Why Off-Price Retailers Are Beating Their Full-Price Counterparts
Off-price retailers are gaining more market share at the expense of their full-price counterparts, according to research from NPD Group. In 2012, the total sales for the U.S.' five largest off-price retailers grew 11% compared to a 4% increase in national apparel sales. Off-price retailers like The TJX Companies , Ross Stores , and Big Lots , which sell brand-name merchandise at reduced prices, are likely to profit from this shift towards value-focused shopping behavior among consumers.
Revenue stability across different economic conditions
TJX boasts of an unrivaled comparable-store sales track record that will put most, if not all, of its competitors to shame. It registered positive same-store sales for every single year in the past three decades, except for negative 2% growth in 1996. In other words, TJX has delivered positive comparable-store sales growth for 17 consecutive years since 1996, which included growth rates of 3% and 1% in 2002 and 2009, respectively.
While the historical same-store sales performances of its off-price peers Ross Stores and Big Lots are inferior to that of TJX, they are no less impressive. In the past 10 years, Ross Stores only recorded negative comparable-store sales in one year -- 2004. On the other hand, Big Lots saw its decade-long positive same-store sales growth from 2002 to 2011 come to an end in 2012 with a 2.7% decrease. However, that was attributed to several mistakes that management made in merchandising rather than anything to do with favorable economics of the off-price retail model.
The financial numbers are at odds with the common wisdom that off-price retailers only perform well in recessions as consumers become more cost conscious. Similarly in the U.K., discounters Aldi and Lidi have gained market share at the expense of market leader Tesco. It is possible that frugality acquired during the recession has stuck in the minds of consumers, and bargain seeking has become more of a mainstream shopping behavior than before.
Wide demographic reach
Off-price retailers tend to have a wider demographic reach compared with their peers because bargain-seeking behavior transcends certain boundaries. TJX's core customers are aged between 25 and 54 years old, and they could earn anything between $50,000 to more than $1 million a year. Similarly, Ross Stores claims that its core customers, who visit its stores about three times per month, belong to a wide range of household-income categories. Ross Stores aptly calls these two extreme groups of customers those who 'need a bargain' and those who 'want a bargain.'
In fact, off-price retailers are always on the lookout for opportunities to extend their customer demographic for higher profitability. For example, Big Lots' increase in store productivity from $146 per selling square foot in 2005 to $163 in 2012 was largely attributed to its ability to attract customers of different income levels. It took advantage of the real estate downturn during this period to open new stores in locations with a higher proportion of middle- to upper-income households. On the other hand, TJX launched its new e-commerce site in September last year, to attract younger customers -- its fastest-growing customer segment.
Supply chain strength
The three off-price retailers have tremendous bargaining power over their suppliers due to the scale of their supply chains. TJX has more than 900 people in its buying organization and 13 buying offices located across 10 countries. It sources from 16,000 vendors in more than 60 countries, with its top 25 suppliers making up only one-quarter of its purchases.
Ross Stores has about 600 buyers who come with an average nine years of merchandising experience. It also has its buying offices located in key apparel markets New York and Los Angeles so that it is closer to its suppliers. The large number of experienced buyers, multiple strategically located buying offices, and the fragmented nature of the supplier base all contribute to superior economics of scale in purchasing for the off-price retailers.
Besides scale, the reason suppliers sell is also another key reason for off-price retailers' bargaining power. Their business models involve capitalizing on the mistakes and misfortunes of other companies. Older products made obsolete by new fashion trends and excess inventories that can't sell contribute to a healthier pipeline of closeouts for Big Lots, the U.S.' largest broadline closeout retailer.
When you buy what people don't want, you can get a better price. Also, smaller competing closeout retailers can't match Big Lots' national network of distribution centers, suggesting that Big Lots has a leaner cost structure as a result of lower transportation costs.
As consumers continue to look to stretch their budgets in an uncertain economic environment, off-price retailing should become increasingly popular. Even if the economy recovers, the off-price retailers should still do well because of their ability to cater to a wide demographic and their supply chain-driven cost efficiencies. Of the three listed off-price retailers, TJX is my top pick for its consistent financial track record, which is a rarity for any publicly traded retailer.
Buy and hold these stocks for life
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love.
The article Why Off-Price Retailers Are Beating Their Full-Price Counterparts originally appeared on Fool.com.
Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.