As retailers scramble to find ways to cope with e-commerce competition, department store chains such as Nordstrom and Macy’s are embracing off-price models.
Last Chance, Nordstrom Rack and Macy’s Backstage — along with traditional discounters like TJ Maxx — have continued attracting shoppers with the promise of a treasure hunt, something online merchants can’t quite replicate. Sears, Carson’s and other onetime retail giants are closing stores or going out of business, but off-price chains have plans to open hundreds of new stores in the coming years.
However, some industry experts caution that a lack of emphasis on online sales, coupled with problems obtaining enough high-quality merchandise to meet demand, could disrupt the discounters’ momentum, which may already be slowing down. At Nordstrom Rack, TJ Maxx, Ross Dress for Less and Burlington Coat Factory, for example, sales at existing stores have been growing at a slower pace over the past three quarters.
Moody’s Investors Service predicted in October that off-price retailers would remain the top performers in the U.S. retail industry over the subsequent 12 to 18 months while department stores would continue to struggle. Christina Boni, vice president and senior analyst at Moody’s, said those predictions are on track.
“Off-price continues to do well, and I don’t think there’s anything that ultimately changes our view,” Boni said.
Although Last Chance is primarily a vehicle for Seattle-based Nordstrom to sell off excess merchandise, the retailer’s other off-price concept, Nordstrom Rack, now has twice as many locations as its traditional department stores. Nordstrom, which did not respond to requests for comment, plans to open 12 new Rack locations in 2018.
The Rack is the No. 1 source of new customers for Nordstrom, and it gained 6 million new customers in 2017, the company said in a March news release.
Rival Macy’s, meanwhile, announced in January that it’s closing seven more department stores this year. But rather than waiting for more of its stores to fall victim to consumers’ changing shopping habits, Cincinnati-based Macy’s is repurposing space in its stores for its “on-mall, off-price concept”: Macy’s Backstage.
Spokesman Andrea Schwartz said Backstage doesn’t sell overstock merchandise from its full-price stores but rather has its own buying team, similar to TJ Maxx.
“We always see an increase in traffic and sales overall when we open off-price in a department store,” Schwartz said. The company doesn’t break out sales from Backstage in its earnings reports, she said.
Macy’s has seven freestanding Backstage stores in the U.S. and plans to roll out the discount section in 100 Macy’s stores this year.
Framingham, Mass.-based TJX Cos., parent of TJ Maxx, HomeGoods and Marshalls, currently operates more than 4,000 stores in nine countries, and it wants to add another 2,000. This year, it expects to open about 65 additional TJ Maxx and Marshalls stores.
Ross Stores has announced plans to open approximately 100 new stores in 2018, 25 of which will be its dd’s Discount concept, offering even lower prices on apparel and home goods.
Discount fashion stores absorbed the most available commercial space in the Chicago area in the last year, and three discount fashion retailers signed leases at former Kmart stores closed by Hoffman Estates-based parent Sears Holdings Corp., according to a report this past spring from real estate firm CBRE.
Ken Perkins, president of Boston-based Retail Metrics, says off-price retailers have largely benefited from the demise of traditional department stores by gaining more market share, but that can’t continue indefinitely.
In fact, sales at stores open at least a year have been slowing down at major off-price chains. In the first quarter of this year, Nordstrom reported an increase of 0.4 percent at its off-price stores compared with 0.7 percent growth at full-price stores and online. During that same period the year before, off-price sales increased 2.3 percent, while sales at full-price stores and online decreased 2.8 percent.
Perkins said the rise of e-commerce also poses a threat for the off-price sector because the Internet offers price transparency on any product from hundreds of retailers, providing a different kind of treasure hunt.
Some off-price stores don’t even display their items for purchase online, likely because of how rapidly inventory changes.
In 2017, just 2 percent of TJX Cos.’ sales were made online.
“It’s been the one area they haven’t invested heavily in,” Perkins said. He added, “Off-price needs to have a more fluid, seamless experience for the consumer online that doesn’t feel like going into the store and going through racks.”