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Off-Price Chains Target Department Store Shoppers

January 15, 2013

It's not exactly breaking news that off-price merchants are cutting into the sales of department stores. The likes of Marshalls, T.J. Maxx and Ross Stores have found a niche serving consumers who want the same items sold in department stores, but not at the prices charged by those businesses.

"Right now, customers are looking for name brands at a value price and these retailers have what the customer wants," Mark Montagna, retail analyst at Avondale Partners, told Dow Jones Newswires.

"Department stores are disadvantaged due to the focus on the domestic consumer, their relative maturity, the promotional models which they have propagated and the continuing pressure of share shifts to other channels," Macquarie analyst Liz Dunn told MarketWatch.

Department stores, recognizing the attraction these chains have with consumers, have responded, in part, with own-name outlets (e.g., Nordstrom Rack) as a means of moving excess merchandise while trying to keep shoppers from going elsewhere for deals.

While some point to J.C. Penney, Sears and others to promote the idea that department stores are going the way of the dinosaur, there are other examples such as Macy's and Nordstrom that show nimble, consumer-centric operators are able to thrive despite the off-pricers.

FINANCIALS:     [NYSE:TJX] [ NYSE:M]

Discussion Questions:

How much of a threat do off-price retailers represent to department stores? What has been the department store channel's most effective response to off-price competitors?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How effectively have department stores responded to competition from off-price chains?

Comments:

The combination of successful off-price retailers and the scarcity of disposable income is a major threat to "normal" department stores. This will not be a surprise to anyone reading this, but the world has changed and it's not going back to the way it was. Retailers are adapting but there is still a reluctance to permanently change in parallel with consumer changes.

Department stores that show respect for their shoppers' needs and wants, creating experiences that overtly demonstrate how they want their businesses to provide satisfaction will be most successful. Taking a close look at Macy's and Nordstrom is a first step.

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Joan Treistman, President, The Treistman Group LLC

Continue to build the loyalty programs, deliver on the service, and provide the type of private label alongside great clothing and shoe brands. Department Stores, like Nordstrom and Macy's, have built a bond with their customers, and coninuously welcome them back with far more than just price.

JC Penney has their customers confused as to who they are, and perhaps they will be proved correct in changing their customer base completely somewhere down the road. Sears, who knows? Certainly not the consumer.

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Roger Saunders, Managing Director, Prosper Business Development

Off price retailers are a legitimate threat to department stores. The most effective response I have seen is Nordstrom and Nordstrom Rack. They are giving the customers a choice and keeping them within the brand.

I've seen more of the Rack stores being located very close to the parent Nordstrom store. I'm guessing it is more of the 1+1=3 — very easy moving the merchandise across the street.

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Robert DiPietro, GVP Product Strategy & Business Development, Affinion Group

In general, off-price retailers offer similar, or the same, merchandise as a mid-range department store like Macy's but at an everyday low price and with merchandise that is always changing. Apparently it is beneficial to consumers not to have to hunt for a coupon or worry if the item is on sale "enough" and it is beneficial to retailers to give consumers a reason to come back to their stores frequently. This sounds exactly like the strategy that JCPenny has been struggling to implement.

'tmlens'

Off-price retailers (such as TJ Maxx and Ross) are definitely competition to department stores, particularly due to the state of the economy over the past few years as many shoppers are looking for bargains. The most effective response for department stores seems to be opening outlet locations, something that many clothing retailers have had success with (such as Banana Republic and The Gap).

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Zel Bianco, President, founder and CEO, Interactive Edge

Off brands with lower, more acceptable pricing will always remain a competitive choice for the buying public. Some buyers are comfortable shopping off-price; others want the label and name. Ego is acceptable when you have the cash to go along with it. What I have not understood is why on can't have the same merchandise and the lower price?

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

Best starting strategy in any case is to be yourself; don't try to be something you're not. Macy's has done a good job of emphasizing their fashion background lately using the digital side of retail, both in-store and otherwise.

What's more, from our studies, Macy's move to attract a younger customer with social and other 'new' marketing methods appears to be working. Younger consumers have a high opinion of the brand. The new media presents them in a fresh light and subsequently takes them out of the price game altogether -- which is a death spiral anyway.

Given that case study, my advice to other department stores would be to just be yourself; if you're price centric, go for it, and if you're fashion oriented (like Macy's is and always has been), be that -- but you'd better do either in an innovative way.

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Lee Peterson, EVP Creative Services, WD Partners

This all goes to price sensitivity and the value proposition. The consumer that is only interested in price will be loyal to the company with the lowest price, which means they aren't really loyal to the company at all — just the price.

Some companies have created their own discount channels. Nordstrom Rack is a great example. Zappos.com has a brand that caters to less expensive close-outs and "last year's" merchandise. Some companies go the opposite direction. Best Buy has their high end store actually inside their regular store. And Enterprise Rent-a-Car expanded into a higher-end market (National) and a lower end market (Alamo). Study these companies to learn how great companies have success in creating alternative channels.

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Shep Hyken, Chief Amazement Officer, Shepard Presentations, LLC

I'm not sure it makes any sense to lump Macy's and Nordstrom together under the moniker "department store" (though the former probably wouldn't mind being linked with the latter). Nordies -- along with Saks and Nieman Marcus -- has always considered itself a specialty store, and the lack of any hard goods lines supports that claim (though of course the physical size of the stores is very "department store-esque").

But semantics aside, there is an obvious reason why Nordstrom and it's kin have opened outlets, while Macy's has not. There is a clear difference between the flagship stores and outlets in merchandise assortment and service, which finally translates into price points. How would a cluttered, understaffed Macy's or JCP outlet differ from the real thing?

'notcom'

It's always kind of amusing to see discussions about how off-price is a "threat" to departments stores. The fact is that off-price is a bigger business than the department store (there really is only one — Macy's). TJX, for instance, does only slightly less annual volume than Macy's but significantly more earnings. Nordstrom and Saks are essentially specialty operations. Both are far smaller than the off-pricers. TJX does almost twice the volume of these two combined.

Truth in advertising: I was with TJX for several years. It is a terrific company.

Bill Emerson, President, Emerson Advisors

Off-price retailers are a definite threat to department stores in the current economy. However, this does not mean that department stores will be wiped out in the future.
This definitely means that the testing times call for strategic planning and focus for department stores. Customer service, private labels and the ability to plan customer demand (and hence merchandising process) are three factors, in that order, that will keep department stores thriving. These are definitely not the strengths of off-price retailers.

Another factor that runs horizontally across the three factors is IT integration:
a) across selling channels (in-store, ecommerce, mcommerce etc) to enhance shopping experience.
b) across business processes to streamline operations (including better use of analytics)

Very few department stores are moving in the right direction and fast enough. There is huge scope but lack of sufficient efforts right now.

Chitra S Dabas, Assistant Professor, Cal Poly Pomona

I personally don't think off-price retailers are much of a threat to department stores at all. If they're to be considered a threat, then so should brand-name factory outlet malls. The simple fact of the matter is that off-price retailers and outlets sell the same brand-name goods, but only in the sizes that remain from the original retailers AND only when they are out of season. People who have the money will pay a premium for in-season goods, in the sizes they want, sold at department stores and branded retail stores that provide a higher level of customer service.

Christopher Krywulak, President and CEO, iQmetrix

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