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The Off-Price Inventory Dilemma

As Century 21 followed fellow off-pricers Stein Mart and Stage Stores into bankruptcy, the loss felt by some designer brands is still to be reckoned.

Many labels are faced with not only fewer channels to move excess product, but also the disappearance of a steady source of income from bespoke manufacturing or licensing programs.

Special buying programs

It’s no secret that many brands have agreements to make product for a specific distribution channel or retail account, and these manufacturing programs can provide a fairly steady source of income.

One business adviser at a fashion consultancy said these programs churn out a steady supply of seasonal goods, which make them quite lucrative for brands. Some manufacturers also take advantage of excess fabric used for one item in the normal distribution channel and then put it into production for something else in off-price retail, the source said. Think of a patterned skirt with matching sleeveless top at a department store and then the same pattern on a long-sleeve blouse at off-price.

“There’s one [European] designer brand in particular that I saw so much of at Century 21 that you could choke on it. That was a combination of both overages and specially produced goods for the retailer across multiple categories,” said retail consultant Walter Loeb. Just as a bargain-hunting consumer might not care if the item is a season old as long as it bears the right price tag and label, that shopper also might not notice—or care about—the subtle differences between regular season goods that have been discounted and their specially manufactured counterpart, he added.

Many times, the off-price-specific product is almost indistinguishable from the regular line. This helps the brand maintain a similar look and design point-of-view, regardless of where the items are sold. For a coat, the buttons or other trim might be different. For handbags, a style might eliminate a design detail such as an outside pocket or zipper, and forgo the dust bag. Or, instead of making the strap from leather, cotton might be used for a sportier look. And because margins run fairly high, skimping on a few design details helps brands recoup some margin power because production costs are that much lower.

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For off-pricers, these manufacturing programs serve as the base for a portion of the inventory assortment, while the higher-end excess product that was sent back from the original distribution channel is mixed in to help with the “treasure hunt” environment that’s key to off-price retail’s appeal. Brands have been manufacturing for different channels for years—selling their core line to the main channels such as department stores and their own stores, while producing other merchandise earmarked for outlets, warehouse membership clubs and off-pricers. Consumers shopping the different channels tend not to overlap.

According to Gary Wassner, CEO of factoring firm Hilldun Corp., retailers often have one-off collaboration programs with designers and many of the manufactured programs—such as some of those at TJX—are through licensing arrangements specifically for items such as shoes and handbags. For off-season designer closeouts and excess inventory, Wassner said some products outside of ready-to-wear, such as those ubiquitous packages of designer underwear, tend to be through these special programs or purchases.

Covid-19 and retail’s rapid-fire evolution

But what worked before the arrival of the coronavirus may no longer be the business model needed in a post-Covid world, at least not where designer brands and the off-price channel are concerned. Century 21 was a New York novelty, where its stores across the city were strategically located to take advantage of tourists who came to town hunting for designer bargains.

“Century 21 did a lot of business and was popular as a store for tourists. It was always mobbed. For me, [the bankruptcy filing] was like J&R Music World going out of business. They’re dinosaurs in a way because we can now buy designer products on the internet from almost anyone,” Wassner said. Hilldun was on the Century 21 list of top unsecured creditors, holding a claim of $520,747.

Wassner’s factoring firm has expertise in the designer fashion world, helping fashion houses manage their financial accounts so designers can focus on the creative side of the business. And it’s the approach to the latter that has changed in the post-Covid-19 world, Wassner said.

“Designers have since cut production back significantly for fall,” he said. “They have plenty of places to ship it to for full-price selling. And since the full-price [channel] is now discounting early in the season, why would they need to ship it to an off-pricer anymore?”

In the aftermath of Covid-19, stores in general have pulled back on the amount of inventory because they don’t want to run the risk of overbuying and then have to resort to major discounting to clear out season-old goods. Scaling back on orders has also meant less merchandise available later for the off-price channel, particularly from department stores, which canceled whatever orders they could at the start of the pandemic.

In the short-term, at least, it has left off-price retailers scrambling to buy goods to fill the shelves. During a second-quarter earnings call last month, Ross Stores CEO Barbara Rentler said there’s a “lot of supply out there, just not as consistently across the merchandise areas.” Read that to mean an oversupply of spring and summer goods department stores needed to clear out, but not enough fall merchandise because of canceled orders. Not to mention factories that still needed time to ramp up their production lines after shutdowns.

A pullback on how much is produced isn’t necessarily a bad thing, nor is shipping closer to need. “I’ve also heard from a number of brands in the designer and luxury space that because they have shipped fall merchandise much later than usual, the seasonal cadence has finally gotten to a more realistic schedule and sell-throughs are stronger than in the past when they shipped early for fall,” Wassner said.

Where consumers can shop for designer finds

While consumers looking for designer apparel on a budget might bemoan the loss of Century 21 and some of its brethren, there is still a plethora of options in the space.

For the super high-end luxury options, there’s MadaLuxe Vault, as well as the online operators Yoox and the Net-a-Porter operation The Outnet. There’s also United Apparel Liquidators, which has both stores and an online site where sales rival some of those at Century 21.

And, of course, there’s also Nordstrom Rack, Saks Off 5th, Haute Look and 6PM, not to mention the one or two Last Call stores left that Neiman Marcus will use as clearance centers.

What’s next for off-price

Some believe that the off-price sector could be challenged for a few more quarters until the retail sector can bring inventory back to a level that aligns with demand. And brands under the corporate umbrellas belonging to PVH Corp., VF Corp. and G-III Apparel Group will likely fare better as they are already working with the bigger, national chains like TJX.

But one problem all off-pricers face is e-commerce.

“Most off-price retailers did not invest heavily in their e-commerce and relied too much on their brick-and-mortar. Therefore, most of these companies will suffer not unlike Century 21,” said Shelly Socol, co-founder of One Rockwell (1R), a fashion and lifestyle e-commerce agency. “In all honesty, the disparity between companies that saw the future of e-commerce and took it seriously and prioritized it well before Covid will survive, and those that did not will most likely not make it. Unfortunately, there are not that many off-price retailers that made that investment when they needed to.”

For now, she expects most excess goods still in inventory either will be sold out of the country or will see some steep discounting on the retail front.

“I think that distribution for retail goods is more challenging, especially for off-price retail, given a combination of retail bankruptcies and diminished foot traffic to stores that are still open,” said Jonathan Treiber, co-founder of RevTrax, an offer management platform that uses data to make “Smart Offers” created for each customer. He believes that the lack of a “robust e-commerce business for TJX has definitely hurt their business, while many other full-line retailers have seen e-commerce growth in the triple digits.”

But it was the “brick-and-mortar business model [that] allowed [Century 21] to succeed by providing the optimal treasure hunting experience, something that has proven elusive in the e-commerce domain,” Treiber added.

And perhaps that’s why Burlington Stores in March said it was shutting down its online platform, an operation that accounted for only 0.5 percent of its revenues.