Apparel retail has never been for the faint-hearted, and today the segment has retailers by their throats. Customers don't want to pay full price for apparel and few need dressy clothes. These casual and budget-minded shoppers are more likely to take fashion cues from Instagram than from designers. That leaves a vast wasteland of specialty retailers to fritter time on efforts that keep missing the mark, so the business is now more cutthroat than ever.
By the end of 2019, 10 of the 16 major retail bankruptcies were filed by companies that mostly or exclusively sold apparel and/or footwear: Forever 21, Avenue, A'gaci, Barneys New York, Charming Charlie, Diesel USA, Payless ShoeSource, FullBeauty Brands, Charlotte Russe and Gymboree. Several others not in (or, apparently, near) bankruptcy have also announced closures. Among them, Express tagged 100 stores to shutter by 2022, Macy's is closing 29 locations this year, Gap last year announced 230 namesake stores would close, and teen retailers American Eagle and Abercrombie & Fitch are both right-sizing their footprints.
Moreover, apparel rental options from Rent the Runway, Urban Outfitters' Nuuly and Le Tote are also "taking away from apparel buying," Roxanne Meyer, managing director at MKM Partners, told Retail Dive in an interview. "It's a substitute."
And then, there's off-price. The model seems to endure no matter what — attracting shoppers of all ages and incomes, in all kinds of economies. It's particularly attractive in an era when the middle class is challenged, experts say.
"Off-price stores can help provide price relief during a more challenging economy. But, even in times of economic growth, these stores still do well," Rod Sides, vice chairman, Deloitte LLP and the firm's U.S. retail and distribution sector leader, told Retail Dive in an email. "Overall, for a significant portion of the population, price and value are important from an income standpoint, and off-price is therefore very relevant and successful."
And its players are actually opening stores. For example, Ross opened 100 last year, Macy's is expanding its relatively new Backstage effort, and market leader TJX Cos. in the third quarter boosted its global store count by 107 for a total of 4,519.
"Apparel did eke out 1% growth on top of a very strong 7% last year, so I don't think apparel as a category is dead. It's more about certain pockets seeing outside growth," Meyer said. "One of the most important to note is off-price stores — with TJX as the leader. Apparel sales are going to off price. And it's not all apparel — beauty and home are doing quite well as well."
The upside of inventory error
Department stores' inventory woes last year contributed to what Meyer, in an earlier note, deemed one of the most promotional holidays on record. But that has off-price retailers' licking their chops. The segment has long benefited from a pipeline of unsold merchandise from department stores, and any inventory misstep means more designer and brand-name goods for their racks.
Some of that bloated inventory came from early merchandise orders designed to beat tariff deadlines, so much of it may be relegated to the last half of last year, Meyer said. But she contends that off-price retailers are increasingly also able to source merchandise from online pure-plays, which mostly continue to struggle with the high rate of returns in e-commerce, especially for apparel, and where demand planning is "tougher" compared to the "formulaic" systems at physical retailers.
That's been an issue from the start, but e-commerce apparel sellers should nevertheless encourage returns, in order to foster trust and work with how consumers treat online apparel try-ons, according to Kate Klemmer Terry, chief revenue officer at Quiet Logistics, who previously worked in e-commerce operations at Tommy Hilfiger, Kate Spade and Ralph Lauren. They can lower returns with better videos, size suggestions, reviews and other information, she said, but ultimately should accept them with a smile.
"When you make the return process easy and forgiving, you get more conversion and more sales — you're still netting out with more sales in the long run," she told Retail Dive in an interview. "Plus, I'm encouraging you to return because in essence I think you will keep more if you try more."
But, for online apparel retailers, accepting and repackaging returns is a time-consuming and involved process, and few have their own discount outlets (or, in some cases, any stores at all). Off-price retailers to the rescue, Meyer said, noting that items from well known e-retailers have been showing up at off-pricers of late. In fact, Nordstrom Rack and Rent the Runway proved her hypothesis further with their tie-up announcement last week. Their "Rent the Runway Revive," program is bringing items out of circulation at the apparel rental company to sell through at select Nordstrom Rack locations.
The sustainability argument
Sustainability has emerged as a key attraction for younger consumers, and that includes fashion. Where does that leave off price?
Concerns around sustainability are endangering fast fashion and even apparel e-commerce, according to Thomai Serdari, a professor of luxury marketing and branding at New York University's Stern School of Business.
So far, off-price retailers have stayed away from the issue. But, in its letter to customers announcing its Nordstrom Rack partnership, Rent the Runway characterized the tie up as the result of its exploration of "new, sustainable ways to provide more women with more access to designer fashion. Because having great style while helping our planet is no longer the future, it's now — just as it should be."
"Sustainability is certainly something that is important to shoppers, particularly those of younger generations. However, I haven't seen off-price store's successes being attributed to sustainability."
Vice Chairman and U.S. Leader, Retail & Distribution, Deloitte LLP
However, while some researches have also posited that off-price retail is a sustainable option for eco-minded consumers — the idea is that such outlets give apparel "a second life" — most customers don't see it that way, and simply go there for a bargain, according to Linda Welters, professor of fashion merchandising and design at the University of Rhode Island College of Business.
"Some companies in the off-price category manufacture their own products for sale in their stores," she told Retail Dive in an email. "Consumers mostly don't know the difference because the products bear labels with names that are not the store's name. They might think it's a brand they haven't heard of. The relationship to sustainability is unintended in my opinion."
In fact, some of the largest off-pricers "have a pretty sizeable portion of their goods made for them, and are not part of the close-out model," said Deloitte's Sides. "Sustainability is certainly something that is important to shoppers, particularly those of younger generations. However, I haven't seen off-price store's successes being attributed to sustainability."
Indeed, from a marketing standpoint, it may be risky, because it calls attention to the fact that off-price collects what essentially amounts to unwanted merchandise, according to Alex Fitzgerald, manager in the consumer and retail practice of global strategy and management consulting firm Kearney. But mostly, it's just not true, according to Serdari. "Off-price does not make up for the volume of inventory that has already been produced — and in that sense, it has already harmed the environment," she said.
Internet proof, and internet bound
The real final frontier for off-price, a retail segment consistently described as "internet proof," is not likely sustainability, but e-commerce — a channel until recently neglected by these stores.
The off-price offer is not just low-priced apparel, but also a hunt for labels theoretically costing well below their suggested retail price. More recently, though, off-pricers are finally selling more online too. TJX's Marshall's last year joined sister banner TJ Maxx in making its site shoppable, for example.
They need the opportunity, considering that they are already increasingly competing with each other rather than with department stores, according to UBS analysis last year.
"There's a huge potential for off price to move into the digital world, it's not a new concept for them," Kearney's Fitzgerald told Retail Dive in an interview. "But what we do see as they search for continued growth, and as expectations of them remain high, is that e-commerce is where they'll seek that growth."
However, Fitzgerald sees a blurry play that retains the treasure hunt atmosphere best offered at stores. "It's also being dictated by the consumer, who has really moved to omnichannel," she said. "So it's less about the digital, but more about really getting the omnichannel piece right. Because their stores have been the secret to their success, and they don't want to lose that."