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Why Are Off-Price Outlets Like T.J. Maxx Thriving?

At a time when many large brick-and-mortar chains are looking to scale back their footprint, 'near luxury' stores like T.J. Maxx and Nordstrom Rack have quietly announced plans to expand.

While Macy’s Q1 sales slump made headlines this spring, TJX — parent company to off-price retail brands T.J. Maxx, HomeGoods, and others — announced plans to open thousands of new stores around the globe.

And it’s not just TJX. Nordstrom Rack, Saks Off Fifth, and other “near luxury” discount chains appear to be skirting some of the sales losses faced by traditional department stores. But why?

The Millennial Mindset

The idea that Nordstrom or Lord & Taylor might need to shrink their brick-and-mortar footprint while discount retailers do not appears to suggest one thing: Customers are scaling back on their spending and, as such, prioritizing inferior goods. But this isn’t 2009, or even 2011; the economy has largely emerged from recession, and Millennials have evolved into a demographic with over $200 billion in annual purchasing power.

Bargains certainly play a role in consumer favoritism toward discount retail emporiums, but that doesn’t tell the whole story. This seismic shift in shopping behavior goes beyond a traditional desire to save money.

Firstly, the aforementioned Millennial group plays a significant role. As a population that largely came of age during the recession, more Millennials “have lived at home, have debt, and value experiences over things,” said Anne Marie Stephen, CEO at Kwolia and a longtime retail analyst. Even as the older segment of this population emerges from the specter of student loan debt, the ideals are there: Don’t invest in material goods, and prioritize experience and self-discovery.

There is a place for customized loyalty that appeals to Millennials, certainly, but current trends show many of these shoppers moving away from the idea that they should shop at Macy’s because their parents did, or at Nordstrom because it indicates some certain type of “status.” Given this “experience over expensive items” attitude, where is a twenty-something woman more likely to buy a trendy, wear-it-once dress for her vacation to Mexico? At a discount, “near luxury” outlet like Nordstrom Rack.

Treasure Hunting

But changing consumption patterns amongst younger demographics can’t account for all of the growth. In May, TJX CEO Ernie Herrman forecast store growth of more than 50 percent, an addition of almost 2,000 additional stores “just with our current chains in just our current markets,” MarketWatch reported.

How retailers can boost the in-store experience in order to compete with Amazon has been a hot topic of discussion over the past several years. Discount chains may actually have a natural advantage here, as it turns out: They aren’t going to provide luxe in-store extras like personal shopping, but they do allow customers the experience of hunting through the racks — touching products, comparing them, trying them on — in pursuit of a hot designer steal. That’s something that can’t be duplicated online.

In other words, it comes down to the “treasure hunter” shopper mentality.

“For brands like TJX, with plans for adding a significant number of stores, their customer has always been the ‘treasure hunter,” Stephen said. “This customer, regardless of demographic bucket, enjoys the [real-world] experience of the hunt and thrill of the good deal.”

It’s for a combination of these reasons that established retailers appear to benefit when they open off-price outlets — or even simply run surprise events like discount pop-up shops.

“When [retailers] invest in themselves via outlets,” Stephen concluded, “they are capturing customers that may otherwise not shop in their full line stores.”