Last year Moody’s Investors Service released a report noting stellar performance by off-price retailers T.J. Maxx, Ross, and Burlington, and predicting steady growth of 6% to 8% for them in the next five years, above the 4% predicted for the rest of retail.

And those leaders, according to the report, "Off-Price Apparel and Home Retailers to Remain One of Leading Retail Groups,” have few supply constraints to inhibit their growth.

The sector has become a shining city on the hill for other retailers looking to cash in.

"Off-price retailers have become too big to ignore for most large vendors, including high-end brands that don't want to be associated with bargains," Moody’s VP and senior credit officer Scott Tuhy said in September. "Their willingness to address high-end stores' brand concerns has led to deeper and broader relationships, while at the same time the quality of their merchandise has improved.” 

Nordstrom, which opened its first Nordstrom Rack off-price store in Seattle in 1975, has recently accelerated its growth strategy for its Rack stores. Hudson’s Bay, the parent of Saks Fifth Avenue, has similarly targeted its growth strategy to digital and its Off 5th stores. And Tony Spring, CEO of Macy’s sister brand Bloomingdale’s, said this year that the retailer sees “Bloomingdale’s Outlet as a growth vehicle for our company as we continue to refine and roll out stores based on our earnings over the past several years.” 

And, now, Macy’s

Macy’s Tuesday joined the fray, announcing that it’s testing four outlet stores, dubbed Backstage, in various spots in the New York City area. 

Backstage merchandise will be culled from clearance racks at Macy’s stores and from “special buys” of excess inventory from suppliers, and prices will be 20% to 80% lower that what’s found at flagship stores, according to the retailer. “Specially made” merchandise (read: lower quality) isn't part of the plan right now, but isn’t off the table for the future, either, Macy’s told MarketWatch. 

The shiny object: T.J. Maxx

All the sales reports from off-price retailers, most notably T.J. Maxx, have clearly been hard for department stores to resist. 

“Today we are raising our estimates for our long-term store growth potential to 5,475 stores, 325 more stores than our prior target,” said TJX CEO Carol Meyrowitz in a Q1 earnings call in February, saying also that the retailer has “enormous brick-and-mortar global growth potential.”

The cannibalistic downside

But the copy-cat moves may be happening because department stores don’t know what else to do, Mark Cohen, director of retail studies​ at Columbia University's​ Graduate School of Business, told Retail Dive.

“I get it, they’re public companies, caught in a vise,” Cohen says. “They seem to be acting as if this is the only path available, and, in a short term sense, that’s true. But these companies are steaming away in the ocean, and they’re running out of fuel, so they’re starting to strip the superstructure for things they can use in their boilers. The problem is, at some point, when you run out of deckboards to burn, you strip the hull, the water comes in and it’s game over—you drown.”

While the success of T.J. Maxx is an act department stores may want to follow, they’re missing the fact that T.J. Maxx’s growth has no cannibalistic downside, Cohen says. Yet, for department stores, not only will some sales transfer from flagship stores to outlets, but the expectations of discounts also sets up pressure to continue the heavy promotions that department stores are already constantly offering.

Finally, the move could be detrimental to the flagship brand, another concern that T.J. Maxx just doesn’t have— especially for retailers that bring in lower-cost, lower-quality merchandise specially made for their off-price stores. 

“They’ll do a lot of business. The question is: How much is truly incremental, how much simply represents transfer sales,” Cohen says. “And more insidious than that, how much will it further erode Macy’s brand equity?”

Seven days of deals 

Cohen notes that Macy’s customers already have come to expect sales nearly every week, with heavy discounts that carry few if any exclusions. And a luxury department store like Saks could find itself having to play that game if its Off 5th brand looms large. 

Luxury handbag retailer Coach seems to be learning that lesson the hard way. Its strategy to eschew discounting is undercut by the prevalence of its own outlet stores, according to reporting by the New York Post. In fact, an estimated four out of five handbags sold by the company are from outlet stores, which are 201 of its 478 stores, Wells Fargo analyst Paul Lejuez told the Post.

“It kills their regular business,” Cohen says. “I cannot almost imagine buying something at full price at Macy’s anymore. How does Saks expect most of their affluent customers to pay regular price when any day of the week they can get a deal?”

So, what happened to the American department store?

The American mall happened. 

Cohen, who worked for decades in retail himself, said the roots of department stores' current predicament run deep. In some ways it started with the suburbanization of America and the rise of the mall, which gutted downtown areas and swept away what Cohen calls the “wonderment” of the urban department store. Even though department stores did well as mall anchors, they were also suddenly surrounded by specialty stores that diminished their offerings.

The stellar customer service of the department store’s heyday has also greatly fizzled, Cohen says, leaving the likes of Costco, which pays and trains its associates extremely well, to carry the mantle of the best in customer service.

What’s the answer?

Cohen says that, rather then spending so much energy on off-price stores, department stores should be upping their e-commerce game, bringing back some unique departments like Macy’s Williams-Sonoma-like Cellar, and improving their in-store customer service.

“The really talented and effective merchants know how to create great value,” he says. “There aren't as many people like that around. The antidote is and always has been creativity. We will not stop consuming things that we feel we must have. The folks who play to that really well are increasingly young, innovative organizations, with a mix of e-commerce and physical stores, along with the Amazons who have consolidated it all. Going ‘outlet’ is just treading water.”