Mastering off-price fashion in an omnichannel world

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Off-price, a large segment within the overall fashion market, stands out for several reasons. First, off-price has increasingly been a growth engine: it expanded faster than the overall industry before the pandemic, it experienced a less pronounced dip in the initial phases, and it is set to grow five times faster than the full-price segment from 2025 to 2030. Second, off-price lends itself better to online purchases relative to the overall fashion market—so it has been well positioned to capture an increasing percentage of shoppers moving online. Last, sustainability is an increasing area of focus for both consumers and brands. There will always be overstock, so brands need to monetize excess inventory in a sustainable way.

Capturing a greater share of the off-price market will require fashion brands to develop comprehensive strategies that protect their overarching brand equity while catering to off-price customers. The segment consists of two distinct channels—offline and online—and each has different strengths, character­istics, and challenges, so brands will have to devise customized, complementary strategies.

Therefore, brands must take a multipronged strategy to maximize revenues for both channels and to secure their brand equity—without cannibalizing full-price offerings. Brands that successfully navigate the off-price market will be able to ride its wave while also strengthening their overall position with consumers. Three priorities will be critical as fashion brands look to activate the off-price segment.

Brands that successfully navigate the off-price market will be able to ride its wave while also strengthening their overall position with consumers.

The rising EU off-price tide

Thanks to recent steady growth, off-price has become too big for brands to ignore. According to McKinsey’s market model, total revenue for the European Union’s fashion industry was €368 billion in 2021, with the off-price segment accounting for 11 percent, or €40 billion.1 This share is projected to rise to 12 percent in 2025. Because the industry is predicted to revert to its traditional growth rate of 1 percent per year, off-price will be an important and dependable engine in the coming years. It represents a particularly valuable opportunity for fashion brands to broaden their reach to customers who might not otherwise consider their full-price offerings.

The off-price segment, which consists of the mid­market, premium, affordable luxury, and luxury price categories, differs from the overall EU fashion industry in several ways, but its growth in the online channel may be among the most important. The online channel makes up about 40 percent of the off-price market, a far higher share than fashion overall. In the coming year, almost all of the growth will come from the online channel because of its greater convenience, simplicity in filtering and browsing, and breadth of assortment.

Off-price shoppers have shown a particular interest in midmarket, premium, affordable luxury, and luxury brands. Indeed, these segments jointly account for 80 percent of total spending in the online off-price channel, which is significantly more than in the overall market (Exhibit 1). These shoppers aren’t necessarily seeking out the lowest-priced items; instead, they tend to care more about brand selection and exclusive offers than the average fashion customer. As a result, off-price players have been successful in attracting these medium and high spenders.

The off-price online market is highly attractive due to its concentration of affordable luxury and premium brands.

Within off-price, the offline and online channels are growing at different rates. The offline channel had a huge head start thanks to the popularity of outlet malls. In 2015, it accounted for 75 percent of the off-price market. Since that time, the online channel has achieved impressive growth: it racked up estimated sales of €17 billion in 2021 and is forecast to grow by 13 percent a year through 2025 (Exhibit 2). Our analysis suggests that almost all of the growth in off-price will come from online channels in the coming years.

The online channel accounted for approximately 40 percent of the off-price segment in 2020 and is expected to grow about 13 percent per year from  2021 to 2025.

The growth trajectories of the two off-price channels reflect their different attributes. Retailers need to understand the dynamics of each to craft an effective strategy.

Offline off-price: A destination and experience

The offline world has evolved over the past few years. This first generation of off-price was all about making sure the channel didn’t undercut the full-price business. Off-price outlets were located outside of urban centers, and brands put little effort into creating a welcoming environment: goods were often piled onto tables and racks for consumers to sort through.

Now, brands recognize the offline off-price channel as an important revenue source that requires an experience to match. The best off-price malls and villages today have the feel of high-street retail. For example, Value Retail’s Bicester Village, located outside of London, has its own train stop, great restaurants, art installations, and carefully manicured foliage. All of these elements combine to create an exciting experience—many shoppers plan special daylong excursions to off-price malls. Inside stores, consumers encounter many of the same elements as those in full-price locations, including the look, feel, and layout. Staff are often multilingual, so customers can get assistance from a salesperson in their native language. In many instances, once consumers make the long trip to outlet villages, the experience is on par with full-price flagship stores.

In such a setting, even some of the most highly regarded luxury and lifestyle brands have embraced the offline off-price channel to gain scale and increase profitability. Without eroding their full-price business, successful operators have been able to use off-price as a customer acquisition channel for their full-price goods. Customers shopping for luxury in off-price outlets are typically younger and more affluent than average, offering brands an opportunity to acquire new customer groups. These outlets are often the first point of contact for luxury brands in particular: because the barrier to enter an off-price luxury store often feels lower to consumers than going to a pricey, high-fashion district, brands have increasingly found ways to protect their brand and attract customers they otherwise might miss.

Online off-price: Increasing demand and supply

The growing popularity of the online off-price channel puts better deals just a click away. A large part of its allure for customers is the chance to track down desirable brands (typically midmarket or higher) at lower prices. Several online models have taken hold:

  • Off-price players that base their sales models on flash sales, including dress-for-less, limango, Veepee, and Zalando Lounge, offer products for a limited time. The gamification of hunting for the best bargains can lead the most engaged customers to check apps on a regular basis to see the latest offers from their favorite brands. However, this limited assortment is available only when flash sales are live.
  • Off-price players can also offer a standing assortment of fashion items (for instance, BestSecret, Booztlet, brands4friends, Otrium, and YOOX). Consumers can go to these sites year-round to find items, similar to the convenience of full-price players, even though some sizes and colors may have limited availability.
  • Luxury mystery box platforms have emerged in the past several years. HEAT and SCARCE curate boxes of goods from more than 60 luxury brands and orchestrate surprise drops promoted on social media.2 By spreading discounts among the goods in each box, these companies keep pricing opaque to protect the integrity of participating brands.

These models can broadly be segmented by their assortment and openness. In terms of assortment, some models enable customers to buy certain products—jeans, for instance—year-round, while other players offer items or products from a specific brand for a limited period of time. As for openness, players using the described online off-price models also offer closed, members-only clubs. Some even restrict access to invitation only, which protects brand equity, and others also require a minimum shopping value each year to ensure that customers remain active.

The accelerated migration of consumers to e-commerce during the pandemic fueled the online off-price channel. A detailed look at the rising demand by country highlights this channel’s durability and broad appeal. Many EU countries enjoyed a spike in consumer demand over the past year. Germany, for instance, saw demand triple that of 2020. Six countries in the European Union are projected to experience demand growth of 16 percent per year through 2025 (Exhibit 3).

The off-price online market is projected to grow by double digits across the European Union from 2021 to 2025.

Indicators suggest supply will follow a similar trajectory. The European online off-price supply is estimated to grow 13 to 16 percent annually from 2021 to 2025, leaving sufficient stock if demand growth accelerates. More brands have recognized that even with more accurate, analytics-based forecasting, oversupply will remain for several reasons. Long lead times in production, fast-changing fashion trends, and other factors influence demand and are largely beyond the control of brands. Because brands have complex product portfolios—more than 10,000 SKUs, along with color and size variations—managing order quantities at the SKU level is incredibly complex.

Many brands are now embracing a more strategic approach to the off-price segment in an effort to manage volumes, use price discounts without eroding brand equity, and gain access to new customer groups. Another favorable driver for increasing supply is rising demand for sustainability that prevents the destruction of potential oversupply and makes off-price sales a positive contributor to environmental, social, and governance (ESG) measures and brand image.

Although the off-price channel offers a great growth opportunity for brands, they should treat it as a complementary rather than stand-alone channel. For example, select North American brands are managing dedicated production of inventory for the off-price segment, a strategy that comes with pitfalls.

The online channel’s impressive growth will be helped along by several strong tailwinds. Consumers are predicted to continue shifting from traditional, brick-and-mortar locations to online shopping (see sidebar, “Getting to know the online off-price enthusiast”). In addition, online fashion marketplaces have become popular destinations, offering shoppers a wide variety on one website. This higher online share will increase the number of potential off-price channels—and the need for brands to actively manage them.

Crafting a comprehensive off-price strategy

Fashion brands should develop a strategy that treats off-price as a largely separate yet complementary segment for their full-price offerings. The goal should be to expand the overall business while fiercely protecting brand reputation. Three priorities can ensure brands get the most out of off-price.

Protect the brand across channels

The best operators of outlet malls and villages have created an excellent experience for shoppers while avoiding too much price and volume trans­parency. Because brands don’t want shoppers to know they can get goods on markdown a week later, the physical separation of outlet locations and high-street city centers has traditionally provided more comfort.

Online off-price platforms threatened to make pricing for every item just one click away, so brands were initially reluctant to participate. However, the emergence of closed off-price portals enables brands to disclose prices and discounts while keeping those barriers in place. Fashion brands should remain vigilant in understanding the reach and transparency of online platforms while staying up to date on new membership-based models.

Be discerning when choosing partners

The best off-price partners, regardless of model, will extend the reach of a brand. For the offline channel, brands should seek to identify partners with a network of outlets in other countries and markets. Customer experience should also be a priority to reinforce a brand’s distinctiveness. For the online channel, brands should evaluate their partner’s online experience (closed versus open) and brand selection to ensure their inventory does not suffer from being placed next to cheaper products.

Optimize the channel mix

Fashion companies should take a holistic view of how the offline and online channels can support each other across touchpoints. While the shift to online will occur rapidly over the next five years, offline outlets and villages will remain major destinations thanks to their exemplary experience. They can offer both immersive brand experiences and an opportunity to raise brand awareness among consumers. And because many consumers still get their first exposure to brands at these physical outlets, they are a potential gateway for extended engagement that can be reinforced by online channels.

Online has a compelling proposition for consumers: it provides a very convenient experience—with goods just one click away. Some players have standing assortments year-round to satisfy needs for items, while flash sales players offer a more gamified, bargain-hunting experience. And the online channel represents a sustainable way for brands to handle their overstock.

The predicted growth of off-price creates greater urgency for brands to develop a coherent strategy that can capture more value from this segment. The benefits—from increased profits to expanded reach and a sustainable way to sell overstock—more than justify the investment. The best fashion companies will take it a step further by elevating their brand’s reputation in the process.

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