Retail Lessons from Off-Price Chains That Can Be Applied to Full-Price Retailers
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by Fiza Khan
New retail concepts are emerging and disrupting the industry. In a challenging economic environment, brands are looking for ways to remain relevant to consumers and drive profitability. With a possible recession on the horizon, the emergence of fast-fashion retailers and other off-price chains that have been growing at the expense of department stores, specialty apparel chains, and other full-price retailers. These new players operate with different business models that create a perfect storm for traditional retailers. If you love reading articles about retail strategies, you’ve probably heard it all before: digital vs. physical; omnichannel integration; social media marketing; in-store experiences; artificial intelligence; augmented reality… the list goes on and on. However, what we often hear about less is the right strategy for our times — combining approaches from both fast-fashion retailers and value-focused retail chains such as Marshalls or T.J. Maxx. Even if you don’t currently operate any physical stores, there are still many lessons that full-price retailers can learn from off-price chains and apply to their own business model.
Consumers Are Becoming More Discriminating
Consumers are becoming more discerning and are seeking value in their purchases. According to new research, 82% of consumers want to buy a good value consumer brand, and they will walk away if they don't match. This indicates that consumers are more selective and are more likely to take something they want if they feel they’re getting a good value deal. Retailers are expanding their assortment in response to changing consumer demand. The rise of e-commerce, private label products, and new categories such as WFH (work from home) apparel and accessories are creating new challenges for traditional retailers. Because of these new demands, consumers are taking more time to find the right product and are not as impulsive. They are more likely to buy a product when they see the value in it, such as quality materials or innovative design, at the right price.
Loss Aversion Is Making Consumers More Risk Averse
Loss aversion is the psychological concept that people will go to great lengths to avoid losing what they have, even if gaining something else is equally or more valuable. Retailers are using loss aversion to drive sales and encourage consumers to buy full-priced products. This strategy is particularly effective when the value of the product is not easily quantifiable, such as a unique design or limited-edition piece, or if it has sentimental value. Many retailers are using limited-edition items, manufactured in small quantities, to drive demand and appeal to loss aversion. For example, Macy launched its Backstage product assortment that follows off-price retail strategy. The assortments are limited editions, discounted, and highly desirable.
The Importance of Timing
Consumers are now more aware of the lifecycle of a trend, less inclined to buy full-priced products, and more likely to wait for a sale. If a trend is seasonal or short-lived, consumers will wait for the item to go on sale rather than purchase the full-priced version. Retailers must work to close the timing gap between the trend’s peak and the product being available at full price. For example, if a trend is heavily featured in the run-up to the holidays, it might already be on the decline in terms of popularity by the time the holiday season ends. A retailer that can capitalize on the trend while it’s still relevant and then offer the products at full price later can close the timing gap.
Off-Price Chains Have a Competitive Advantage in Selection
Off-price chains have a competitive advantage in selection because they can sell the full product assortment, but at a lower price. There are two big implications for this. First, it means that off-price chains do not have to make the same design sacrifices as full-price retailers that are looking to reduce the number of products in their assortment to reduce markdowns. Second, it means that off-price chains can stock more product variations. Full-price retailers can take advantage of this by combining an online-only model with an off-price product assortment. This allows the retailer to offer a wider range of products and reduce markdowns at the same time.
Off-Price Chains Use Data to Reduce Losses Due to Returns
Retailers are looking for ways to reduce the number of products they have to discount and the amount of merchandise they return. A significant number of full-priced retailers have adopted an off-price model and now accept the returns that are common among off-price chains. Retailers are now using data insights and return analysis to determine which products to accept as returns, and which products to keep in inventory. Usually, a product will be returned because it does not fit well or because it does not match other items in a consumer’s wardrobe. Using data to identify these products before they are returned can reduce the number of returns retailers have to accept, which leads to less discounting and fewer markdowns.
Consumers Want High Quality at a Good Price
Off-price chains are known for carrying mostly low-priced items. However, these retailers are expanding their assortment and offering products with higher price points. They are using data to inform their assortment strategy and test which products to add to their assortment. Their unique product assortments mostly come from reputed trade shows such as OFFPRICE Show, which offers quality products at affordable prices. Full-price retailers can take advantage of this by being more transparent about their supply chain, shipping methods, and product construction. We recommend that you use your product data to show the consumers what they’re buying. For example, you can use product data to show the materials used in your products, share the country of origin, or provide details on the shipping carrier.
Full-price retailers can benefit from studying the business model of off-price chains. Doing so allows them to increase their profitability by reducing markdowns and returns and by offering products with higher price points. This can be achieved by making smart design decisions, adopting an off-price assortment strategy, and better communicating the value of their products to consumers.