The Rise of the Discount Department Store

The Rise of the Discount Department Store

Discount retailer TK Maxx (well actually its American sister TJ Maxx) was labelled as "Macy's worst nightmare" back in 2016 by Business Insider.

Why? Because consumer buying habits were changing and shoppers were becoming increasingly motivated by purchasing at a discount. Added to the fact that overheads at discount stores such as TK Maxx are, as a percentage of sales, about half that of traditional big department stores and you can see the problem that was brewing.

Fast forward a couple of years and chuck in a toxic mix of fiscal pressures on both retailer and consumer wallets and we can see the impact on some of the UK’s best known department stores - think House of Fraser, M&S and Debenhams.

House of Fraser have just enjoyed a reprieve from their creditors thanks to a radical store closure plan and M&S are also moving away from their "store in every town" pledge and closing stores to try to stem rising loses.

On the other hand TJX the US owner of TK Maxx, Britain’s best known discount department store has seen rising profits and has been adding real estate, albeit much of it in cheaper out of town locations, although not always, as in Edinburgh they recently opened a prime city centre store.

How can this be?

Well, discount department stores are a bit of a rarity in retail at the moment as shoppers are still choosing to come into stores and footfall figures are rising. This is explained by the smaller stock quantities, quicker inventory turn around and the sense that an item on a rack may not be there the following day, as well as the thrill of getting a bargain.

But do these discount department stores represent purely bad news for traditional fashion retailers?

I don't think so.

Given that so many retailers are currently struggling with an overstock problem these discount retailers could be just the way to clear this allowing them to start afresh with the right product for future consumers. Obviously if they had got the stock mix right at the start they wouldn’t have to clear product in this manner.

The majority of retailers are currently trying to shift this overstock by increasing the volume of items being sold on sale and at a discounted price but through their own distribution channels and to the same customer base who weren't prepared to pay full price for the very same items.

Adopting this intelligent discounting theory works by separating discounted products from the core brand - targeting different customers and customer demographics,meaning these discounted products still emphasise the brand and product value but because they are offered separately from the parent retailer and to a different customer base the discount doesn't erode the price point that core consumers are willing to pay and doesn't condition them longer term to seek a discount.

Therefore, to my mind, high street retailers with an overstock problem could do worse than to partner up with these discount department stores to shift unwanted product without damaging their brand value. They could even follow Ivanka Trump’s lead - when her clothing line was dropped by a series of US stores following her father’s election win her range started popping up in UK TK Maxx stores!

That’s not to say the working with stores like TK Maxx is always an easy win for all retailers and brands, of course there is an element of brand damage from having your products appear in discount driven stores but the huge piles of excess inventory currently crippling the finances of many retailers calls for drastic action.

This model of course has also moved online with the likes of Brand Alley and Secret Sales growing fast in the UK. Whilst these sites appeal to the designer brand hunters they’re not for the standard high street retailers and their margins are often even more aggressive than TK Maxx.

Offloading stock to discount department outlets is obviously a short term fix to retailers current overstock issue, longer term the focus needs to be on getting the product/consumer fit correct and offering consumers the product that they actually want and are willing to pay full price for.

Mallzee Insights helps brands and retailers create the right product for their audience through consumer testing and benchmarking against over 3m products.

Cally Russell

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