As department stores pull back, discounters are taking off

The closing sale at the downtown Minneapolis Macy's was in full swing, but the Marshalls next door was hopping nonetheless during a recent lunch hour.

Graduate student Rachelle Henderson, her arms overflowing with clothes and a box of makeup brushes, was one of a dozen customers waiting in line to check out. A loyal Marshalls shopper, it didn't even occur to her to check out Macy's, even with the liquidation sale.

"It's way cheaper here," she said. "And at Macy's, it's so big and hard to find stuff."

This is the new reality facing department stores. Not only are they seeing more shoppers flee to the internet, but consumers also are increasingly gravitating to off-price retailers such as T.J. Maxx, Marshalls, Nordstrom Rack and Burlington Coat Factory.

They offer several things department stores often don't: discount prices without having to wait for coupons or sales, an always-changing product mix, and the thrill of the hunt. And their parent companies are opening and expanding throughout the Twin Cities while department stores are pulling back.

The changing landscape can be seen on Nicollet Mall itself, which decades ago was the center of the retail universe in Minnesota and home to several department stores. The last one standing is Macy's — which started as, and is still referred to by many Minnesotans as, Dayton's. But it, too, is set to close later this month.

Among the retailers still going strong along the corridor, Marshalls and Saks Off Fifth are down the street in the City Center. Set to join them this fall is a Nordstrom Rack across the street in the IDS Center in a space left vacant when a Gap store closed in 2015.

"We couldn't be more excited to open a Nordstrom Rack right in the heart of downtown Minneapolis," Jessica Canfield, a Nordstrom spokeswoman, said in an e-mail. "We feel that this will be a great location that offers better convenience for our customers."

The chain has three other Rack stores in the region, including one that opened in 2015 in St. Louis Park, and is adding another one in Woodbury this spring.

While department store sales have been struggling, off-price stores have been on the rise. During the holidays, Nordstrom's full-line department stores saw comparable sales drop 2.7 percent, but its Rack stores were up 4.3 percent. And while it has been opening only a couple new department stores every year, Nordstrom has been growing its Rack division much more quickly. It plans to have 300 Rack stores by 2020, up from 215 currently.

After reporting a 5 percent increase in annual comparable store sales, executives at TJX Cos. — the parent company of Marshalls, T.J. Maxx, and HomeGoods with 3,800 stores — said last month they will accelerate new store expansion this year, adding more than 200 stores worldwide. The company, which also has opened four new stores in the Twin Cities area in the past few years, sees runway for another 1,300 stores in North America.

Two years ago, annual sales at TJX eclipsed those of Macy's for the first time. The gap has widened since then. TJX just finished its last fiscal year with $33.2 billion in sales, compared with Macy's $25.8 billion.

Macy's, meanwhile, is in the midst of closing 100 stores, including its flagship store on Nicollet Mall. J.C. Penney announced last month that it will close 130 to 140 stores, or about 14 percent of its fleet. And Kohl's also said after reporting disappointing results that it would shrink its stores.

Department stores "can be quite boring, can be quite dull, can be quite predictable," said Neil Saunders, managing director of GlobalData Retail. "But with off-price, it's sort of a treasure hunt. You don't know what you're going to get. It almost gives us a form of entertainment."

Sales at off-price retailers have grown 5 percent in the past year, while department store sales dropped 3 percent, according to data from the NPD Group.

And the off-price sector is expected to grow about 6 to 8 percent a year over the next five years, far outpacing the rest of the apparel market, according to Moody's.

One of the major draws of off-price stores is that they turn over inventory much faster than department stores — and the prices won't likely go down further — creating more of a sense of urgency among shoppers, said Christina Boni, a senior analyst at Moody's.

"There's a call to action to purchase," she said. "If you don't buy it today, four weeks from now it probably won't be there. ... So take it or leave it."

By contrast, shoppers can usually expect to be rewarded if they wait to buy at department stores, she said. The items will likely not only still be there, but at marked down prices.

Since off-price retailers often make opportunistic buys from vendors based on closeouts and surplus inventory, shoppers never know what they will find. The stores often don't carry every item in every size, heightening the sense of the unexpected.

If that wasn't enough, off-price retailers are also bucking the trend by having limited or no e-commerce presence. T.J. Maxx only launched an online shopping site in 2013. Marshalls still doesn't have one. It shows, analysts say, that if you have the right products, shoppers are still willing to come to stores to make purchases despite the industrywide shift to online shopping.

They don't really need do to e-commerce yet because their model is not easily replicated online and they know they are more likely to win if they keep getting people to come to their stores, said Marshal Cohen, an analyst with the NPD Group.

"Online would only create less frequency of shopping in the store," he said. "They know when you're in the store, you're going to spend more money."

As these discount chains increasingly flex their muscle, department stores are trying to stay relevant by investing in their websites and apps, boosting their private-label merchandise and trying out new concepts in its stores. J.C. Penney, for example, has begun selling appliances again to help bring in new business.

At the same time, many are pursuing their own off-price strategies.

In the last year or so, Macy's has added about 22 off-price departments called Backstage to its existing stores. This year, it plans to add them to another 30 stores in an effort to maximize its current real estate without opening new stores, while also hoping to draw in new customers.

Saunders thinks it makes more sense for retailers to keep some physical and brand distance between their core and discount divisions as Nordstrom has done with its Rack division.

"Off-price can't be used as a way to offset an ailing department stores," he said. "But it can be a successful addition. It gives department stores a way to clear excess merchandise rather than cluttering up full-line department stores and to capture other parts of the market."

In any case, while it may have seemed like these discount chains were a passing fad after the Great Recession, Saunders said they are pretty clearly here to stay.

"It isn't just about saving money," he said. "It's about that idea of getting a bargain. Everybody likes to get a bargain. It doesn't matter if you're rich or poor."

kavita.kumar@startribune.com • 612-673-4113