Using discounts to shift clothes is no novelty in fashion retailing. Indeed, in the current climate, with competition fierce and consumers hesitant, it is hard to avoid. But what marks out T.J. Maxx and other “off-price” retailers is that most of their stock is from habitually pricey designer labels, at drastic reductions. TJX, the parent company of T.J. Maxx and a handful of other off-price chains, rarely gives interviews, like its closest competitor, Ross. But their model is essentially as follows: when the designer labels produce more clothes than normal shops will sell at full price, TJX and Ross buy them at a deep discount, then resell them. As a strategy for global domination, it sounds underwhelming. But TJX and Ross are booming.
TJX has become the top seller of clothing not just in America but, according to some measures, the world. Ross is smaller but, given its room to grow, has become an investor darling. The Dow Jones United States Apparel Retailers Index fell by 6% during 2015 but the shares of Ross and TJX rose by 15% and 4% respectively.
Other American fashion chains are having a harder time. Shoppers are snubbing once-beloved names like Gap, J.Crew and Abercrombie & Fitch. Department stores’ habit of ordering their stocks of clothes months in advance leaves them vulnerable to ever-faster changes in tastes and to unpredictable weather. This autumn’s mild temperatures, for example, left them stuck with unwanted coats and scarves. All are threatened by more agile foreign “fast fashion” retailers, such as Inditex of Spain and H&M of Sweden.
In contrast, the American off-price chains are continuing to expand. In 2014 TJX’s sales overtook those of Macy’s, a famous department-store chain (which this week announced big job cuts and store closures). They are not at the cutting edge of high-street fashions: many of their lines are last season’s. Their skill lies in hunting down surplus batches of stock from well-known brands and negotiating steep reductions. But the wind is at their backs. According to Bryan Gildenberg of Kantar Retail, a consulting firm, it is getting harder for shops to predict which clothes will sell at full price. “If the apparel industry is harder to forecast, there’s more inventory at risk, and if there’s more inventory at risk, the opportunity for this sort of buying goes up astronomically,” he says.
Off-price retailers do not try to offer every size in every colour in every outlet. They buy whatever is available, so their shops have a constantly changing, seemingly random assortment. Ross says its stores typically get fresh stock three to six times a week. They therefore appeal to the sort of shopper who loves to rummage, hoping to stumble across the perfect item at an irresistible price. “It looks like a jumble, but actually it’s a very deliberate jumble,” says Neil Saunders of Conlumino, another consulting firm.
The shops are spartan and thinly staffed, since customers are happy to hunt for bargains without help, and understand that if it isn’t on display, the store doesn’t have it. As a result, the overheads at TJX and Ross are, as a percentage of sales, about half those of Macy’s or Nordstrom, another department-store chain. The experience of shopping in an off-price store is hard to replicate online, notes Oliver Chen of Cowen and Company, a financial-services firm, so TJX and Ross are less threatened by the rise of internet retailing than other clothing chains.
It may all sound simple, yet some off-price chains have flopped. The company that owned Filene’s Basement, for example, filed for bankruptcy in 2011. Ross and TJX now have the benefits of scale as well as, analysts say, strong management. TJX is spreading across Europe, where it trades as T.K. Maxx.
The two chains are not just admired by industry analysts. They are also appreciated, albeit more discreetly, by the designer labels. An elite brand dare not damage its image by flooding off-price retailers with its products. But TJX and Ross have become an essential part of the retail ecosystem, offering a way for brands to clear their excess stock quickly. The off-price chains may drive a hard bargain but are otherwise easy to deal with. Department-store chains often demand sale-or-return clauses, or retrospective discounts for stock that they were forced to reduce.
The risk for the fashion brands is that they end up a bit like American carmakers before their bail-outs, habitually overproducing and dumping their growing surpluses on the off-price chains and thus gradually losing their ability to sell at full price. As for TJX and Ross, one long-term worry, says Mr Gildenberg, is that younger consumers expect ever less expensive clothes. Forever 21, which specialises in cheap, trendy wear, has grown quickly. Primark of Ireland, which opened its first American branches last year, boasts fashionable clothes for Walmart prices.
For now, though, both of the big off-price chains have room for further expansion. It is no surprise then, that some rivals are seeking to muscle in to the business: Macy’s is expanding a new off-price chain, Macy’s Backstage, and Nordstrom is opening more branches of its one, Nordstrom Rack. Off-price is in fashion.