What happened to off-price retail this year?

Off-pricers have enjoyed a certain durability uncommon to retailers that sell mostly apparel. They tend to shrug off macroeconomic challenges and often thrive as other retailers falter. These players did relatively well during the Great Recession and even rode out the pandemic despite most having little to no e-commerce. The three major chains, TJX Companies, Ross and Burlington, bounced back from that last year and often beat expectations.

There are various reasons for this. For one thing, consumers from all income groups frequent their stores — for the cheaper prices, the treasure hunt or both. For another, supply chain disruptions that wreak havoc on wholesalers, department stores and specialty stores sometimes translate to a refreshed pipeline of merchandise for off-price stores. And their rejection (or at least minimization) of online sales means they are meeting their customers where they shop the most (in stores), and spares them the steep costs of online fulfillment, delivery and returns.

This retail segment retains its advantages, and analysts generally expect them to continue to thrive, especially starting in 2023. This year, however, seems different. As inflation has warped consumer behavior, the three main off-pricers are in different situations, and are taking different tacks, according to Jane Hali & Associates analyst Jessica Ramírez. That explains their divergent Q2 results.

“Some of the off-price retailers are better set, either because of the consumer that they have or because of the assortment they have,” she said by phone, noting that higher-end, name brand goods are found at TJX lately, while Ross and Burlington, whose customer base is more dominated by lower-income consumers, are struggling to coax people in. “So I think there’s a there’s a bit of a different story across each one of them.”

But even leader TJX, which runs off-price favorites Marshalls, T.J. Maxx, HomeGoods and other banners, saw its U.S. comp sales fall 5% in the second quarter. This is a sign that the off price model’s usual draw in times of uncertainty isn’t what it once was, according to GlobalData analysts.

“Economic downturns are normally a favorable headwind for off-price retailers as they blow more customers looking for bargains through the doors,” GlobalData Managing Director Neil Saunders said by email. “However, this usually resilient segment of retailing is not currently seeing this benefit play out as it used to.”

Saunders agrees that the various players also are grappling with their own idiosyncratic challenges, depending on who their customers are and other factors. But he pinpoints various reasons why the model itself is less buoyant, starting with the plethora of lower-cost choices in home and apparel — including resale, which he called “a serious alternative for those looking to save money.”

Credit Suisse analysts led by Michael Binetti similarly note that off-price retailers seem to be facing more competition. For years department stores in particular have given up market share to off-price retailers, a showdown that started in the 1970s. But several retailers have reported a need to use promotions to clear inventory over the summer, and Ross Stores, for one off-pricer, didn’t see as much shoppers trade down to its stores, Binetti said in an Aug. 18 client note.

“We wonder if the [department] store/mass channels are more battle-ready to defend share from Off price vs past downturns,” he said.

Moreover, unlike in the past, off-price retailers aren’t immune to many of the elements unique to current macroeconomics, Saunders said. That includes the fact that consumers are well stocked in the merchandise found at off-price retailers, mainly apparel and some home goods. That not only makes year-over-year comparisons tough, but also makes it easier for people to cut back. And off-pricers, usually known for their procurement and merchandising prowess, haven’t been able to avoid disruptions lingering from pandemic-related supply chain shocks, according to Saunders.

“The assortments in off-price are reasonable but ranges are not quite as sharp as usual,” he said. “Obviously, this damages sell through – even if only marginally.”

Finally, inflation, which is reshaping consumer behavior in a way that’s unhelpful to all retailers selling discretionary items, wasn’t the dominant feature of previous economic downturns like the global financial crisis.