Some off-price retailers are poised to thrive in 2023, while others look to get back on their feet

Shopping at discount or off-price retailers is often described as a treasure hunt. But while consumers still deal with inflation and a potential recession looms, 2023 will probably look more like a hunt for essentials.

As of December, inflation on a YoY basis continues to slow down from its 2022 highs, but that doesn’t mean off-price retailers won’t have room to compete in 2023. Economists believe there’s a 64% chance the US economy will shrink this year, according to Bankrate’s Fourth-Quarter Economic Indicator poll.

But the off-price market may see a decline in total revenue in 2023, according to Erin Schmidt, senior analyst at Coresight Research. She explained that much of that decline can be attributed to the performances of Burlington and Ross, two apparel off-pricers whose customers have struggled to keep up in an inflationary environment.

• Ross’s $4.6 billion in Q3 sales were roughly similar on a YoY basis, but comparable sales fell 3% after a major 14% increase in 2021.
• Burlington’s comparable sales in Q3 decreased 17% after seeing 16% growth in 2021.

“Their average unit retail is between like $10 and $12,” Schmidt said. “And so they have reported that their customers have just really pulled back on their spending.” She added that she believes both Burlington and Ross will rebound this year.

Off-price has historically thrived under poor economic conditions as consumers trade down from full price stores, Paige Thomas, president and CEO at Saks Off 5th, told Retail Brew in an email. She added that she believes the “trade down” effect will spill over into 2023.

• Last year, Saks Off 5th introduced a new loyalty program, Off 5th Rewards, which has found its members shop with the company more frequently with larger basket sizes.

“Saks Off 5th benefits from the convergence of two powerful yet separate forces - the continued strength of the off-price sector along with the expansion of digital, particularly across online luxury retail,” Thomas said, via Meghan Biango, DVP, corporate communications for Saks Off Fifth.

The almighty…“Dollar” stores, as Retail Brew previously reported, were able to navigate the economic headwinds of the Great Recession in 2008 and even doubled down with more store openings, increased sales, foot traffic, and average consumer spend. And there are some parallels to the current economic environment.

• In FY 2023, Dollar General plans to open 1,050 new stores, and the chain’s net sales increased 11.1% to $9.5 billion in Q3 2022.
• CEO Jeff Owen said during a December earnings call that Dollar General has grown its customer base across all income levels, even among households making $100,000.
• And as a bonus, the company expects supply chain costs—both internal and external—to be down in 2023.

Schmidt said slightly higher-end off-price concepts like Popshelf and Five Beyond have done a good job of offering a wider variety of merchandise that’s still more heavily discounted than full-price retailers.

“That’s a really lucrative market because people maybe don’t want to spend a lot of money on these kinds of items,” Schmidt said. “They’ve upgraded their branding, so to speak. It’s less junky and more sophisticated, which is more in competition with maybe some of the things that you would find at TJ Maxx or Marshalls.”

In 2023, Coresight Research anticipates that retail REITs with off-price and dollar stores as tenants will see revenue growth as lower-income and middle-income consumers switch to cheaper options, particularly if an economic downturn takes hold in 2023, which will further dry up discretionary income for US shoppers.

• Much of dollar stores’ strengths lie in the discount grocery space, which Coresight predicts will see sustained growth this year and be supported by the expansion of food and beverage assortments.

The TJX Cos. was able to hold its own when inflation was at its peak. TJX, which owns and operates TJMaxx, Marshalls, and HomeGoods, raised prices on select items while making sure to keep competitive with full-price retailers, according to Coresight’s 2023 retail and technology outlook report.

• The company’s Q3 net sales were $12.2 billion, a 3% decrease from Q2, but that figure for the first nine months of the fiscal year was $35.4 billion, a 2% increase from the year prior.
• Past the 2022 holiday shopping season, the company sees opportunities to increase sales and traffic, and even its global store growth, CEO Ernie Herrman told analysts during a November call.

“Our flexible model has been a tremendous advantage of this environment. We’ve been able to expand and contract categories and merchandise in our stores so that customers have full racks and shelves to shop when they visit,” Herrman said.

+1: This year, Coresight expects US grocery sales to grow 3.9% YoY, moderating from 8.2% growth in 2022. Inflation might explain much of this growth, but the USDA predicts that food-at-home prices will increase more slowly in 2023 than 2022 at a 2.5% to 3.5%

• Increased competition in the space will compel grocery chains to bolster their omnichannel capacity, offer discounts and promotions, and strengthen their customer loyalty programs, per Coresight’s report.