The Squeeze from Bottom-Up, Top-Down

At a time when store closings and consolidations are dominating the headlines, understanding the underlying industry dynamics also requires paying close attention to new store openings. Brands that are expanding their footprints are providing a revealing look at how consumer shopping patterns, priorities and preferences are evolving. In turn, this shows what might be in store for the retail industry ahead.

Regardless of what the volume of coverage or casual media narratives might suggest, there are a significant number of new store openings to talk about. We are in the midst of a turbulent (and fascinating!) time for the retail industry, and that period of transition is ripe for both consolidation and new additions.

The vast majority of new store openings are taking place in two major retail categories. The first is the discount sector, where off-price concepts are expanding at an impressive rate. The TJX Companies’ discount brands, including T.J. Maxx, Marshall’s and HomeGoods, continue to grow at an impressive rate. In another indication that discount concepts are thriving, TJX recently announced an upcoming HomeGoods spinoff–a new home concept store that will be rolled out sometime next year. Ross Stores is continuing to roll out their deep-discount format: dd’s Discount, which offers bargain-priced fashion and home goods. Dollar General–and the entire dollar store category–continues to expand nationally. Further down the discount chain, in a category you might call “off off price,” brands Ollie’s Bargain Outlet are also opening a large number of new stores.

This strong growth and activity in the discount and off-price sector is more interesting when you consider the other retail sector that is currently opening new stores: high-end specialty retailers. Specifically, the online-only retail concepts that are relative newcomers to the brick-and-mortar space. Brands like Warby Parker, Bonobos, Birchbox and Brilliant Earth are occupying new spaces and new markets, and they are doing so with strategic precision. They are following a pattern perfected by groundbreakers in this space like Apple and Amazon, who have leveraged their online information to great advantage. When online retailers have accumulated extensive information about who buys their products and where, site selection becomes less of a guessing game. Online brands moving into brick and mortar can zero in on ideal locations in ideal markets–in some cases even micro-merchandising a location–a clear advantage over their brick-and-mortar-only counterparts.

With most growth located on both ends of the pricing spectrum, discounters at one end and higher-end specialty retail at the other, the result is a kind of barbell-shaped expansion curve. Middle-market brands are treading water (and in some places sinking) while discounters and specialty/online concepts gain ground. To some extent, we see that same barbell dynamic reflected in the grocery sector. The success of discount brands like ALDI and Costco, and the proliferation of grocery offerings from non-traditional sources like Walmart and Target, has pushed traditional middle-market grocery stores from the bottom-up. On the other hand, gourmet, high end or organic-based markets like Whole Foods and Sprouts have applied similar pressure from the top-down.

I think it’s noteworthy that one end of that barbell is being supported almost entirely by formerly online-only concepts. If you remove these retailers from the equation, then the barbell becomes be even more lopsided. This speaks to the dominance of the discount sector right now. Value and affordable pricing remain top consumer priorities, even with the lean times of the 2000s recession behind us. The recession may have ended, but it seems that the shopping patterns remain. I would have thought that an improving economy would help full-price and upscale stores bounce back. To some extent, it feels as if we have been “taught” to shop this way. Members of the influential Millennial demographic are clearly motivated to a large extent by value, but they are hardly alone. When T.J. Maxx first came on the scene, conventional wisdom was that it would be popular for middle- and lower-income individuals­–but discount shopping turned out to appeal to a universal demographic.

There is no better testament to the power of discount retail than the fact that upscale and luxury brands all seem to have their own discount counterparts as well. Nordstrom Rack, Last Call by Neiman Marcus, Bloomingdales Outlets and Saks Off Fifth are all evidence of the fact that not only is discount at the top of the retail heap right now, but it looks to stay that way for quite some time.