Moody’s: Off-Price Retail Will Outpace Competition

According to a Moody’s Investors Service sector in depth report, off-price retail’s ability to deliver major label brands at significant discounts to value-hungry consumers will continue to provide a leg up on the competition, with the home business making a contribution.

The report detailed how the off-price sector would outperform much of retailing in the next few years, particularly the department store channel. Weak mall traffic has accelerated off-price initiatives at department stores, even as they differentiate product offerings and customer experience to woo consumers who have been less enthusiastic about the channel.

The market research and ratings firm stated that it expects off-price sector revenue to grow by 6% to 8% in the immediate future.

Moody’s asserted that the off-price business model is difficult for new entrants to replicate, so it expects the four main incumbents, TJX Cos., Ross Stores, Burlington Coat Factory and Nordstrom Rack to remain dominant. The expectation remains even as some large department store competitors such as Macy’s and Hudson’s Bay Co. increase square footage dedicated to off-price retailing. The sector should gain from the well-established advantage the big incumbents have in operating scale, flexible purchasing, solid and expanding vendor relations, and adaptable real estate strategies, Moody’s maintained.

Another element that should propel the sector is the home category. Revenue for home categories at off-price retailers grew almost 13% in 2015 versus growth of about 3% for the overall segment, Moody’s reported, adding that TJX posted 14% sales growth for its HomeGoods division last year and intends to expand the operation’s store base by 9.5% with an additional 50 stores this year.

Even within that home goods universe, the off-price sector has enjoyed relatively strong results. For example, the home category as tracked by Moody’s, including household textiles, glassware, tableware and utensils, saw growth, but on a declining scale between 2014 and 2015, from just over 5% to around 3%. In the meantime, off-pricer home merchandise sales advanced from a growth rate of about 10% to one of more than 12%. Moody’s expects those growth rates to settle in at about 4% and 10% respectively for the next three years.

The ability to source disparate product categories within the off-price sector helps retailers participating in the channel leverage broader shifts in consumer demand. Moody’s pointed out that Nordstrom Rack, with less exposure to home categories, recorded a 1% decline in comparable store sales, without online contributions, for fiscal 2015. In contrast, the three other major off-price retailers, which sell more home merchandise, recorded comp gains.

The brick-and-mortar model remains the key to growth in the off-price sector. Although most of the off-price incumbents have implemented online initiatives, part of the value proposition for the channel is the treasure hunt that shoppers experience in stores, which is difficult to replicate online.

The robustness of off-price store traffic patterns suggests that consumers see value in the in-store presentation and product selection within the stores, Moody’s noted, adding that major competitors expect to grow their store square footage in the U.S. by 4% or more this year.