Between 2012 and 2017, the global off-price market grew more than 30% to $62 billion annually; two-thirds of all shoppers now purchase off-price products, making up 75% of all apparel transactions across all retail channels, according to findings from The NPD Group in July 2016.

While off-price stores like TJ Maxx and Burlington have existed for decades, the 2008 recession—the biggest since the dot-com boom—incited retailers to turn more heavily to the off-price business model. At the time, consumers across all socioeconomic levels were stretching their wallets and seeking out off-price and other discounts to extend their purchasing power.

But a decade later, this recession-era relationship between brands and shoppers is still in place, despite the improving economy. Now brands and retailers are attempting to match consumer expectations and combat falling revenue and profit by selling more off-price products, even though they often carry lower margins.

This report details success stories and cautionary tales around off-price business, warning retailers and brands not to fall into the off-price trap. It also outlines ways to help those already entrenched in it to climb their way out. Some, like Neiman Marcus, are dialing back their off-price stores to tap into their strengths. Others, like VF Corp, are creating or enhancing avenues that will raise the value of their products and bring in full-price shoppers.

This report also includes our first Playbook, which features actionable directives and questions that you can take back to your business to drive positive change.

Read the playbook


How We Got Here

Department stores are embracing off-price, but commoditizing themselves in the process.


  • Traditional department stores saw a 9.3% decrease in operating income in 2017, despite continued GDP and wage growth since the 2008 recession. Off-price retailers, conversely, saw an estimated 7% increase in operating income, a trend that will likely continue.
  • According to Burlington, the number of shoppers who have a household income of over $100,000 is rising, pointing to more price sensitivity across the board.
  • Department stores are increasingly opening more off-price versions of their stores and closing or not growing their full-price channels.
  • Macy’s, whose revenue has gone down every year since 2014 and whose profit has almost halved in this same period, is now putting off-price inside of its stores with the hopes of enhancing sales.
  • Off-price stores not only sell discounted full-price goods but also increasingly sell goods created specifically for the off-price channel.

Even though the economy is growing, department stores remain addicted to the short-term benefits of off-price, which have barred them from reestablishing the full-price competitive advantage they used to have. In emulating the very behavior they despise in low-price-hunting shoppers, they are demonstrating short-sighted money-grabbing behavior at the expense of long-term sustainability.

The original intention of off-price was to sell excess high-quality products or last season items that didn’t sell at full price, this time at a discount. But today, after years of increasing inventory for wholesale channels, brands are now offloading this excess stock to their off-price channels, in addition to artificially creating made-for-off-price products. For example, 10% of merchandise at Saks Off 5th Avenue comes from Saks’ full-price lines, another 25% comes from private label goods, and the rest is created specifically for the outlet by vendors and brands.

This commoditizes the mainline business by not only reducing the value of the existing inventory, but feeding and generating a concerning number of cheap, price-conscious customers. As the economy continues to grow, brands and retailers are keeping off-price alive, only to their own detriment.


Nordstrom is investing in off-price in an attempt to profit from the trend while encouraging customers to try out its full-price offerings.


  • Nordstrom has 232 Rack stores, compared to 122 full-price department stores, with further off-price growth planned.
  • Revenue from its off-price vs. full-price stores increased from 23% of total revenue in 2012 to 31% in 2016.
  • Revenue increased 67% from $2.7 billion in 2012 to $4.5 billion in 2016, while profit grew 16%. Profit has accelerated slower than revenue because much of the revenue growth comes from Rack, a lower-margin business than full-price.

As it saw full-price sales fall each year since 2012, Nordstrom turned to off-price to drive growth. Now it is diversifying and upping the quality of Rack’s assortment. For example, it has recently started to sell MAC cosmetics in its off-price stores, further branding itself as a luxury retailer and distinguishing the Rack brand from other off-price competitors. Nordstrom is also prioritizing synergy between Nordstrom and Rack, using Rack as a gateway to Nordstrom, much like full collection brands use accessories to lure shoppers their main collections. For now, this ladder seems to be driving shoppers from off-price to full-price.

Why it matters

While Nordstrom is seeing short-term success with its off-price stores, this forary is fundamentally reshaping the business into an off-price store rather than a full-price one. Using Rack as the entry point will still attract new shoppers: in 2016, Rack brought in 6 million new customers, and one third of customers that start at off-price eventually migrate to full-price, according to the company’s Q4 2016 report. But as the commodity markets continue to grow, the company risks diluting its elevated brand by attracting lower margin customers and selling lower-priced products. Since off-price mostly exists offline, focusing more on the channel might come at the peril of ecommerce investments, which are more relevant in full-price business and will only become more crucial as retail continues shifting online. The company might fall further behind if its setting up more of its potential revenue to come from offline not online. Since the Nordstrom family is exploring taking the company private, it will be important to watch how the off-price business impacts these efforts, and what the family hopes to create if its go-private bid succeeds.


Neiman Marcus is a rare department store that is deemphasizing off-price and encouraging full-price shopping.


  • Neiman Marcus’ revenue decreased from $5.1 billion in 2015 to $4.7 billion in 2017, down 8%. Profit has decreased from $2.2 billion in 2016 to $1.5 billion in 2017, down 32%.
  • In 2015, Neiman maintained an equal number of full-price and Last Call off-price stores. But in the past few years, the number of Last Call stores has decreased and the company plans to close an additional 25%, according to its 2017 Q3 report.

After Neiman Marcus posted revenue loss in 2016 and 2017, largely due to deteriorating shopper loyalty as customers become more price conscious, the retailer decided to hone in on its strengths—namely, its full-price department store business—in order to focus on and engage its upper-middle class customers. At Last Call stores, Neiman Marcus is increasing the merchandise sourced from its full-price stores, and decreasing its made-for-off-price options, hoping that this will differentiate its off-price stores from competitors. Instead of using a range of discounting tactics that department stores like Macy’s are using—from adding its off-price Backstage option to its Last Act clearance space in-store—Neiman is taking a disciplined, focused approach that taps into its strengths for the long term and is more likely to pay off over time.

Why it matters

While Neiman Marcus is sacrificing short-term sales gains, its focus on the long term differentiates the company from many of its peers. Closing some of its off-price locations will help to improve its margins; Neiman will invest more in its strengths, freeing more resources to pour into full-price stores and associated ecommerce, which are most aligned to its elevated brand. While other traditional retailers continue to depend on transparent diffusion lines—a line created by a high-end brand that sells at lower prices, like Michael Kors’ secondary line, MICHAEL Michael Kors—Neiman Marcus is readying to regain full-price market share. Instead of chasing the off-price gains that many of its competitors are, Neiman’s current strategy increases the chance that its brand will remain intact for longer.


Companies like The North Face’s parent company VF Corp choose to reduce their focus on off-price, saddling short-term losses in order to build long-term, sustainable businesses.


  • Brands like Ralph Lauren, Tommy Hilfiger and others are tightening inventory, hoping to increase product value and full-price sell-through.
  • Higher-end brands that are narrowing their inventory can not only reduce their number of off-price stores, but also pose a risk to off-price retailers like TJ Maxx, which count on this inventory as the “treasure” in its off-price trove.
  • Since 2012, VF Corp’s revenue has been stable and grown 15% from $10.4 billion in 2012 to $12.0 billion in 2016. Between 2015 and 2016, revenue decreased slightly and profit went down 11%—an expected short-term loss.
  • In 2017, brands under VF Corp’s umbrella, including The North Face, have seen higher revenues and profits now that their short-term loss is leading to better odds in the long term.

As brands realize the dangers of third-party and off-price channels, they are taking efforts to fundamentally realign their businesses to feature more direct-to-consumer strategies. This allows them to tighten inventory even further, in addition to buying and planning more intelligently, which raises the value of their products and diminishes their reliance on sales.

For big brands, this takes serious, multi-year investments that are not always easy to communicate to public market investors. If executed correctly, however, this shift—which importantly features tighter inventory control—boots sales in the long term and leads to improved brand health and sales growth. This focus on brand and price fundamentals have led to higher gross margin per item for VF Corp, which expects the strategy to continue paying off in the future.  

Additionally, selling off-price items in its own retail stores gives the company freedom to control price and its associated brand perception without undercutting its full-price sales. The North Face is working with Nordstrom’s pop-up initiative, “Pop-In@Nordstrom,” to display its merchandise in an even better light. For the pop-up, the company reimagined some of its classics for the store, in a section that was meant to cater to millennials (earlier brands in this space included Everlane and MOMA). These careful inventory considerations have helped the brand keep its “cool,” unlike others, which continue to oversaturate the off-price environment.

Why it matters

VF Corp’s moves are proof that the next decade of growth will not come from the traditional wholesale channel—a channel mostly out of the brand’s control. Instead, the company is taking steps to vertically integrate more, both with its full-price sales and the associated ecommerce, as well as in its own off-price outlets that it can control. As price competition increases and shows no signs of slowing, companies that control their pricing architecture will be able to increase profits and preserve their brand image over time. For example, whereas wholesale sales on Amazon give the platform control over a brand’s pricing, selling on Amazon Marketplace allows the brand to retain pricing control. All of these adjustments take serious investments and require teams with new skill sets, but they will pay off over time.


Brands that are over-reliant on off-price, such as Michael Kors, cannibalize the parent brand’s image.


  • Since Michael Kors went public in 2011, its revenue has increased almost four times, going from $1.3 billion in 2012 to $4.5 billion in 2017.
  • But in the past two years, growth has slowed. Revenue and profit both decreased 4% from 2016-2017.
  • In May 2017, the brand announced it would close 100 to 125 stores, a symptom of reckless growth.

While Kors revenue exploded throughout the decade, much of this growth has been in the off-price and outlet category. The brand’s reliance on its lower-end lines degraded the overall brand image—it has become too accessible to maintain its original status as a luxury brand.  

Although Michael Kors was able to use cheaper lines to grow in the short-term, the company has plateaued. Even as the brand attempts to cut down on discounted products, shoppers, now accustomed to seeing the brand constantly on sale, stopped buying products at full-price at traditional retailers and Michael Kors branded stores.

Other affordable luxury companies like Coach have been able to navigate the changes more successfully—its reliance on off-price didn’t go as deep as Michael Kors’, allowing Coach to bounce back. Now, Michael Kors has to figure out whether it wants to be a high-end or low-end brand, and it’s unclear whether it can succeed at either, having led itself astray with off-price.

Why it matters

Brands are not frozen in time. Every action the company takes impacts the brand’s perception. Kors is perhaps the biggest cautionary tale of the off-price drug, and the short-term high and long-term crash it instills. Growth at all costs is not a recipe to building a lasting brand. If Kors wants to recover, it will need to pull back off-price distribution and put its focus back on its luxury line, using it to rebuild the brand’s image. Doing so will likely lead to short-term sales and profit drops, which it will need to explain to investors. It’s worth questioning where Kors would be today if it were a smaller, but more powerful brand with tighter distribution.

More direct-to-consumer sales and less inventory

You can trace many of the problems from off-price back to one thing: too much inventory. Over-producing at full-price stores leads to the discount cycle that effectively turned these destinations into off-price stores and then paved the way—both for companies and shoppers—for off-price stores themselves to thrive.


  • Take a serious look at your buying and planning process and trim the fat. Start with the assumption that you are buying too much inventory and work backward from there. Yes, gross sales might go down but net margin will increase, while also freeing up cash flow.
    • What isn’t selling? Why are you buying it then? What would happen if you cut these products?
    • How would shifting toward more direct-to-consumer sales improve your inventory and cash flow? What would you do with this extra cash flow?
    • How can you calibrate expectations around revenue if you are prioritizing profit and free cash flow?
  • Reevaluate your understanding of sell-through, especially since it is relative to inventory.  
    • What are your sell-throughs and how is over-buying affecting them?  
    • Why are your targets where they are? How has discounting affected them and how could you undo these affects?


  • Companies that hold less inventory for less time and can make new inventory faster than their competitors are best poised to evolve with the market, as leading fast-fashion brands have shown.
    • What are your portfolio companies’ lead times and inventories? How do these benchmark to competitors? Will they be able to improve these features or are the problems structural and slow moving?
    • How are lead times affecting cash flow? Is there enough money to invest in a leaner supply chain? What are competitors with faster lead times and lower inventory doing with this cash flow?

Real Estate Professionals

  • Stores that heavily rely on discounts in your full-price locations are dragging down the quality of the property and bringing in less advantageous shoppers.
    • How can you work with your tenants to better cultivate full-price shoppers? The shoppers in the property also affect your tenants. How can you share learnings across the portfolio—especially lessons from direct-to-consumer tenants—about attracting these full-price shoppers?
    • How would stores with less inventory affect your properties and how could you use this space differently? Could you break up bigger floorplans into smaller ones? Could you add online fulfillment locations either for individual tenants or in a centralized fashion?

Evergreen products  

Evergreen products work well because they are scalable—something seen in a large number of digitally-native direct-to-consumer brands from Warby Parker and Away to Glossier, and now gaining speed with more traditional brands like VF Corp, which are using evergreen products to lower their excess inventory and remove the need to sell off-price.

Conversely, fast fashion, which creates on-demand, on-trend items multiple times a year, requires extremely agile supply chains, better served by the speedy and low-cost production cycle of brands like Zara whose model has remained sustainable for now, selling at its low price points. Fast fashion stores sell apparel products at much lower price points than full-price, off-price, and direct to consumer stores, dragging down expectations of price.

Focusing on evergreen products is a proven way to control inventory. Because these products avoid seasonality, it’s harder for their value to diminish—instead, they become a signature offering for the brand. This helps to keep brand equity high because it allows a company to more easily control consumers’ expectations on price, quality and product assortment—and it’s easier to plan for on the back end.


  • Assess your production cycle, both from a cash flow and lead time perspective.
    • What needs to change in order for you to keep your margins and demand high without having to heavily discount or move into off-price channels?
    • How can you reconceptualize your production cycle to embody evergreen practices that lower your inventory and sell your products at higher margin?
    • What are least time effective aspects of your production cycle? What can you do to speed up these stages in the process or remove them completely?
    • How can you incorporate a faster supply chain—similar to fast fashion—into your brand to create and sell more efficiently in a leaner capacity?
  • Identify the products that consistently sell through with the highest margins.
    • How can you establish an inventory architecture that reflects a successful ratio of breadth to depth and leads to higher demand of your products on the market?
    • How could you use scarcity to improve sell-through, revenue and margins?
    • How can you test which products will consistently sell through with the highest margins and the best proportion of these products in store? How can you funnel more resources into those while trimming your inventory?
    • How can you exploit these products to bring in and/or retain new customers? How can you build these in a way that complements your revenue drivers and your core selection?
    • How can you play into your brand’s strengths to cast a better ratio between SKUs and quantity of each SKU, minimizing risk and increasing market demand for your inventory?
  • Think through new ways to create excitement and demand around your products that appeals to customers and improves brand equity.
    • What capsule collections or collaborations or evergreen or other niche lines could create this excitement for your products, while also limiting inventory?
    • What type of campaigns can you envision around these collections that will draw in the most engaged customers and attract new ones?


  • Investors should be wary of companies that are focusing too much on their short-term cash gains rather than their long-term viability. Brands with full-price businesses should have the lowest proportion of off-price to full-price possible, allowing for upmost control of inventory without diluting the main brand.
    • What is the best proportion of off-price to full-price for your portfolio company? How can you ensure that the company doesn’t focus too heavily on off-price and can bring in enough revenue in the future to meet its growth expectations with as many full-price sales as possible?
    • How can you ensure that the company isn’t devaluing its brand or customer base by relying too heavily on off-price or other forms of discounts?
  • Your portfolio companies should be looking into ways to funnel resources into full-price products and divert resources away from off-price initiatives.
    • How can businesses add services, products and redesign their online and offline experiences to encourage more people to buy full-price and stand out in a consumer landscape that is increasingly fed with lower prices?

Real Estate Professionals

  • Real estate professionals must think through how to respond to the rising popularity of off-price department stores and increasing closures of full-price department stores.
    • How can you decipher which off-price stores to include in your property? How will this affect your contracts with full-price tenants?
    • What legal and logistical changes should you establish for stores that want to include in-store off-price options like Backstage at Macy’s?
    • How can you design the retail spaces in your property to be flexible to your tenants’ changing needs as they introduce off-price, capsule collections, or reduce inventory?
  • Properties need to evolve the composition of full-price and off-price tenants, without offering so many off-price stores that they drive away full-price shoppers.
    • If you haven’t traditionally accepted off-price stores in your properties before, how can you work with tenants to advertise their off-price options in a way that doesn’t denigrate the perception of the store or your property?
    • When it comes to the ratio of off-price and full-price stores in your property, how can you survey and learn from your competitors to compose the most effective blueprint for your mall? Where can you position off-price stores in your property so as not to detract from full-price traffic? Where can you position off-price options to best complement full-price options?
    • What incentives can you provide full-price tenants? How can you advertise them or collaborate with them in a way that encourages more foot traffic to full-price stores on your property?
    • As full-price anchor stores turn increasingly to off-price, how can you assess the long-term effects of this move on your property? Are you better off bringing in younger, full-price options to offset this shift? What about other anchors like gyms?

Confident and consistent pricing

In order to sustain and evolve in the long run, companies should establish a confident and consistent pricing strategy. In turn, investors and real estate developers should incentivize and work with brands and retailers whose price structures prioritize full-price over off-price and discounting. Incorporating lessons from direct-to-consumer and ecommerce companies into traditional brands and retailers can attract more full-price customers to meet this goal.   


  • Brands and retailers can learn from direct-to-consumer companies, which use other strategies like an invisible “straw man” to establish less detrimental, more confident pricing.
    • What would happen if you eschewed discounting your products altogether?
    • How long would it take to wean yourself off of discounting? What stakeholders would need to be on board? How can you use customer insights to prove your case? How can you learn from your competitors’ moves?  
  • Look inward at inventory practices, customer insights, and/or stakeholders. Gather a team that can help you conceptualize, test, and eventually change new pricing structures that emphasize full-price.   
    • How could you prioritize long-term thinking at the expense of short-term losses? How would you need to change both internal and shopper incentives to make this happen?
    • How can you think through what kind of timeline is most effective? How can you ensure that you do not alienate customers in the process? How can you begin to market yourself as a company not built around discounts?
    • What will it take to infuse this new pricing structure into your wholesale and/or direct supply chains?
    • If you have excess inventory, what’s a more clever way to discount your products to avoid diluting your brand image?


  • Investors should research the landscape as it changes quickly to de-risk their investments on companies—especially those brands and retailers that are digitally-native and direct-to-consumer—and ensure that these companies have a pricing architecture that will scale well over time.
    • How can you ensure that a digitally-native or direct-to-consumer company you’ve invested in is positioning its pricing structure for eventual profitability and significant scale? Does it have the margins to support a large retail network as well as continuous ecommerce investments?  
    • How can you position your investments to work toward building better valuations, less inventory, and more full-price customers for these companies?
    • If your company subsidizes prices, how long should it continue to do so before it erodes its own scalability? How could up-front pricing offer more transparency with shoppers and more scalability over time?

Real Estate Professionals

  • Properties need to feature destinations for full-price shoppers, and ones that will wean “treasure hunter” and “coupon” shoppers off of their low-price expectations.
    • How is your property’s blueprint affecting and drawing in off-price and full-price shoppers? What supplemental tenants could you bring in that would cater to more full-price shoppers and don’t rely on discounting?
  • Work with your tenants to rely less on discounting, knowing it will positively impact tenants across the entire property.
    • How can you discourage high levels of discounting by your tenants and instead encourage full-price businesses?
    • How can your data about foot traffic and shopper demographics help companies decipher what price points they can offer without discounts and where they should index their full-price businesses?
    • How can you use short-term leases or concessions to specifically incentivize full-price business, possibly even giving them better lease terms because of the shoppers they bring in?