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McKinsey Has 3 Tips for Winning at Off Price

Off-price retail is turning into a growth engine.

Growth in the sector is seen outpacing full price five times in the back half of the decade, with digital fueling most of this trajectory, according to McKinsey’s “Mastering off-price fashion in an omnichannel world” report.

Europe’s off-price-hungry consumer base grew the online portion of the sector 40 percent in 2020 and is projected to drive 13 percent annual growth from last year through 2025. Brick-and-mortar off-price retail, meanwhile, is expected to chug along at its usual 1 percent growth rate over the same frame. Off price in Europe includes manufacturer-operated factory outlets.

Despite fashion’s efforts to reduce oversupply, McKinsey believes companies will continue to churn out too much product. “Long lead times in production, fast-changing fashion trends, and other factors influence demand and are largely beyond the control of brands,” it said. “Because brands have complex product portfolios—more than 10,000 {SKUs], along with color and size variations—managing order quantities at the SKU level is incredibly complex.”

McKinsey urged fashion players to develop clear strategies to protect their brands while they reach new consumers.

Off price accounted for 40 billion euros ($44 billion), or 11 percent, of the European Union’s 368-billioneuro ($400 billion) fashion industry last year. Off-price sales in mid-market, premium, affordable luxury and luxury combined for about 80 percent of total spending in the online, off-price channel. Value and discount contribute the remaining 20 percent. The study found that shoppers are looking more for brand selection and exclusive offers than rock-bottom prices.

Off-price offers a “valuable opportunity for fashion brands to broaden their reach to customers who might not otherwise consider their full-price offerings,” McKinsey said.

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The sector has evolved the in-store experience over the years to match consumers’ rising expectations. McKinsey pointed to Value Retail’s London-area Bicester Village, which “has its own train stop, great restaurants, art installations, and carefully manicured foliage.” These features encourage many deal hunters to “plan special daylong excursions to off-price malls” as the experience often is “on par with full-price flagship stores,” it added.

Many brands use off-price to court new consumers who typically trend younger, the report noted. And a diversity of off-price business models abounds online. Limango, Veepee and Zalando Lounge promote limited-time offers during flash sales. BestSecret, Booztlet, brands4friends, Otrium and Yoox, on the other hand, offer a limited merchandise selection round the clock on a first-come, first served basis. Companies such as Heat and Scarce sell curated luxury mystery boxes filled with items from more than 60 brands, with discounts spread out among the goods to obscure pricing and protect brand integrity. Members-only clubs, invitation-only events, and outfits requiring minimum annual spend are all competing for off-price wallet share.

The pandemic supercharged off-price’s online growth. Germany’s demand last year tripled versus 2020, while Germany, Spain, Netherlands, Sweden, Poland and Austria together are projected to see demand rise 16 percent annually through 2025. Demand growth in the U.K., Italy and Switzerland are pegged at 14 percent, with France, Belgium and the rest of Europe at 13 percent.

The consulting firm found that many brands are utilizing a more strategic approach to the off-price channel, such as to better manage supply and include price discounts, but in a way that won’t erode brand equity. Off-price sales also have a place in the sustainability discussion because the channel can help prevent the destruction of potential oversupply.

3 strategies for success

But McKinsey cautioned fashion brands to treat off price as separate but complementary to full-price. It urged companies to utilize closed off-price portals to limit access and protect brand value, identify experienced off-price partners with cross-border outlet networks, and strategize on how the full- and off-price channels can work together for a 360-degree brand experience.

The off-price sector in the U.S., which wasn’t included in McKinsey’s report, remains a store-based experience. Unlike rivals Ross and Burlington, TJX is the sole big-three player to run full-fledged e-commerce websites for its brands, including TJ Maxx, Marshalls, HomeGoods and Sierra brands. HomeSense’s digital presence points visitors to basic information, as do Ross and Burlington’s web pages.

Nordstrom Rack and Saks Off Fifth, though smaller, operate in digital and physical. Macy’s Inc. has big expansion plans for the Backstage off-price concept inside Macy’s-branded stores as well as standalone locations. , the department store retailer is the presence of its store-in-store concept.

Century 21, once a force in off-price, saw its fortunes fade after a Covid-19 insurance dispute forced the on- and offline operator into bankruptcy.