Bon-Ton shutting down this year and Sears stores living on a prayer, off-price retailers can look forward to even more customers from the migration of shoppers who once bought from these now defunct department stores.

And just as the so-called retail apocalypse is working in their favor, so is the strong economy. While you might think shoppers with more to spend might trade up, Michael O’Sullivan, president and chief operating officer of Ross Stores, said come rain or shine, off-price does well. “The drivers of our performance do change based upon how the economy is doing. So, when the economy is doing well, typically what happens is the price differentiation between us and department stores and other competitors actually increases,” he said during an earnings all in March. “So, we actually offer even better value and that drives business, to the store.”

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But increased demand doesn’t mean these retailers will be able to meet it. The question that always crops up when looking at these ballooning store counts is: is there enough inventory to go around?

It’s a good question given that many execs at the majors have vowed to go on an inventory diet and many have touted their progress toward this goal lately. But despite these efforts, the secondary market grew by 2.6% in 2017 to $569 billion. A 2018 report by co-lead Dr. Zachary Rogers, assistant professor of operations and supply chain management at Colorado State University, found that value retailers like these account for 10 percent of the secondary market up from 6 percent one year prior. While the pie keeps growing, these stores are battling against a wide variety of players for inventory, including factory outlets, online auctions and dollar stores.

But if off-price executives can be believed, it seems there’s plenty to go around. Ernie Herrman, CEO of T.J. Maxx parent company TJX, told analysts on a recent earnings call that there is “an unusual degree of supply [of products] across all tiers of vendors and goods quality and brand level.”

And while that may be the case, one avenue for getting first run merchandise has changed. Thanks to the privatization of China’s state-owned enterprises, there’s been a major shift in the way wholesalers source off-price goods and products.

Harry Nassib, jobber and CEO of L.A. Grand, said off-price merchandise often came from China before China privatized all of the factories still being used today. “If a manufacturer wanted 50,000 units of jeans in China, the Chinese would send half a million yards to the factory and then they’d get on computers and find someone to make them at 50,000 a pop,” Nassib said. “First, they would try to sell 50,000 units to other people. Then. the off-price people could set their price for the extra remaining units. This was the off-price market… there was always merchandise overseas. Now that the Chinese marketplace is privatized, it’s harder to find overseas products.”

So, how are off-price retailers such as TJX and Ross Stores sourcing goods for their stores now?

“Off-price retailers get their merchandise from a variety of places,” said Georganne Bender, retail strategist and partner at KIZER & Bender. “Sure, some of it is actual product straight off the sales floors of big department stores, but most of the goods come from manufacturers’ overruns, store returns and cancellations.”

Bender said the buying pattern for off-price means they’re always on the lookout for goods “Traditional buyers order products that will be shipped to stores approximately six months out; off-price buyers shop last-minute, scouring the market for merchandise that can be shipped ASAP. You’ll see them scouring the aisles at trade shows like ASD Market Week because they are great places to find off-price goods you can sell in your store at a killer mark-up,” she said.

Off-price wholesalers and jobbers face competition from Amazon and from fast-fashion retailers like H&M and Zara, which are shortening the production cycle for apparel. As a result, shoppers are becoming accustomed to immediately shopping looks that emulate those seen on the runway and getting them to their doorstep within a two-day window.

Wholesalers, therefore, need to be able to quickly respond to new trends in order to remain competitive. Jobbers can’t quickly respond to trends when they have to wait for products to first run their course in traditional department stores, however, many jobbers who sell to off-price outlets are beginning to manufacture their own apparel lines. Wholesalers like Harry Nassib are creating their own manufacturing operations in order to offer clients trending, high-quality product within a similar short runway-to-racks production window as fast-fashion giants.

“We are buying liquidation, but what about all of the fashions?” Nassib asks. “Like how camo is now the hottest thing or when paisley is on the market. You can’t find those on the discount rack unless they are produced and planned for. So, we buy excess fabric at trade shows and use it to produce the fashion looks.”

—additional reporting by Caletha Crawford