Off-Price but on Target

By Alexander L. Taylor III

Selling name brands cheap, upstart chains give traditional clothiers fits

It was a telling vignette from a department-store owner's nightmare. Walking through the designer-dresses floor of Saks Fifth Avenue's flagship Manhattan outlet last week, a fashionably dressed woman was asked what she intended to buy. She replied: "I'm just window-shopping here so I can find something good that I like. As soon as I do, I'm going back home to my off-price merchant and get it much cheaper."

More and more Americans are doing just that. They have discovered that they can usually buy Ralph Lauren shirts, Jaeger sweaters and Albert Nipon dresses for 30% to 60% below retail by shopping at off-price stores. Since 1979, sales at Syms, T.J. Maxx, Marshalls and similar outlets have more than doubled, to an estimated $7 billion. Industry analysts expect them to continue to grow at an average pace of 20% to 25% a year. Says Edward Brennan, head of Sears retail stores: "There is no question that off-price retailers are becoming a big factor in the industry."

Much of their gains have come at the expense of traditional department stores. Now those merchants are mounting a counterattack. After seeing their customer base eroded mostly by discount stores in the 1960s and then by specialty shops in the 1970s, they are reworking merchandising strategies. Many are shedding stodgy departments, strengthening customer service and sharpening price competition. A few are using more aggressive tactics. As a result, disputes between off-price and full-service retailers are increasingly winding up in lawsuits.

The struggle is all the more intense because retailers expect 1983's fall and Christmas selling seasons to bring to a rousing conclusion the best year they have had since 1979. The recovery is continuing to steam along. Last week the Commerce Department reported that the gross national product grew at a healthy annual rate of 7.9% from July through September, down just a bit from the 9.7% pace during the second quarter. Consumer spending jumped 1.5% in September, fueled by a .9% increase in personal income. Says Marshall Field Chairman Philip Miller: "A lot of pent-up buying is going on now. It promises to be a terrific fourth quarter."

Although they have existed on the fringes of retailing for nearly three generations, off-price stores did not really catch on in a big way until a few years ago. The impetus was two-pronged. Inflation-afflicted and recession-burdened shoppers began to watch their expenditures more closely and seek greater values. At the same time, they were developing a taste for nationally recognized brands and designer-name merchandise because these goods symbolized higher quality, not to mention status. It was not long before consumers discovered that they could get name-brand goods more cheaply in the converted warehouse near the railroad tracks than they could in the slightly shabby downtown store where Mother had always shopped.

Off-price stores fit into a gray area between discounters and full-service stores that sell goods at a more or less full markup. Discount stores pay wholesale prices to suppliers but cut costs on their overhead so they can sell below retail. Off-price stores, on the other hand, often buy below wholesale. They load up on manufacturers' overruns and end-of-season goods, and often get special deals for buying in large quantities. Unlike discounters, many specialize in designer labels that have proven consumer appeal.

Los Angeles-area shoppers who enter the renovated medical building that houses Rick Pallack in Sherman Oaks, for example, find garments bearing such well-advertised labels as Alexander Julian, Perry Ellis and Alan Flusser. Boasts Owner Pallack: "I sell a sport coat that might go on Rodeo Drive for $400 for only $250." Pallack also displays merchandise with his own label, which he claims is often identical to designer wear and made by the same manufacturers. Says he: "Our dress shirt doesn't have the polo player on it, but it's the same as Ralph Lauren's and sells for 40% less."

Department stores are combatting the success of off-price stores with several stratagems. Minneapolis-based Dayton's has become more price conscious and makes sure that its fashions are up to the minute. Says Executive Vice President Dean Baarda: "Off-pricers mostly have last year's merchandise." Boston's Filene's is enhancing its customer service. It has expanded its training program for salesclerks from two hours to up to 24 hours and asked customers to evaluate each sales transaction. Both Dayton's and Filene's are placing greater emphasis on their lines of private-label merchandise. Private labels guarantee exclusivity for whoever sells them and also give department stores greater flexibility in setting prices.

To keep their high-fashion image, some department stores are privately threatening to cease ordering from designers who sell to what they consider to be less desirable outlets. New York City's Bergdorf Goodman stopped carrying Halston clothes when it discovered that the designer had created a line of clothing for J.C. Penney that included $100 dresses (compared with $1,000 to $2,000 for a typical Halston dress at Bergdorf's). Says President Ira Neimark: "We decided that designers and retailers have to decide who their customers are. Halston made his decision, and we have made ours."

Fearful of losing their merchandise sources, off-price stores are taking to the courts. Burlington Coat Factory Warehouse has sued R.H. Macy & Co. for helping manufacturers fix prices. Kids "R" Us, a new outlet for off-price children's clothing owned by Toys "R" Us, sued Federated Department Stores, owner of Bloomingdale's, and the makers of Izod/Lacoste alligator-emblazoned shirts. It accused them of conspiring to prevent Kids "R" Us from selling Izod merchandise.

Several of the most successful retail chains have decided to co-opt the competition by going into off-price merchandising themselves. Dayton Hudson (1982 sales: $5.7 billion) has opened four stores in California called Plums ... the Elegant Discounter. Associated Dry Goods (sales: $3.2 billion), owner of Lord & Taylor, acquired Loehmann's earlier this year (see box). K mart (sales: $16.8 billion) has opened 14 off-price outlets called Designer Depot.

One of the most aggressive entrants is Zayre, a Massachusetts-based discount chain (sales: $2.1 billion). Off-price sales are the fastest-growing part of its business. This year it added 92 outlets to its chain of women's Hit or Miss stores, which now number 352, and expanded its T.J. Maxx family clothiers from 86 to 118 stores.

Like the department stores, several mass merchandisers are having to re-examine their strategies in order to become more competitive. "The day of the old 'we've got everything' general store is over," says Ira Quint, executive vice president of merchandising for Montgomery Ward. J.C. Penney, in addition to adding Halston's line, has expanded its apparel selections and eliminated its old automotive, large-appliance and hardware busi nesses. Sears still sells DieHard batteries and Kenmore washing machines, but it is giving more emphasis to sportswear endorsed by Cheryl Tiegs and Arnold Palmer.

Some carriage-trade stores are not bowing to the new trend at all. Houston's Sakowitz plans no changes in its pricing policies. Vice Chairman Irving Weiner compares shopping in his store to consuming a gourmet meal. Says he: "You have a choice of eating in a cafeteria or eating in a fine French restaurant. You get the same amount of calories in both."

Fortunately for U.S. consumers, their choice of which calories to buy -- and which level of check to pay -- has never been greater.

-- By Alexander L. Taylor III.

Reported by Russell Leavitt/Los Angeles and Adam Zagorin/ New York

With reporting by Russell Leavitt; Adam Zagorin This file is automatically generated by a robot program, so viewer discretion is required.