Discount stores sell goods inexpensively because they buy massive quantities at low prices and have developed efficient operations strategies to reduce overhead costs.

Contrary to popular public perception, they are rarely buying and selling close-out or discontinued merchandise.

TJ Maxx, Ross and Marshalls all began in the 1950s – 1970s.

At that time it was possible for small and mid-size retailers to purchase discontinued or closed-out brand name merchandise at heavily discounted prices.

• These discontinued items were then sold through bare-bones, low overhead warehouse type stores.
• Reduced overhead costs allowed the discounters to operate on lower profit margins than standard department stores such as Macy’s or Sears (and many others that are no longer in business.)

This was a very successful business model prior to the 1980s.

The original business model depended on two very important factors which had changed by the 1980s.

• As the companies expanded and opened more stores, they needed far more merchandise to satisfy their rapidly growing customer bases.
  • There was simply not enough discontinued brand name merchandise available to meet the growing demand.
  • Rapidly growing retail chains were forced to look for new sources of low cost products.
• Textile and clothing suppliers opened low-cost manufacturing operations in China and other low cost Asian nations, beginning in the 1970s.

Today, most of the low cost clothing found in the big discounters is regular line merchandise.

• The perceived “low” prices are the result of massive purchasing power combined with improved operational efficiency.

Well known designer brands create lower priced merchandise for discounters.

• These are usually not the same items sold to smaller boutique stores or to the non-discount department stores.

Large department stores typically require exclusivity on brand name products that they purchase.

• Although these products may appear in discount outlets after they are dropped by the department stores, sophisticated modern inventory control systems minimize the amount of merchandise that remains unsold.

The vast majority of “discounts” and “mark-downs” that appear on price tags are marketing techniques that are completely legal in most cases.
There are very few rules regulating how clothing is priced by retailers.

Manufacturers can establish high “suggested retail” or “comparative” prices. These prices are far above the markup that the retailer actually expects the item to sell at.

• The function of a “comparative price” is to create an artificial price level. This allows retailers to take deep discounts and still make profits.

Comparative pricing (before discounts) can be calculated in several different ways:

• Non-discount retailers (such as Macy’s) offer new products without discounts at prices that have very high profit margins.
  • Most of the items may actually be sold during frequent sales, at heavily discounted prices, but enough are sold at the original price to legitimize it.
  • Discount retailers are allowed to use the high prices offered by other retailers for the same (or similar) items as a comparative price on their tags.
• Suppliers can offer their own “suggested retail price.” That can be used by the retailer as a comparison even if the product was never actually sold at that price.

Giant retailers like TJ Maxx deal primarily with a limited number of very large suppliers.

Most suppliers must be big enough to and ship the huge quantities of multiple products required to stock the stores.

 

Discount retailers have many strategies to generate the impression of huge discounts and a feeling of urgency in their customers.

• Traditional department stores typically order items, which are then repurchased as they are sold.
• Discounters may buy a particular product only once and not repurchase it, even if it sells well. That has two benefits:
  • Customers know that if they do not buy immediately, an item may be gone the next time they visit the store.
  • This strategy supports the impression that the store is selling discontinued merchandise at deep discounts.
  • Additional mark-downs for merchandise that does not sell quickly also adds to the perception that the clothing is available for only a limited time period.

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