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The Art of Shopping Off Price

By David Sacks

For apparel retailers, shopping the off-price markets has become a key business strategy in response to an increasingly cutthroat retail environment. There are several reasons why.

Apparel has followed a deflationary trend for several decades now. With the nearly complete transfer of apparel production from the U.S. to overseas factories and the elimination of quota, price points have shrunk to the point where you need a magnifying glass to read them. The actual production cost of some items today is lower than it was 30 years ago.

While the retail market has shrunk and consolidated in recent years, for those retailers that have survived, having fewer competitors has not translated into a more business friendly environment. Efficiency of size through consolidation into mega stores and the proliferation of big box off-price chains and discounters have dealt a death blow to numerous regional chains and mom and pop stores across the country who have been forced to deal with steadily increasing overhead costs and lack of buying clout.

The price point phenomenon can be divided into three movements: the big box off-price retailers represented by Ross Stores, TJ Maxx and others, which source their merchandise primarily through closeouts from brand manufacturers; the price clubs, which work off short markups (traditionally, 12% - 15% margin on soft goods); and the big box discounters such as Wal-Mart and Target, whose sheer size gives them tremendous buying power.

While the competition is fierce, there are survivors. Interestingly, the smaller retailers that have survived have done so because they, too, have studied their Darwin and adapted to the times. They know their customers well and have learned how to provide unique and personalized services with which the big chains can’t compete. And perhaps most important, they have learned how to buy smart.

Buy Right to Sell Right
            Whether you are a value-price discount retailer who depends on sharp deals to build margin or a regular price retailer looking to augment your inventory, sharpen your price points, and add a few points to your margins, it all starts with what you buy and how you buy it. You may have little control over your rent, staffing, and general overhead costs, but you do have a measure of control over your buying activity.

Buying, in many ways, is the most creative and interesting part of the retail game. It is also the key activity that determines your ultimate success. It’s here where you evaluate and make decisions on what your customers want and need. It’s here where you analyze current and upcoming trends, determine how you in comparison with your competitors are serving your customers’ product needs, and work with your vendors to meet those needs. It’s here where you determine the value of product both in real and perceived terms. And finally, it’s here where you establish professional relationships, even friendships, with your industry peers through the buying process.

Anticipate
            Before you enter the off-price arena, you need to know your immediate and future needs for product, regardless whether you are working off of a formal open to buy or an intuitive feel for the inventory needs of your store. That requires some homework.

Read the fashion magazines so you know what the looks and trends are. The Internet is also a great resource. If you Google “fashion trends spring 2007,” for example, you will get a lot of useful information on what’s currently hot. You might want to register for the MAGIC show; even if you don’t plan to attend, they will send you trend reports that will keep you abreast of what’s happening in the market. Visit the Off-Price Specialist Show website (www.offpriceshow.com) for industry news and show information.

Of course, the information you gather must be related to what you know about your customers and your store. If you own a boutique in a small town in the Midwest, your customers’ fashion tastes are obviously going to be different from those in a large city in the Northeast. Nevertheless, knowing what’s out there and the direction in which fashion is heading can help you make educated decisions on new product you may wish to experiment with. As a retailer, part of your job is to know the fashion trends, which your customers may or may not have the time or inclination to stay abreast of, and sometimes nudge your customers toward new fashions. If done cautiously and subtly, mixing new fashion into your product mix will keep your store fresh and interesting to your customers.

How much product do you need? That depends on your business. You know the price points that attract your customers and how much inventory you will likely need to carry at these price points. While cash flow is always a primary concern, sometimes you will run into a deal that’s just too good to pass up, even if it is more than you need. For example, if you see a great price on an item that you sell every fall, and perhaps you have a difficult time finding it early in the season each year, it’s okay to buy it and stack it in your backroom for a year. If your cash flow allows, such deals can be a great investment for your business.

Sometimes you just have to make a solid educated guess on product and how your customers will respond. You can’t be in business today without taking a position in the market. If you always attempt to sell in short quantities of everything, it’s nearly impossible to succeed in business today. You have to find the key items for your store and take a position.

With regard to the percentage mix of off-price and regular price product, that, too, depends on your store. Inserting off-price goods into your product mix, however, does more than increase your margins. It also encourages customers to associate these sharply priced items with your regular priced goods. In other words, if your customer walks out of your store with a $15 pair of jeans and $50 blouse, she may feel that she got a real bargain on both.

Participate
Buying, in general, and off-price buying, in particular, requires active participation in the market. What are your competitors doing? What’s hot and what’s not? Where can you find vendors with whom you can establish long-term and profitable relationships?

Know your competition. If you don’t know what your competitors are doing, you can rest assured that your customers do. And sometimes they will let you know what they know by visiting them instead of you.

Visit your competitors. What are they selling on the feature racks at the front of the store? Is there an item that has been picked through but is not on sale? Then it’s probably hot. What’s on the sale and clearance racks? These items probably didn’t work. Talk to sales staff. Tell them you’re looking for a gift for someone (you pick the age and gender) and want to know what’s popular and selling well.

Answers to questions like these give you invaluable information when you are out there making buying decisions.

Attend the Off-Price Specialist Show. A strong indicator of the value of off-price shopping today is the growth of the Las Vegas Off-Price Specialist Show over the past ten years. Starting with a handful of exhibitors hawking their goods out of guest rooms at the Debbie Reynolds Hotel in 1995, the shows today boast over 450 exhibitors and 10,000 buyers. For retailers, both small and large, the Off-Price Show is their biggest and best buying opportunity of the year.

But there’s a method to the madness of shopping the Off-Price Show. The deals are there, but you have to find them. It’s a big order-writing show and it takes time and patience to find and negotiate the deals that can add significant points to your margins for the next six months.

Some buyers like to schedule appointments with vendors before they get there. This is a fine strategy if you know what the vendor has and what you want. One drawback is that the vendor is prepared for you before you get there, which may or may not work to your advantage. Also, geographically speaking, you might find yourself running from one end of the show to the other end to attend your appointments and not have time to catch that great deals lurking in exhibitors’ booths along the way.

The method I prefer is to take the first day and tour the show in its entirety. I try not to write orders on that day so I can make a complete evaluation of what’s currently in the market. If I do write an order, I prefer to tell the vendor that I will drop it off the next day.

Evaluate the goods at the show with an eye to where demand and price points are falling in the off-price market. For example, several years ago women’s velour jogging suits were a hot item for my stores. I attended the show and couldn’t find them for under $15. Gradually, over the next couple of years the price dropped to around $8 at last year’s show. Then this past fall they moved up a bit in price. In other words, this item moved from a hot item several years ago to a commodity item a couple of years later to a staple item today—all of which is reflected in the price points at the Off-Price Show.

Understanding how to strike an ideal balance among trendy fashions, commodity goods, and staples for your stores is very useful knowledge when you are shopping the show. The show is all about opportunity. The winners are those who are prepared to seize that opportunity when it arises.

Correlate
Know the value of the goods you are shopping for.

What is the intrinsic value of a particular item? For example, intrinsically, a polyester item is less valuable than a cotton item.

What is the marketing value of an item? Brands are important because they are important to consumers. Earlier in my retail career, I made the mistake of placing intrinsic value over brand value in my purchases. I didn’t think my customers should be paying big dollars to support the advertising budgets of brand name manufacturers. But I forgot that my customers had a vote too, which they demonstrated by not giving me as much business as they gave to some of my competitors who were carrying brand goods.

What is the market value of an item? It’s up to you to determine the perceived value of the items you purchase in your particular market, be they branded or non-branded. In other words, regardless of what you paid for an item, its value is ultimately determined by what your customers will pay for it.

What is the effect on your bottom line? All of the above need to be correlated in order to determine their effect on your bottom line. If you sell primarily regular price goods, having 20 percent of inventory earning extra margin can have a tremendous effect on the bottom line. As a general rule, in this day and age, smaller stores need to realize 40% – 50% margin after markdowns. There are exceptions to this rule, for example, stores in areas with low rent, but in general the mom-and-pop boutique needs to find some extra margin somewhere. Off-price goods can do that for you.

Negotiate
Now comes the fun part. You’ve found what you want; now you need to get it at the price you want.

Here, it’s important to understand that you only get one chance to make a first impression. The precedent you set with your first deal establishes and cements your future deals with a particular vendor.

The importance of establishing quality relationships with your vendors cannot be stressed enough. In initiating a relationship, you want the seller to know you in two different ways: (1) What kind of buyer you are and (2) What kind of person you are.

I view the buyer – seller relationship in paradoxical terms: that is, a true off-price buyer is a seller. In other words, if you, as a buyer, are attempting to buy goods for less than their cost, you have to sell that proposition to the seller, who then becomes the buyer. Conversely, if you are paying more than the cost of procurement, you remain the buyer and the vendor remains the seller.

Finally, a good buyer values and nurtures the personal side of his or her professional relationships. People like to work with people whom they like. And people like people who are interested in who they are and what they like. With this in mind, get to know the vendors with whom you are dealing. Do they like to gamble while they are in Vegas? How many kids do they have? Seek out and make mental notes of this kind of information.

When you think about negotiating deals, view it this way:

You and the vendor are standing side by side looking at a garment. You are not facing each other with the garment between you. Perhaps you are talking about a great meal you had last night and recommending the restaurant to the vendor. You are listening, you are smiling, while the garment sits there waiting…for the pause…there it is… “now how can we get this deal done?”

Bottom line…shopping off price has become an integral part of the buying process for apparel retailers. If you do your homework and enter the off-price arena armed with knowledge of the market and your stores, the buys you make can give you the margin points you need to compete successfully. And…it’s a lot of fun.