Discount Apparel Logistics: Outfitting the Outlets
As consumers embrace bargain hunting, off-price apparel retailers re-style their supply chains to meet demand.
Walk into any TJ Maxx, Marshalls, Ross Stores, or Burlington Coat Factory location and you’re sure to find killer deals on top-notch apparel brands. Ditto for visiting Web sites such as
"Consumers have a preconceived notion that they’re buying last season’s goods, but today off-price stores are selling merchandise designed and intended for the current season," says John Barbee, senior manager in the retail and consumer products division of New York-based consultancy Kurt Salmon.
How are these retailers able to offer desirable goods at such affordable prices? And what type of supply chain operations allow them to give consumers such steep discounts while still thriving and expanding?
The answers are complex—and hard to come by.
"It is a secret recipe of sorts," admits Marshal Cohen, chief industry analyst for global consumer market research firm NPD Group, Port Washington, N.Y. "Off-price retailers rarely discuss their sourcing strategies, or how much inventory they are purchasing."
"Their supply chains are their competitive advantage, so they are very protective of sourcing information," adds Barbee.
While the industry may be hush-hush about its operations, the off-price segment is clearly doing something right, because it continues to grow at a healthy rate. "Online is the only channel in the apparel industry that is growing at a better rate than off-price," Cohen notes.
The leading brick-and-mortar players in the off-price segment boast numbers that make "regular" retailers green with envy. TJX Companies (which operates both TJ Maxx and Marshalls) reports net sales for the first quarter of fiscal 2014 increased seven percent to $6.2 billion, and the company is "on the road to being a $40-billion-plus company," according to CEO Carol Meyrowitz. TJX operates 1,036 TJ Maxx stores and 904 Marshalls stores across the United States.
Meanwhile, Ross Stores Inc. posted fiscal 2012 revenues of $9.7 billion from the 1,112 Ross locations and 115 dd’s Discounts stores it operates. And Burlington Coat Factory boasts nearly $4 billion in annual sales from its 470 stores—which average nearly 80,000 square feet.
More in Store
That strong growth is part of a two-pronged strategy that has drastically changed the way the off-price apparel market operates. Thanks to all the shoppers who love the thrill of a good bargain, off-price retailers have continued to add store locations—meaning an increased demand for inventory to fill those stores.
"When you’re operating a few hundred locations, you can no longer rely just on getting the leftovers and remnants, or liquidating excess inventory," Cohen notes.
In concert with this growth spurt, apparel brands and retailers began focusing on tightening up their supply chains and inventory control to the point where they are not producing as much excess inventory as in the past. Again, this has left the off-price chains in need of more inventory.
"Traditionally, manufacturers cut thousands of garments and sold as many as they could to brands and retailers—then sold whatever was left at a discount to off-price retailers," Cohen explains. "But today, retailers, brands, and manufacturers are not looking to over-cut. They would rather sell out than have to sell off goods.
"Having less inventory is key to apparel brands’ profitability," he adds. "That has put greater pressure on off-price retailers to keep stores filled with merchandise."
As a result, off-price apparel retailers have tweaked their purchasing and inventory strategies in two ways. In addition to the traditional buying up of excess or remnant goods, they now commit ahead of time, in season, to purchasing product from manufacturers in order to guarantee inventory. In addition, some leading off-price players are now making their own branded-label merchandise to fill the stores.
"Large retailers such as TJ Maxx and Marshalls have begun buying out heritage labels and brands that they can build themselves," Cohen says. "This model gives them two advantages: it ensures a flow of recognizable merchandise, and allows them to create even greater margin because they are building it for themselves from the beginning.
"Overall, the off-price segment of the industry went from being a remnant-based business to now being programmed and systematic," he adds.
This new business model—which more closely reflects the standardized, systematic model of full-price retailers—has had significant supply chain and transportation impacts. Instead of receiving random, unplanned shipments from whatever sources were supplying the inventory, off-price retailers today have detailed and developed supply chain, logistics, and transportation processes.
"Off-price retailers now maintain supply chain networks with very efficient transportation and distribution," Barbee explains. In many cases, the apparel now moves directly from manufacturers to off-price retailers’ DCs—or even directly to specific retail stores.
"Off-price retailers’ goal is to make it as easy as possible for vendors and manufacturers to send merchandise through the discounter’s supply chain," Barbee says.
That means off-price retailers have embraced more collaborative logistics practices in an effort to optimize both inbound and outbound transportation. TJX, for example, partnered with software provider Manugistics (which has since been acquired by JDA Software) more than one decade ago to implement an interactive, online environment to collaborate with its partners to compress transportation planning and execution processes.
The Web- and EDI-enabled application includes robust planning and execution capabilities such as purchase order management, centralized transportation planning and load consolidation, carrier selection, what-if scenario modeling, load tendering, freight payment, exception management, performance monitoring, and analysis capabilities.
Such tools can help off-price retailers realize significant savings on the inbound side—which is especially important for discount chains. Logistics makes up an even larger share of their overall cost of goods sold, because they are selling items at lower price points than full-price retailers.
Sleek and Lean by Design
Another logistics strategy being embraced by off-price retailers is leaner inventory. While in the past, discount stores were often a confusing jumble of picked-over goods, today the stores are sleek, organized, and lean—all of which appeals more to shoppers, and makes better logistics sense.
"The trend in dollar-of-inventory-per-square-foot has decreased substantially over the past decade," Barbee explains. "Discount retailers are getting wiser about how they flow inventory to their stores, and how much they purchase, which helps reduce logistics and transportation costs."
In addition, off-price retailers have gotten better at developing highly efficient distribution centers that can handle high-volume, fast-moving inventory, and quickly distribute goods to store locations.
Off-price apparel retailers also need to keep their supply chains nimble enough to take advantage of opportunistic buying scenarios as they pop up. If a department store cancels an in-season order with a manufacturer, off-price retailers will often swoop in and buy that inventory—and they will do the same if a retailer returns in-season merchandise to a manufacturer.
This opportunistic buying—which still makes up a large chunk of off-price retailers’ merchandise—is harder to forecast. That’s one reason retailers such as TJ Maxx and Marshalls don’t operate e-commerce channels.
"Discount retailers are getting wiser about how they flow inventory to their stores, and how much they purchase, which helps reduce logistics and transportation costs."
—John Barbee, senior manager, Kurt Salmon
"They don’t offer their products online because they are not sure exactly how much inventory they will have on hand, and when they will have it," Barbee says.
The e-commerce world of off-price apparel comes with its own complications and supply chain implications. While Internet leader
Popular sites such as Ideeli, Rue La La, and Gilt Groupe focus on offering instant access to high-end designer labels at steep discounts through sales that last only a few days. In this model, the retailers work with brands to create demand for merchandise that did not sell in primary channels. "The remnant-based model is still working for flash sale sites," Cohen notes.
The nature of this model has interesting logistics implications—their distribution centers have to be extremely efficient at moving a high volume of goods in a short time.
"The sites buy the inventory from merchants, the goods come to their DC, then they sell 90 percent of that inventory during the few days of the sale," Barbee says. "Their procedures have to enable efficient processing of all those orders."
This emphasis on distribution is just one reason that even these companies are looking for ways to move their businesses in the same direction that the rest of the off-price world has gone.
"Every off-price retailer is looking for ways to systemize its business, and solidify product offerings," Cohen says. "Ensuring a steady inventory flow gives them the ability to function more like traditional, full-price retailers. Otherwise, if inventories get really lean and the overstock channel dries up, they have a Web site with nothing to sell."
Clearly, having nothing to sell is the last thing anyone involved in the off-price channel—from manufacturers to brands to retailers and consumers—wants. The whole industry is working hard to make sure that doesn’t happen.
Partnership Approach: Overstock’s Changing Business Model
Overstock.com, the leading online off-price Web site, boasts a strong apparel division led by outerwear. The company has shifted much of its focus from purchasing goods and bringing them into its own warehouses to be shipped to customers, to what it calls a “partner” approach, where its partner brands maintain ownership of inventory, sell it via Overstock, and ship directly to Overstock customers. Today, more than 80 percent of its business is partner-based.
“We believe our brands know their consumers best, so we’re moving the majority of our brand base to a partner business,” explains Dave Nielsen, Overstock.com’s co-president. “This method takes another step out of the supply chain, which benefits everyone involved.”
But this shift to partner business doesn’t mean Overstock—which offers roughly 60,000 apparel items for sale on the site at any given time—has given up control of the supply chain and the customer experience. In fact, the opposite is true. Aside from shipping orders from the brand partner’s warehouse, Overstock manages the whole process.
“If a customer purchases a jacket from Overstock, for instance, the shipping confirmation comes from us,” Nielsen explains. “And if anything is wrong with the order, or if we see it won’t arrive within the right delivery window, our customer care department works to resolve these issues.”
Overstock also handles all returns out of its Hebron, Ky., warehouse. (The company also operates a warehouse in its hometown of Salt Lake City, and is opening a Jonestown, Pa., warehouse facility in fall 2013—both dedicated to the non-partner portion of its business.)
“It is crucial for us to control the supply chain and the customer experience so we can provide the best possible shopping experience for our customers,” Nielsen says. “Also, this setup gives our brand partners peace of mind. It is one of the biggest reasons we have so many brands on Overstock—once they ship their merchandise, they don’t have to worry about it.”
The company also works closely with each partner brand on assortment planning and management to ensure that popular styles will be available to its apparel customers.
“We have merchandising plans and target dollar volumes we want to achieve with our brand partners, and they often work with manufacturers based on those plans,” Nielsen explains. “We still buy some of the excess goods, but most brands have tightened up in that area. So it’s a commitment on both parts to run this business—they are putting up dollars in inventory, and we are putting up SKUs on our Web site to sell their products.”
This partnership approach has been a great fit for S. Rothschild, a New York-based luxury outerwear manufacturer that sells coats from many of its leading upscale brands on Overstock. The 130-year-old company was one of the first businesses to adopt the partnership model with Overstock, and moves thousands of men’s, women’s, and children’s coats and jackets through the Web site. While it is still a small portion of S. Rothschild’s overall business, Overstock has become a reliable sales channel for the company.
“We started working with Overstock as a way to move unsold inventory and overruns, but over the years, some of our styles have become best-sellers for Overstock,” explains Mark Friedman, president and CEO of S. Rothschild. “So we treat some of these styles like replenishment now. We keep an inventory of them in our warehouses; we receive data from Overstock multiple times daily, and we ship the goods direct-to-consumer within 24 hours.”
Friedman and his staff work closely with Overstock’s merchandise managers and buyers to ensure that each season they are producing the styles that were a hit with customers the previous season.
“It’s no longer about getting rid of bad styles that didn’t sell,” says Friedman. “A bad style in a department store is still a bad style on Overstock—even at a discounted price. We want to find styles that sold strongly in a previous season, and bring them back for the next season.”
For S. Rothschild—and the thousands of other Overstock partner brands—working closely with the off-price retailer has yielded strong sales, despite the discounted prices the retailer offers.
“Overstock has built a strong, direct fulfillment model that has proven to be a very effective way to retail,” Friedman notes. “They’ve lowered their own costs, and are passing the savings on to customers.”