Apparently, even upscale shoppers like a discount. High-end retailer Neiman-Marcus recently announced it was partnering with online consignment shop TheRealReal to facilitate an opportunity for customers to sell their used clothes.
Because of the outsized success of discount chain TJX Companies (NYSE:TJX), mid-tier retailers like Kohl's (NYSE:KSS) and Macy's (NYSE:M) are trying their hand at going down market to juice sales. Both retailers are opening outlet stores that operate more like a Marshall's or T.J. Maxx than a traditional discount offshoot like Nordstrom's Rack, Saks Off 5th, or even Macy's own Bloomingdale's Outlet.
Rather than stocking discounted goods that didn't sell at the full-price stores, Macy's Backstage will feature items made specifically for the outlet store, a strategy that actually hurt handbag maker Coach (NYSE:TPR) when it tried it. Off-Aisle by Kohl's is even more unusual in that it's going to exclusively sell like-new, returned merchandise.
Sure, plenty of retailers have clearance racks or shelves where open-box items or returns are sold at a big discount -- they're otherwise sold to liquidators that buy them up to resell them -- but Kohl's may be the first national chain to dedicate an entire store to merchandise that customers had second thoughts about. Still, customers can get discounts of as much as 90% at the new store. And it does say that there's potential for adding exclusive merchandise some time in the future.
But is there a risk of damaging a brand by cheapening it?
Many years ago, Tiffany (NYSE:TIF) nearly wrecked its brand's cachet when it began offering bracelets at such a low price that any mall rat was able to afford one. The ubiquity of the bracelet tarnished the reputation of what was supposed to be a jewelry store with an air of exclusivity.
It's part of the reason why Coach's sales have collapsed. While it was always an aspirational luxury brand -- a stepping stone for the shopper looking forward to the day she could afford Louis Vuitton or Prada -- Coach made its handbags ubiquitous by opening so many stores, and making merchandise available at a discount at its outlets, that it no longer appealed to women who desired something different than what everyone else had. Instead, they turned to Michael Kors and Kate Spade for fresh designs.
Coach's stock has lost nearly two-thirds of its value from its peak in 2012. This is why it's worrisome that Macy's seems to be pursuing a similar path.
Yet it's also understandable why retailers want to emulate the success of TJX. Its off-price formula has been a consistent bright spot in retail. Where the S&P 500 is down more than 5.5% in 2015 -- and Macy's and Kohl's are down 10% and 15%, respectively -- TJX Companies has actually gained more than 20% this year.
As for Neiman-Marcus, the partnership could be a good fit. According to Forbes, TheRealReal specializes "in authenticating luxury goods, then photographing the items and putting them up for sale on their website." When a sale is made, the seller gets to keep 60% to 70% of the price.
And last year, TheRealReal generated more than $100 million in revenue from selling more than half a million goods on its site. It expects to pay sellers at least $100 million this year for their wares.
So what could a luxe name like Neiman-Marcus -- where 40% of its customers have a net worth higher than $1 million and the average customer owns 48 pairs of shoes and 18 handbags -- hope to get out of a partnership with a consignment shop? New customers.
The RealReal says the people who are consigning merchandise to them by and large prefer getting paid in gift cards to retailers instead of receiving cash. A Neiman-Marcus gift card could drive more new customers to its stores. To incentivize them to do just that, the retailer is kicking in an extra 10% in savings off the goods sold with the card.
The two will also expand to 34 the number of Neiman-Marcus stores participating in the consignment program. Employees will be instructed on referring customers to The RealReal and signs will explain the opportunity of having their used goods picked up through a “white glove” service. And since Neiman-Marcus is just serving as a conduit between the customer and The RealReal, and it’s not a whole new bricks-and-mortar affair like Macy's and Kohl's are testing, any potential fallout will be limited
The National Retail Federation recently lowered its forecast for full-year industry sales from its previous estimate of 4.1% growth to 3.5%, after first-half 2015 sales only rose 2.9% year over year. The trade group is worried about consumers shifting their purchases away from goods, and toward services.
They say it may just be a temporary shift in priorities; but when even high-end names start letting their well-heeled customers rummage through the basement discount bins, investors know there are still tough times ahead.
Editor's note: This article has been corrected to reflect that there is no in-store boutique involved in the Neiman Marcus/The RealReal partnership.
Rich Duprey has no position in any stocks mentioned. The Motley Fool owns and recommends Coach. The Motley Fool owns shares of Michael Kors Holdings. The Motley Fool recommends Nordstrom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.