The economic slump is proving to be a blessing for branded discount chains, as shoppers seek quality product at low prices.
Where does a discerning, strapped-for-cash shopper in search of a bargain go in today’s tough economic climate? A branded discount retailer, it would seem.
Last week, TK Maxx, which is owned by US retail giant TJX Companies, reported that like-for-like sales at its stores in the UK and Europe were up 5% (in GDP terms) in the first quarter of this financial year, while net sales climbed 13% to US$495 million (£254.5m) for the 13 weeks to April 26.
Other off-price chains, including The Original Factory Shop, and designer outlet operator McArthurGlen, have all reported like-for-like growth for the first quarter while many traditional value market retailers, notably Ethel Austin, Select, Internaçionale and MK One, have struggled to stay afloat.
Clearly, retailers whose offers rely on price alone are struggling in a consumer downturn (unless your name is Primark), but those that combine low prices with brand status are emerging as winners. In fact, branded discounters have found a way to profit directly from the downturn by buying better stock in bigger quantities and at lower prices, thanks to the mountains of excess stock in the warehouses of branded suppliers.
According to off-price buyers, the market is awash with product from big global brands that had to buy additional stock to placate investors to make up for a lack of forward orders from retailers, who have battened down the hatches and trimmed their buying budgets. The result is they are now desperately offloading stock to off-price players.
One buyer says the situation has played right into his hands, and that his discount stores are experiencing double-digit growth. “The big brands, particularly those under pressure to show growth, have to buy loads of stock to appease the City,” he explains. “The result is that they have a lot of product to clear, which in turn means there are great deals to be done on what are really good product styles. It’s only May and the brands all want to get rid of stock now. We are making brands offers on spring 08 stock that isn’t even being discounted in mainline high street stores yet. That shows just what the situation is.”
He adds that where the product is good, the discounts passed on to the consumer can be at a slightly lower level and still achieve good sell-throughs, which boosts margins. “That’s why the likes of TK Maxx are having a field day at the moment,” he says. “When the economy is slow, off-price businesses go through the roof, as desperate suppliers look to offload good stock at dirt cheap prices.”
One TK Maxx supplier says he is doing “substantial” business with the retailer this season. “TK Maxx has managed to get its hands on better stock and more of it,” he admits. “The buyers can be quite pushy on price, but as a supplier you know you’ll get the order, so it’s a good retailer to work with. TK Maxx is a discounter that gets it right – shoppers find great brands there at amazing value and it offers genuine value for money.”
Further evidence of TK Maxx’s opportunism lies in its Big Label Fortnight, involving a “special” delivery of casualwear, which started in stores on May 21. A spokeswoman explains that The Big Label Fortnight is not a scheduled event. “Every now and then we get amazing deals, so we like to publicise these special deliveries – everything from homewares to lingerie. In this case, it’s fantastic casualwear.”
A second TK Maxx spokeswoman adds: “Off-price is delivered via a unique business approach, and rooted in an opportunistic approach to buying. We have a huge team of buyers – much bigger than average – working directly with brand owners and designers all over the world in a unique way, and so securing great deals for our shoppers.”
Carol Ratcliffe, retail analyst at Verdict Research, says TK Maxx has been growing market share over the past few years and is “coming into its own”. She explains: “TK Maxx is very well pitched and is different to other value retailers because it has a broader appeal. Price is so widespread now that quality, which is associated with branded product, is a key driver for where consumers choose to shop.”
TK Maxx isn’t the only branded discounter enjoying healthy sales. George Foster, chief executive of The Original Factory Shop, believes the outlook is good for the sector for the rest of the year. Like-for-like sales at The Original Factory Shop are running in high single digits already this month.
Foster says: “The dicount end of the market is holding up well in these tough times, but only if you get the offer right. No one can beat Primark on price and the supermarkets, with their footfall, are gobbling up the value end. But like TK Maxx, we trade on brands at great value – that’s the difference.”
He admits that there is a lot “more stock about” than normal because of the difficult trading climate, which is boosting business for the company. The Original Factory Shop is so confident in the market that it plans to open between 15 and 20 stores this year, taking its portfolio to more than 100.
In addition to the great deals available on surplus stock, the discount sector has benefited from consumers who want to trade up but make fewer purchases because of the tough economic environment. Brands are seen as better quality, but savvy shoppers are still looking for a bargain, meaning TK Maxx suits them down to the ground.
The off-price buyer explains: “In an economic downturn the thought process is that consumers want to trade up to fewer, better quality items, which drives them to brands. They spend a bit more but buy less often, and we are seeing that in our mainline business. But you can’t hide from that savvy shopper who wants the same thing, but still wants it cheaper from an outlet store. It’s double edged.”
Henrik Madsen, UK regional director of McArthurGlen, which operates seven designer outlet centres, including Cheshire Oaks in Chester, said all its centres have shown a like-for-like increase in sales for the first quarter. “We’re offering discounts of up to 70% on quality brands, and that kind of offer has become more attractive to shoppers since the credit crunch,” he says.
A TK Maxx spokeswoman agrees. “We see our customers as being both value- and fashion-driven. We define value as a combination of fashion, brand, quality and price – this is what differentiates us from other retailers and enables us to deliver a shopping experience where consumers can find great prices without compromising on quality,” she says.
Madsen adds that McArthurGlen has experienced an uplift in traffic from shoppers who would normally buy from full-price premium high street chains. He says this is partly as a result of the introduction of more upmarket brands to its centres such as Kurt Geiger, All Saints and Mulberry, but that this has also been driven by shoppers becoming more conscious of value for money and their spending power.
Madsen adds: “High street retailers and brands seem to be turning over their stock much more quickly, either putting it into Sale or sending it to outlet centres if it doesn’t sell in order to make room for more full-price stock and more newness in their stores. This year will be challenging for all sectors, but McArthurGlen has a bit of an advantage because we offer brands at a discount.”
TK Maxx’s big deal:
From May 21 to June 8, TK Maxx is offering up to 60% off the RRP on a “special delivery” of branded casualwear from what it says are the “world’s hottest lifestyle brands.” The selection for its Big Label Fortnight includes jeans, T-shirts, vests, sweatshirts, hoodies, dresses and polo shirts from street, surf and skate labels.
T-shirts, vests and polos at between £7.99 and £9.99 (RRPs £20 to £50);Dresses from £9.99 to £12.99 (RRPs £40-£120);Jeans at between £16.99 to £24.99 (RRPs £45 to £100);Sweatshirts and hoodies priced from £14.99 to £19.99 (RRPs £35-£65).