Will department stores regret their off-price push?
Photo: Macy’s

Will department stores regret their off-price push?

Through a special arrangement, presented here for discussion is a summary of a current article from the Retail Doctor’s blog.

As more retailers follow the Macy’s Backstage, Nordstrom Rack and Kohl’s off-price model, expect more stores to become lands of misfit clothes.

The momentum seems to be building. Last week, Macy’s indicated that it plans to expand Backstage to another hundred locations, many in premium malls. Macy’s claims consumers have grown accustomed to off-price buying.

The expansion follows Macy’s reported success last year with “open-selling” or self-service environments in women’s shoes and fine jewelry. The retailer has been testing it in beauty as well. Karen Hoguet, Macy’s CFO, told Fortune last year about Macy’s shoppers. “Lots just say, ‘Leave me alone — let me get the shoe I want and move on.’”

Yet the Backstage departments I’ve seen are devoid of merchandising, proper lighting or much care. Sweaters designed to be lovingly folded are hung forlorn on hangers that stretch the shoulders wide enough to fit the Hulk. Row after row of non-descript t-shirts, dress shirts and casual shirts are jammed on rack after rack, the brand tags nothing more than an afterthought.

It is all about the discounted price.

Shopping in a place like that is work. It is a shopping trip most would skip.

What will it take for retailers to understand discounting more and more merchandise won’t save them? They need to know their customer, carry quality products that are displayed impeccably, and have employees who focus on customer service and can sell those products.

That is the way forward.

Why don’t they do that? Because it’s hard. Training employees, engaging strangers, moving sequentially through a selling process, upselling, etc. — all hard work.

Department stores wonder why brands like Michael Kors and Coach are going direct-to-consumer. They don’t want all the hard work they put into creating a superior brand to be watered down, discounted and drowned in a sea of sameness.

That’s what a focus on the customer and customer service does — it keeps your brand unique and worthy of the price charged. When you can’t do that, you’re happily selling discount goods.

BrainTrust

"Department stores are facing real challenges, but I'm not sure that stacking up second-tier merchandise or taking away service are the answers."

Ryan Mathews

Founder, CEO, Black Monk Consulting


"As retailers get to know their customers better, improve buying practices and merchandising, how will the off-price brands be sustained?"

Lee Kent

Principal, Your Retail Authority, LLC


"Just because you’re discounting it doesn’t mean the consumer has to accept an inferior experience."

Phil Chang

Podcast Host, Retail Influencer, Fractional CMO


Discussion Questions

DISCUSSION QUESTIONS: Will their off-price pursuits ultimately help or hurt the positioning of department stores? Is extending self-service to more departments a net positive or negative in your opinion?

Poll

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Mark Ryski
Noble Member
6 years ago

Department stores are trying to find their way, and they seem to be flailing around as they work through this process. Off-price is just one of these flailings. Ultimately, off-price may hurt department stores’ positioning once they clarify who they’re trying to be. That’s the problem, they’re still trying to figure it out and in the mean time they move forward with initiatives like off-price that are obviously popular as evidenced by the success of TJX and Ross. While I can’t fault department stores for chasing the market (and positive same-store sales), it’s not a recipe for long-term success.

Gene Detroyer
Noble Member
Reply to  Mark Ryski
6 years ago

“Flailing” is the perfect description.

Lyle Bunn (Ph.D. Hon)
Lyle Bunn (Ph.D. Hon)
6 years ago

Off-price needs some thoughtful market positioning. It runs the risk of sitting between Goodwill and fast fashion with a devaluing of the banner store brand that carried the goods at bigger prices just weeks earlier. Off-price takes retail down more steps toward the bottom where profits are hard to come by. Off-price serves only the over-production of goods.

Phil Chang
Member
6 years ago

There are some retailers that have made their success based on an off-price treasure hunt system. TJX, the parent company for Winners and Marshalls has posted strong growth year over year and continues to show success. Having said that, TJX’s entire strategy is an off-price treasure hunt. Consumers go there deliberately for “the hunt” and to flex those shopping muscles and get euphoric on finding a deal.

These off-price offshoots feel off. I’ve also seen poor merchandising and, frankly, when I’m in a Backstage I feel like a second class citizen that can’t afford to shop in the regular Macy’s.

I think that’s the crux of it. Just because you’re discounting it doesn’t mean the consumer has to accept an inferior experience.

Ryan Mathews
Trusted Member
6 years ago

If curation is the essence of good merchandising then the off-price for off-price’s sake approach will hurt in the long run. In the short run you can obviously sell a lot of merchandise to shoppers on the basis of price. But in the mid to long term the value proposition just isn’t there, especially for consumers who can buy what they want at competitive prices online. Ditto for self-service in more departments. If people didn’t need help selecting shoes or applying makeup those departments would have gone away long ago. As a channel department stores are facing some real challenges, but I’m not sure that stacking up second-tier merchandise or taking away service are the answers to that challenge. So what’s in it for the consumer? That’s the real question.

Art Suriano
Member
6 years ago

Here is another example of how so many retailers are no longer innovative and developing and implementing their own concepts but instead are just chasing after everyone else. The problem is that everything becomes short-term success. Today we’ve lost the entrepreneur leadership who thinks about long-term strategy with a plan that brings substantial victory over time. Instead, it’s all short-term thinking with a short-term result. Today we have retailers getting in each other’s space copying business models, prices, selections, designs and all it does is confuse customers and give them absolutely no reason to be loyal to a brand because there is no identity and too much sameness.

So what will opening more off-price stores with more self-service accomplish? It will lead to short-term growth with the business failing eventually. And rather than admit that is the reason they will blame it on Amazon. It’s time for retailers who want to remain in the game to step up, find something unique for their brand, develop it, promote it and wow the customers with outstanding service. Then the retailer will find out that rather than chasing the competition, the competition will be chasing them because of their success!

Brandon Rael
Active Member
6 years ago

The off-price retail segment has been thriving for years, as the Ross Stores, TJ Maxxes and Marshalls of the world have aggressively expanded and offer significant value to their customers. So why wouldn’t department stores want a piece of the action, and why wouldn’t they take advantage of the off-price market? One of the key success factors for any retailer delving into off-price arena is to clearly distinguish the brand from the main department store.

Saks Off Fifth, Nordstrom Rack and others have their own physical locations and are differentiated from the main department store in terms of pricing, merchandising and product assortments. The challenge is once you have an off-price presence embedded within the department store, then you will need to have the same lighting, presentation and service standards extended to that section.

Gene Detroyer
Noble Member
6 years ago

What is the sustainable competitive advantage in an off-price strategy?

David Weinand
Active Member
6 years ago

There is a recent study out showing that one of the categories that experienced price deflation over the last 10 years is clothing. This is not surprising given the recession and the growth of fast fashion. What I’ve often wondered is, where do consumers place the off-price brands in their spectrum of the discount hierarchy? I mean, Nordstrom Rack is still priced above the TJXes and Rosses of the world. And it is still merchandised better. If a department store can effectively brand their off-priced pursuits as “better than,” they have the potential to capture two different markets — the luxury consumer and the discount hunter. They just have to be careful not to tip the scale too heavily to the discount side.

Ricardo Belmar
Active Member
Reply to  David Weinand
6 years ago

Dave, you’ve nailed a very important point. It’s a bit of a misnomer to me to group every discount apparel retailer into the same category — TJX, Ross, Nordstrom Rack, Neimans Last Call, Saks Off 5th, and now Kohl’s and Macy’s entering the mix. I would argue there is a reason we refer to these stores as either “discount” or “off-price” and we should keep the distinction. The original discounters, like TJX and Ross, have a formula that’s all about the treasure hunt and low price. There’s very little true merchandising going on in those stores. Then you have brands like Rack, Off 5th, and Last Call which still deliver in-store merchandising and frankly came to be as a way for those retailers to sell aging merchandise at a discount without “lowering” the status of new season merchandise in their mainline stores. This leads to your distinction of having “better than” goods to offer!

Macy’s and Kohl’s need to choose which of those two they want to play in and understand the impact to their mainline brand image. Otherwise, they are just asking themselves “do customers want to pay less for more value?” — of course the answer is yes, but this doesn’t rationalize the investment in off-price branding!

Dick Seesel
Trusted Member
6 years ago

There is a big difference between what Nordstrom and Kohl’s are doing (building out freestanding Rack and Off/Aisle stores) and what Macy’s is attempting by locating its Backstage concept inside its full-line stores. Either way, department stores are jumping on the off-price bandwagon because it’s a hot segment with the “treasure hunt” experience that some shoppers are looking for. But at what point does the segment get overcrowded?

Macy’s may feel strongly enough about Backstage to roll it into more locations, but from my experience it does nothing to enhance the overall store “brand.” (Bob is dead-on regarding the housekeeping.) And the merchandise content is not compelling, since Macy’s “upstairs” brands feel safer dealing with TJX than having their goods show up in Backstage. From what I’ve observed, there is a lot of closeout product from brands that you might find at J.C. Penney or Kohl’s but not on the main floor of Macy’s.

Joy Chen
Joy Chen
6 years ago

No company can win on price alone. The department stores will see a positive bump for a while as they provide discounted stores, but in order to succeed and win in the marketplace they must have a positioning that differentiates them beyond price. At this time, it does not look department stores like Macy’s have one.

Nikki Baird
Active Member
6 years ago

Off-price’s long term success is ultimately a function of supply. Retailers who are investing in growing this business — essentially moving in on Ross, T.J. Maxx, etc. — are basically admitting that their full price division stinks at buying. Because other than competing on the open market for oversupply, where does this off-price stuff come from? It comes from their own buying mistakes, or they have to get into the private label low-quality, intrinsically low-price business. That means they either have to build in a sufficient “mistake” budget to feed the growing number of their own off-price stores, or they risk choking out the inventory in those stores — and killing the off-price business that they’re rushing to invest in.

That’s even before you get into the whole “it’s way too easy to go down-market, but it is exceedingly difficult to maintain — or grow — an upmarket position,” which should also be a major consideration that is not getting much due.

Lee Kent
Lee Kent
Member
Reply to  Nikki Baird
6 years ago

Yes, Nikki. Many off-price brands got their start as a way for higher-end department stores to outsource merchandise after the third markdown. As retailers get to know their customers better, improve buying practices and merchandising, how will the off-price brands be sustained? Private labels? There is a lot to think about for my 2 cents.

Lee Peterson
Member
6 years ago

Being off-price has already put a near death knell on department stores so it is hard to understand why anyone would think that would work (the definition of insanity comes to mind). At the end of the day, department stores can’t compete with the “real” off-price brands or even the fast fashion teams for that matter. They need to take the opposite tack; experience, great service and real estate for “other” places like work spaces, gyms and grocery/food service. In any case, the other missing quotient here is much smaller — you know, about the size they were 50 years ago.

Ron Johnson had the right idea (just the wrong execution plan).

Camille P. Schuster, PhD.
Member
6 years ago

Department stores are facing a challenge. It is expensive to hire and train the number of employees needed to engage with and help consumers in the store. It takes creativity, time and money to create in-store experiences that engage consumers in interesting ways. If there are no good in-store experiences or if the smaller number of employees in the store are not helpful, then customers might as well go to the discount stores. It takes a lot of effort, planning and monitoring to develop a fast inventory system to have limited amounts of merchandise available with fast replenishment. If the department stores do not do the hard work of hiring and training employees, creating interesting in-store experiences and having the right inventory available, then they should just become off-price, discount stores.

Mohamed Amer
Mohamed Amer
Active Member
6 years ago

I agree with Mark that department stores are working their way through a new way of being that is defensible. At times it may come across as “flailing,” but it’s more of a recognition that they understand the current model is no longer suitable or viable.

On the other hand, chasing trends set by other formats is not the way out either and definitely not a differentiated approach to the business. The crux of the issue here is having an organization and cost structure that is out of sync with the changing consumer purchase behavior and the perceived value.

In this case, the path to success is not evolutionary but revolutionary given that the gap is wide and the speed of change is accelerating. Anything less will get you occasional moments of brilliance before a final fade-out. With the right mindset and long-term view, department stores can successfully re-invent themselves and get back on the offensive.

Dick Seesel
Trusted Member
Reply to  Mohamed Amer
6 years ago

Agree on the need for reinvention, but I’m not sure that imitation of a concept going through a growth cycle right now is sustainable. Department stores had enough trouble developing their answer to “fast fashion” retail (when it was hotter than it is now) because they don’t have the mindset or supply chain to move as quickly as, say, Zara.

Mohamed Amer
Mohamed Amer
Active Member
Reply to  Dick Seesel
6 years ago

Dick, we are in violent agreement!

Ricardo Belmar
Active Member
6 years ago

Bob Phibbs really nails this point so well — just selling merchandise at a lower price is not going to automatically result in a total panacea for retailers. Yes, of course, consumers want to pay less. The problem with that is one you start discounting, you’ve trained your customer to expect it and they won’t look back!

The original apparel discounters, like TJX and Ross, had a simple formula in mind based on the treasure hunt and made discovery interesting for shoppers. Coupled with lower prices, shoppers loved it even though they were typically buying “yesterday’s fashion” that department stores didn’t want any more. Over time this evolved and we can’t generalize the merchandise like that necessarily, but the treasure hunt aspect is alive and well.

Department stores saw this as a potential new growth sales channel and we then saw Nordstrom Rack, followed by Saks Off 5th, Neimans Last Call, etc. start to pop up. These were different discounters, however, because they had real merchandising happening in the stores — it was as if they were a mini version of the department store with slightly less service, slightly “older” merchandise from a previous fashion season, all with a lower price.

The goals are different in each model and department stores are walking a fine line between cannibalizing their customer base and selling old inventory at a discount to recoup costs. I agree with Bob Phibbs that department stores need to focus on people — having associates that deliver great service will go a long way to rekindling customer’s desire to shop at these stores versus specialty retailers and discount stores. The value of the experience delivered is the last, best hope for department stores!

Craig Sundstrom
Craig Sundstrom
Noble Member
6 years ago

Well, what’s the alternative? Consumers seem to want off price, so shouldn’t department stores give it to them? There are many who argue stores should instead return to their past and emphasize service (more), but I think that’s why they’re in the state they are now: people want service, they just don’t want to pay for it.

All this having been said, I think it’s also important to remember that while most people don’t want to pay for service, there are some who do, and for the few stores who still offer this (and they tend to describe themselves in terms other than “department stores), off-price can offer a clearly different experience, i.e. it “works” in a way that isn’t true for operators like Macy’s and … well, there isn’t much anyone but Macy*s left, is there?

Ken Morris
Trusted Member
6 years ago

There is a reason that the off-price category is one of the hottest categories in retail and why Macy’s is expanding its Backstage chain. It is because consumers want it! They like the thrill of the treasure hunt and they love deals or “bahhgins” as we say in Boston. As retailers garner more sales and profits from their off-price brands, they will be less concerned with brand positioning and more concerned with satisfying customer demands.

Regarding self-service at department stores, it is always good to give customers options, as not everyone has the same service expectations. However, department stores need to be careful, as many have already cut back on staff so much that those that want service from an associate can’t find an associate to help or the associate isn’t helpful. Providing exemplary personalized customer service is the best way for department stores to differentiate from Amazon.

Christopher P. Ramey
Member
6 years ago

Let’s not confuse off-price with low margin. Most of the off-price stores will have comparable if not higher margins. Too many department stores confuse service with the number of feet on the floor. While the best retail experiences equate to less interruption from one of those feet on the floor.

Let us not confuse reimagining retail with opening down-market/high- margin/off-price stores.

Who needs Amazon to make brick and mortar moot?

Min-Jee Hwang
Member
6 years ago

Off-price retail is a symptom of getting buying wrong. Some retailers can properly tap into the “treasure hunt” shopper mentality and offer an exciting experience. But others put a damper on their overall brand value with off-price concepts that are poorly thought out and executed. Retailers must think long and hard about their reasoning behind an off-price offshoot. Self-service models can be effective if they are done properly.

Jeff Miller
6 years ago

Unless you started your business with this kind of model, I see this as yet another misguided and short-term decision for these stores. Some self service elements can be helpful, but all self service and low cost is a race to bottom and these retailers don’t have the unlimited access to capital that Amazon does to compete in that area.