Important opportunity to be realized in the off-price fashion segment

McKinsey’s “Mastering off-price fashion in an omnichannel world” report states that in 2020 the discount or discount segment grew faster than the market as a whole and also declined during the pandemic.

Between 2025 and 2030 the off-price segment will grow five times faster than the market in general.

The segment benefits from a strong online presence that puts its offerings in a good position to profit from the pandemic’s online shopping boom.

“Online sales represent 40% of the discount market and are growing extremely rapidly right now – around 13% per year, on average,” says Katharina Schumacher, digital expert and author of the recent study.

“This development creates opportunities for fashion companies to get their brands to reach new consumers who wouldn’t normally consider making a full-price purchase.”

Many consumers in Europe have made more online purchases in the past year. In the off-price segment, online sales growth has tripled: the CAGR jumped from 9% in 2020 to 19% in 2021. Annual growth through 2025 is projected to be 13%. Additionally, off-pricing provides a sustainable way for fashion brands to sell off excess inventory.

Low-priced shoppers, the report says, care about style and usually start shopping without a specific brand in mind. But they enjoy comparing prices and spend 2.3 times more on their purchases than other groups of fashion customers. In Germany, 30% of low-priced customers spend more than € 1,000 per year on fashion purchases and account for 70% of total fashion spending. “At the same time, these shoppers are basically willing to pay full price for the premium and luxury brands,” says Achim Berg, a McKinsey expert in the fashion industry. “Fashion companies should therefore carefully consider which products they offer out of price.”

Low-priced shoppers who visit brick-and-mortar stores are often younger and shop more than other fashion consumers. They like to go to outlets, but they tend to avoid the regular luxury shops in the luxury shopping districts. “Outlets offer luxury fashion labels an opportunity not only to be more profitable, but also to reach new customer groups without cannibalizing their full-price assortment and damaging their brand,” says Felix Rölkens, another. fashion industry expert McKinsey and co-author of the study. “But shoppers’ expectations for outlets are constantly growing: services that resemble those of regular stores, sales staff who speak multiple languages, restaurants, and a good customer experience.”

How can brands take advantage of the discount opportunity?

Brands must adopt a multi-pronged strategy to maximize revenue for both channels and secure their brand equity, without cannibalizing full-price offerings. Brands that successfully navigate the low price market will be able to ride its wave while strengthening their overall position with consumers. Three priorities will be key as fashion brands will seek to activate the off-price segment.

  1. Protect the brand across all channels

The best outlet and resort operators have created an excellent experience for shoppers by avoiding too much transparency of price and volume. Because brands don’t want shoppers to know they can buy lower products a week later, the physical separation of retail outlets and city centers from main roads has traditionally provided more comfort.

Off-price online platforms threatened to make the prices of each item just a click away, so brands were initially reluctant to participate. However, the emergence of off-price closed portals allows brands to disclose pricing 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 subscription-based models.

2. Be insightful in choosing partners

The best off-priced partners, regardless of model, will extend a brand’s reach. 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 make sure their inventory doesn’t suffer from being positioned alongside cheaper products.

3. Optimize the channel mix

Fashion companies should have a holistic view of how offline and online channels can support each other through touchpoints. While the move to online will happen quickly over the next five years, offline retail outlets and villages will remain top destinations thanks to their exemplary experience. They can offer both engaging brand experiences and an opportunity to increase brand awareness among consumers. And because many consumers still get their first exposure to brands at these brick and mortar stores, they are a potential gateway to extended engagement that can be strengthened by online channels.

Online has an interesting proposition for consumers: it offers a very convenient experience, with products just a click away. Some players have permanent assortments all year round to meet item needs, while flash sale players offer a more playful and bargain hunting experience. And the online channel is a sustainable way for brands to manage excess inventory.

The anticipated rise in the selling price creates greater urgency for brands to develop a coherent strategy that can capture more value from this segment. The benefits, from increasing profits to expanding reach and a sustainable way to sell excess inventory, justify more than the investment. The best fashion companies will go a step further by elevating their brand reputation in the process.

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