Off-Price Retail Landscape Explained

Off-price retail is growing faster than any retail sector. But what is it and what makes it so successful? In this brief guide, we’ll take you through off-price retail and explain exactly what makes it so appealing to brands and consumers alike.

INTURN is the only enterprise inventory optimization solution empowering brands to efficiently sell slow-moving and excess inventory to retailers and recover cash faster. Learn more about our solution and see how INTURN can help optimize your off-price business.

1. What is off-price retail?

Off-price is the selling of branded or designer items to consumers at significantly lower prices than full-price stores.

Brands have excess inventory that they are unable to sell at full-price (or even at a slight discount) in stores, and in order to have proper cash flow and be successful in business, they have to find a way to sell this inventory. They typically look to off-price retailers to purchase their product at 40-60% off of the wholesale price, usually taking whatever they can get for their unwanted goods. Excess inventory can occur for many reasons, such as cancelled orders, off-season product, overproduction, manufacturing errors, among other things. It is inevitable in the retail industry.

Because off-price retailers buy products at such a low price, they can still turn a profit by selling it to consumers at significantly lower prices than those found in boutiques, department stores, and other full-price retailers.

2. How does off-price retail work, and where does excess inventory come from?

Off-price exists because of excess inventory in the market, which can be caused by a number of reasons:

Economic Instability

Unpredictable Demand for Product

Changes in Consumer Spending Habits

Purchasing Setbacks, Credit Issues

Unexpected Weather Fluctuations

Excess inventory can be either a potential loss of revenue or a huge opportunity to unlock cash flow, depending on a brand’s strategy.

Brands are often stuck selling excess inventory below MSRP. As time goes on, both consumer demand and the value of the products decrease, making it even harder for brands to offload their excess inventory. Holding costs like warehousing, insurance and taxes also cut into revenue. What’s more, slow monetization of inventory affects a business’s freedom to take out loans at the best rates, further inhibiting their financial situation.

This is where off-price retailers come in. They operate by buying products from thousands of different designers, capitalizing on the unpredictable nature of consumer demand and errors made in the production process by outlets looking to ensure that their stores are always stocked.

However, this is hugely beneficial for manufacturers looking to shift excess units in order to recover some of the money that would have otherwise been tied up. Off-price retailing is therefore made possible and acts as a solution for manufacturers.

3. What are the benefits of off-price retail?

With off-price retail comes many benefits to a number of different groups:

Consumers

It makes sense that consumers are big fans of off-price retailing. After all, off-price retailers sell brand name and designer products for a fraction of their original price, enabling customers to browse bargains whenever they want and eliminating the need to wait for annual sales. For consumers, part of the original attraction is that they have no idea what they are going to end up buying when they enter the store. It’s like a treasure hunt for the best deal, price, or item.

Off-price retailers

The off-price retail business is entirely dependent on excess inventory and is thriving more than ever before, as buyers have become accustomed to discounts and enjoy hunting for the best deals available. With an ever-changing stock, off-price retailers are in a much stronger position to keep their customers engaged than traditional retailers. In many ways, the off-price retail business plan takes the volatile nature of the retail industry and converts it into a steady model for off-price retailers.

Brands

Off-price retail gives brands the opportunity to turn their inventory over and maintain a healthy cash flow. Since excess inventory ties up cash, the advantage to sell it to off-price retailers allows brands to hit their margins by shifting stock and recovering revenue that would otherwise be tied up in goods form. Off-price also offers a solution for brand manufacturers looking to become more sustainable. Brands can extend the product lifecycle, ensuring the energy pumped into the supply chain doesn’t go to waste, whilst reducing the greenhouse emissions that would inevitably come from destroying unused goods.

4. What is the difference between off-price and full-price?

The differences between off-price and full-price go beyond costs.

Negotiating

Off-price retailers negotiate on discounted prices, whereas full-price retailers negotiate for better payments terms and gross margin deals.

Buying timeline

While full-price retailers buy products 6-9 months in advance of being sold in stores, off-price retailers buy products only 1-3 months in advance.

Stock

Full-price retailers get their pick of particular styles and quantities to stock. On the other hand, off-price buyers buy whatever is left over, choosing from the remaining selection still available.

Challenges

While full-price buyers need to be in touch with what consumers want and what items are on trend, off-price buyers need to be strategic with how they price their items to increase demand for their items.

5. Which industries are impacted?

Off-price is becoming an increasingly bright spot for industries. As more and more customers come to favor off-price, here are some industries that are benefiting the most:

Fashion

Consumers want the latest trends and the unpredictable nature of their habits means the fashion industry has to keep up with increasingly fast turnover. In recent years, several fashion brands have faced tremendous scrutiny over the destruction or discarding of excess inventory and the negative environmental consequences that result. As a result, brands are starting to explore alternative methods for moving slow-moving and overstocked items in a more sustainable way.

CPG

Consumer packaged goods (CPG) brands are faced with the reality of having to carry more inventory to keep up with consumer expectations as demand increasingly becomes more volatile. Food, drink, makeup and household goods and more needing to be regularly replenished, an unpredictable demand pattern can cause problems that result in slow-moving, obsolete and excess inventory.

Home Goods

As disposable incomes increase, so too does consumer interest in home goods. With home furnishings and decorative items so readily available for consumers to purchase whenever they want, the industry is currently booming – being expected to reach over $700 billion by 2025. Unfortunately, as soon as the market turns, home goods are usually the first industry where consumers cut back. This means brands may suddenly find themselves with an abundance of stock that they cannot shift.

6. Why is off-price thriving, while department stores struggle?

While off-price continues to flourish, it is not without an impact on other parts of retail, namely, department store chains. While off-price stores like Target are seeing shares surge by up to 90%, it is clear that brick and mortar is struggling – with an estimated 2,600 stores expected to close in 2020. 

The unique business model of off-price retail has proven to be a hit with consumers, and it is looking increasingly likely that this sector will become the main beneficiary of brick-and-mortar sales volume. In a world of fleeting fashion trends and unpredictable weather fluctuations, off-price is able to cater to a range of needs without enduring the lengthy department store process of buying clothes from sellers months before clothes are due to arrive in stores. In contrast, the off-price model is adaptable to changing needs while having proving an effective structure to keep customers engaged, allowing them to browse bargains without having to wait for sales season.

7. How can brands optimize their off-price business?

It can be difficult to know where to start when optimizing for off-price. You don’t simply want to sell your products to buyers who will purchase the most; you also want to optimize the value of your inventory to help hit your margins. Here are some best practices in doing so:

1

Updating your backend systems

While it can be easy to let this drop down the priority list, ensuring that you have a solid internal infrastructure is integral to your success. Updating legacy systems, such as your inventory management, image management, markdown optimization and invoicing/PO, is key. And it’s important that you replace any outdated processes as well as systems to ensure that you’re bringing improved visibility and structure to your inventory tracking and overall off-price business performance.

Action

Aggregate and provide all available product information to buyers in a clear, comprehensive manner in order to increase buyer confidence and purchasing prices and enhance existing relationships.

2

Determining what inventory needs to be marked down and sold

Products can reach a range of locations during their selling lifecycle as a result of unexpected returns, cancelled orders and changes in shipping processes. Poor reporting systems only worsen the situation, leading to further misjudgements over inventory levels.

Having a clear and up-to-date reporting platform is therefore essential. Take full stock of products across all wholesale, retail and e-commerce stores and ensure that you collate this information to help you locate the places where your cash is tied up in.

Action

Get all of your reporting up-to-date and aggregated for each channel of purchase to give you a clear real-time view of the inventory situation and where your cash is tied up.

3

Optimizing your buyer network

Timing is everything – a huge element of your success is finding the right buyer for your inventory in the right market at the right time. The ideal buyer isn’t always the one with the highest market demand for your product, with there being a number of other factors to consider like ease of communication and whether they have a customer base that fits with your brand.

Review your current buyers and reach out to new ones in domestic and global markets. Doing so will help you work towards your ultimate goal of selling inventory with the highest profit margin.

Action

Vet your current buyers, and reach out to new buyers in both domestic and global markets in order to sell your inventory with the highest profit margin.

4

Providing buyers with detailed product information

No one wants to blindly commit to a purchase. Detail is everything, and buyers who are purchasing items based only on a text description are likely paying a much lower price for those products because they’re not entirely sure what it is they’re buying.

Save buyers the trouble of Googling style numbers in search of more information by ensuring that your product listings include images, product descriptions, measurements, fabric content, material codes, product origin, color codes and country of origin. There’s no such thing as too much information, and providing such detail will increase buyer confidence and in turn boost your profit margin.

The proof is in the numbers – global apparel brands have seen an increase in recovery value of +50% on product listings with rich content. Multinational off-price retailers also project that they can save 100 hours per buyer per month with simpler access to inventory offers rich with product data.

Action

Aggregate and provide all available product information to buyers in a clear, comprehensive manner in order to increase buyer confidence and purchasing prices and enhance existing relationships.

5

Understanding your market demand

Offers that are curated for specific buyers in specific markets are much more likely to see products sell at a higher price as this means that buyers will also be able to sell products to their end customers at a greater price.

Determine the location and market where there is the highest demand for and lowest supply of your merchandise to allow you to sell your items for more. Through curating product listings for particular markets, multinational brands have reduced the time that off-price retailers spend on buying by 80%. Off-price retailers have bought 25% more units from these curated product listings, so it’s well worth doing your research to help buyers out!

Action

Find the location and market where there is the highest demand for and lowest supply of your merchandise in order to sell your products at the highest price.

6

Supporting a robust internal communications system

It might sound obvious, but strong internal communication is the key to your off-price success. Transparency and internal oversight allows for better management, informed decision-making and more efficient processes.

Employees spend 30% of their workday looking for existing company information. Optimize your work efforts by supporting a strong internal communication system. Collaborating saves time and money, streamlining processes and helping you turn over more inventory.

Want to learn more? We have more off-price resources for you here.

Action

Improve teamwork and internal insight in order to create a streamlined and efficient process for turning over your inventory.

8. What is the future of off-price retail?

Off-price is growing faster than any other retail sector. With retail being worth over $3 trillion in the global market, excess inventory is an inevitable part of the industry, and off-price is flourishing from this.

Increasing department store closures present a strong opportunity for off-price retailers to continue gaining market share, protected by their ‘more value for less’ business structure. Off-price is constantly hailed as the future, with the model meeting rapidly changing consumer tastes and customers having become accustomed to the low prices on designer brands.

“I believe we will start to see a moderation of growth in the off-price sector, mainly given the large number of stores being opened and the growing intensity of competition. A strong economy may also cause more customers to “trade up” to more expensive product offerings.” – Steven Dennis

“Consumers today not only look for a bargain, they’re looking for an immersive experience. The treasure hunt experience that the off-price model offers has led two-thirds of all shoppers to their stores. Off-price gives shoppers the opportunity to find the latest trends and brands they know and love at an attractive price. Consumers love to share the great deal they found with family and friends. This excitement encourages others to hunt for a great deal. We are confident that the off-price sector will continue to thrive, evolve and increase their footprint worldwide.”

– Katy Albrecht, www.offpriceshow.com

With growing concerns over the environment, brands are also under increasing pressure to take action in order to combat waste at every stage of the inventory life-cycle. With this in mind, off-price is becoming a more attractive solution for companies looking to shift older, slow-moving and excess inventory in a more sustainable way. If off-price’s success until now is anything to go by, the future is bright.