Off price retailers are retail businesses that offer merchandise at lower prices than regular retail stores, by implementing a mixture of buying strategies and lean operations models, that allow them to pass the savings achieved by those models to their customers.
Types of Off Price Retailers
The three main types of off price retailers are:
- Factory outlets
- Independent retailers
- Warehouse clubs
In addition to those types of off price retailers, there are businesses that have started as a small operation and then expanded into big off price retail chains.
The Business Model
Off price retailers follow the traditional retail business model, with a twist when it comes to the profit formula.
The customer value proposition for off price retailers is to deliver a good product assortment at the lowest price in the market. Low price is what will bring customers in the first place.
The profit formula in a business model defines how the business will generate profits, while also delivering the customer value proposition.
This is defined through:
- Revenue Model: How the business will generate revenue and how much
- Cost Structure: What the business needs to spend on, in order to deliver the value
- Margin Model: The difference between revenue and costs
- Resource Velocity: How fast the business needs to turn its resources to deliver the value proposition to profit for the business
The dilemma in off price retailing is how to stay profitable while selling at lower margins, and the key here was the resource velocity.
Resource velocity is how fast you need to turn your resources (here inventory) to deliver the value proposition and generate profits, and in this case if the business succeeded in turning its inventory fast, it will generate profit with each turn and overall will generate high profits at P&L level at the end
So, in order for off price retailing business model to work, the following key success factors needed to be present.
The Keys to Success for Off Price Retailers
1. High Inventory Turnover
Because the lower prices at off price retail stores will result in lower gross margins, the key to profitability is to have more inventory turns. This is achieved by holding low average inventory and launching newness more frequently.
While the average inventory turnover for department stores in 2019 was 3.7 turns per year, the inventory turnover of TJX was 6.2 turns. This has resulted in a higher GMROI and also higher pre-tax profits.
Source: our retail benchmarks calculations, using data from select publicly traded retailers for FY 2019.
We explain inventory turnover in details in this video
2. Smart Buying
In order to be able to offer merchandise at such low prices, off price retailers will have to get creative with their buying and use a mix of different buying sources.
These sources include:
- Closeout deals
- Past season merchandise
- Department store cancellations
- Private label manufacturing
Furthermore, off price retailers don’t stick to the regular seasonal buying like other retail chains. Instead, they maintain a rolling OTB, and use the available purchasing budget at any given time to take advantage of merchandise deals that arise.
Lower Depth & More Freshness
As we mentioned, the main rule is to keep inventory at low levels and turn it faster. What this means while buying is that they don’t buy in high depths, but rather few pieces per SKU, which then sell fast and be replaced with other collections.
It is not unusual to see new merchandise dropping in stores every week, or to have no replenishment for the sold items at the warehouses. This also encourages customers to buy the item while it is still there, and not wait for the next time or for any discount.
Which takes us to the next point..
3. Everyday Low Price Strategy
Off price retailers generally follow an everyday low price (EDLP) strategy. This simply means that prices are set low from the start, and are not expected to be reduced further.
Regular retailers, on the other hand, follow a planned markdowns strategy, where they launch at high prices (full price), and then markdown as the season goes by. This results in higher margins, and in having the most attractive merchandise sell at higher prices and the leftover sell at low prices. But it also results in having many customers wait for the sale, which is not the case for EDLP strategy.
4. Flexible & Efficient Merchandising & Display
Unlike luxury retail and premium brand stores that have a more relaxed and spaced out display on the floor, value retailers generally try to maximize their sales per square foot, and hence tend to have a more condensed display, in order to sell the most amount of inventory.
Also, the fact that their buying is not regular, and the merchandise that is coming to the stores can vary from time to time, requires them to have a more flexible approach to visual merchandising. This comes in the form of moving fixtures around regularly and changing rooms and departments based on the current inventory at hand.
5. Lean Operations
One of the reasons they are able to offer low prices to customers is that they follow a lean operations model. This means less staff on the floor, and the ones available are mainly for cashiering, receiving shipments and merchandising.
Learn about more alternative business models in retail at the Retail Growth & Expansion Course