For numerous reasons, off-price, a substantial component of the overall fashion business, stands out. First, off-price has become a growth engine: it grew faster than the whole business before the pandemic, had a milder decline in the early stages, and is expected to grow five times faster than the full-price segment between 2025 and 2030. Second, compared to the entire fashion business, off-price lends itself better to online purchasing, thus it has been well positioned to catch a rising number of buyers going online. Last but not least, both customers and brands are more concerned about sustainability. Overstock will always exist, therefore brands must find a sustainable way to monetize their extra inventory.
In order to gain a larger proportion of the off-price market, fashion firms will need to devise complete strategies that safeguard their whole brand equity while catering to off-price customers. Because the category is made up of two unique channels—offline and online—each with its own set of strengths, characteristics, and difficulties, marketers will need to develop tailored, complementary strategies.
As a result, marketers must employ a multifaceted strategy to maximise revenue from both channels while also protecting their brand equity—all while avoiding cannibalism of full-price products. Brands who master the off-price market will be able to ride the wave while also enhancing their overall customer position. As fashion manufacturers strive to stimulate the off-price category, three goals will be crucial.
Off-price shopping in the EU is on the rise.
Off-price has grown too huge for brands to ignore, thanks to consistent expansion in recent years. Total sales for the European Union's fashion business was €368 billion in 2021, according to McKinsey's market model, with the off-price segment contributing for 11%, or €40 billion. 1 In 2025, this percentage is expected to climb to 12%. Off-price will remain an essential and dependable engine in the next years, as the industry is expected to return to its usual growth rate of 1% per year. It's a particularly useful chance for fashion firms to get out to buyers who might otherwise overlook their full-price offers.
The off-price segment, which includes the mid­market, premium, affordable luxury, and luxury price categories, differs from the wider EU fashion business in various aspects, but one of the most significant is its expansion through the internet channel. The online channel accounts for over 40% of the off-price sector, significantly more than the overall fashion market. Because of its higher comfort, ease of filtering and browsing, and range of choice, the internet channel will account for nearly all of the growth in the following year.
Midmarket, premium, affordable luxury, and luxury brands have piqued the interest of off-price customers. Indeed, these categories account for 80% of total online off-price channel expenditure, which is much higher than the general market (Exhibit 1). These customers aren't necessarily looking for the cheapest things; instead, they value brand choices and special deals more than the usual fashion shopper. As a result, off-price players have been able to attract these medium and high-spending customers.
The retail and internet channels in off-price are increasing at distinct rates. The prevalence of outlet malls gave the offline channel a tremendous head start. It accounted for 75% of the off-price market in 2015. Since then, the internet channel has grown rapidly: it generated predicted sales of €17 billion in 2021 and is expected to rise at a rate of 13% per year until 2025. (Exhibit 2). According to our research, internet channels will account for nearly all of the growth in off-price in the next years.
The two off-price channels' growth curves reflect their distinct characteristics. To design an effective plan, retailers must first understand the characteristics of each.
Offline bargain: a destination and an adventure
Over the last few years, the offline world has changed. The goal of the first generation of off-price was to ensure that the channel didn't undercut the full-price market. Off-price stores were mostly found outside of cities, and businesses made little effort to create an inviting ambiance, with goods stacked high on tables and racks for customers to sort through.
Brands are now recognising the offline off-price channel as a significant revenue generator that requires a corresponding experience. Today's top off-price malls and towns have a high-street vibe to them. For example, west of London, Value Retail's Bicester Village has its own train station, fantastic restaurants, art installations, and meticulously managed flora. All of these factors come together to produce a thrilling experience, which is why many buyers plan daylong trips to off-price malls. Consumers encounter many of the same aspects inside stores as they do in full-price locations, such as the look, feel, and layout. Customers can get help from a salesman who speaks their local language because many employees are multilingual. In many cases, once customers travel the lengthy distance to outlet villages, they have a similar experience.
Even some of the most well-known luxury and lifestyle businesses have embraced the offline off-price channel to acquire scale and boost profitability in this environment. Successful operators have been able to leverage off-price as a client acquisition channel for their full-price goods without jeopardising their full-price business. Customers shopping for luxury in off-price retailers are often younger and wealthier than the general public, providing businesses with an opportunity to reach new demographics. Because the barrier to entry into an off-price luxury store is typically lower for consumers than travelling to a pricy, high-fashion neighbourhood, firms have increasingly discovered strategies to safeguard their brand and attract customers they may otherwise overlook.
Increased demand and supply for online off-price
Better deals are just a click away thanks to the growing popularity of the online off-price channel. Customers are attracted to it because they can find desirable brands (usually midmarket or above) at reduced rates. Several online business ideas have gained traction:
Dress-for-less, limango, Veepee, and Zalando Lounge are examples of off-price retailers who use flash discounts as part of their business model. The gamification of deal hunting can encourage the most devoted customers to check apps on a frequent basis to see what their favourite brands are offering. However, this restricted selection is only accessible during flash discounts.
Off-price retailers can also provide a constant supply of fashion items (for instance, BestSecret, Booztlet, brands4friends, Otrium, and YOOX). Consumers can shop for things on these sites all year, similar to the convenience of full-price players, though some sizes and colours may be limited.
In recent years, luxury mystery box platforms have arisen. HEAT and SCARCE curate boxes of goodies from over 60 luxury labels and plan surprise drops that are publicised on social media. 2 These companies keep price hidden by spreading reductions across the contents in each box to safeguard the integrity of participating brands.
The variety and openness of these models can be used to categorise them. In terms of selection, some models let customers to buy certain things year-round—for example, jeans—while others only sell items or products from a certain brand for a limited time. In terms of transparency, players that use the aforementioned online off-price models also provide closed, members-only clubs. Some even limit access to invitation only, which protects brand equity, while others impose a minimum annual purchasing value to keep customers engaged.
During the pandemic, the rapid migration of consumers to e-commerce drove the online off-price channel. A closer look at the expanding demand by country reveals the channel's long-term viability and wide popularity. Over the last year, consumer demand in many EU countries has increased dramatically. In Germany, for example, demand tripled from 2020. Demand is expected to expand at a rate of 16 percent per year in six European Union nations until 2025. (Exhibit 3).
Supply is expected to continue a similar path, according to indicators. From 2021 to 2025, the European internet off-price supply is expected to rise by 13 to 16 percent yearly, leaving enough stock if demand grows faster. For a variety of reasons, even with more accurate, analytics-based forecasting, overstock will continue to exist. Long production lead times, rapidly shifting fashion trends, and other factors influence demand and are mainly out of brands' control. Because brands have large product portfolios with thousands of SKUs and colour and size variations, handling order amounts at the SKU level is extremely difficult.
In order to control volumes, employ price cuts without diminishing brand equity, and gain access to new client groups, many brands are increasingly adopting a more strategic approach to the off-price category. Rising demand for sustainability is another favourable driver for growing supply, since it prevents the destruction of potential excess and makes off-price sales a positive addition to ESG measurements and brand image.
Although the off-price channel has a significant development opportunity for brands, it should be viewed as a supplement rather than a substitute. Select North American brands, for example, are managing dedicated inventory production for the off-price market, a risky practise.
The tremendous rise of the internet channel will be aided by several significant tailwinds. The shift from traditional brick-and-mortar stores to online purchasing is expected to continue (see sidebar, "Getting to Know the Online Off-Price Enthusiast"). Furthermore, online fashion marketplaces have grown in popularity, providing shoppers with a wide range of options on a single website. With a bigger online market share, there will be more possible off-price channels, and companies will need to actively control them.
Creating an all-encompassing off-price strategy
Off-price should be treated as a substantially independent but complimentary category for full-price goods by fashion firms. The goal should be to grow the company as a whole while preserving the brand's reputation. Three criteria can help brands make the most of off-price opportunities.
Defend the brand across all platforms.
The top outlet mall and village owners have developed a fantastic shopping experience for customers while avoiding excessive pricing and volume transparency. The physical separation of outlet locations and high-street city cores has traditionally provided more comfort because manufacturers don't want buyers to know they can get things on sale a week later.
Brands were first hesitant to participate since online off-price platforms threatened to make pricing for every item just one click away. The introduction of closed off-price portals, on the other hand, allows firms to reveal prices and discounts while maintaining such barriers. Fashion firms should keep an eye on the reach and transparency of online platforms while also keeping up with emerging membership-based models.
When it comes to choosing mates, be cautious.
Regardless of model, the finest off-price partners will expand a brand's reach. When it comes to the offline channel, firms should look for partners who have a network of locations in other nations and areas. To emphasise a brand's originality, the customer experience should also be a top emphasis. In the internet channel, companies should assess their partners' online experience (closed vs. open) and brand selection to ensure that their inventory is not harmed by being positioned next to lower-cost items.
Optimize the combination of channels
Fashion brands should consider how offline and online channels may complement one another across touchpoints. While the change to online will happen quickly over the next five years, offline businesses and towns will continue to be popular locations due to their excellent service. They can provide customers with both immersive brand experiences and opportunities to boost brand awareness. Because many consumers still get their first taste of a brand at these brick-and-mortar locations, they can serve as a springboard for deeper interaction that can be bolstered by internet channels.
For consumers, the internet offers an appealing proposition: it provides a very convenient experience, with things available in only a few clicks. Some players have year-round standing assortments to meet item needs, whereas flash sales players provide a more gamified, bargain-hunting experience. In addition, the internet channel is a long-term solution for brands to deal with excess inventory.
Because of the expected expansion of off-price, brands must design a cohesive approach to capture more value from this market. The advantages—from higher profitability to a wider reach and a long-term strategy to sell excess inventory—far outweigh the costs. The greatest fashion brands will go one step further and improve their brand's reputation in the process.