– How are stores like Marshall’s, Ross, and TJ Maxx able to sell things for a cheaper than retail price?
In: Economics
These stores sell a lot of remaindered products, things that didn’t sell very well, last year’s fashions, out of season items, those sorts of things. The whole process goes something like this:
* Michael Kors comes out with a new $100 top, in three designs
* Macy’s buys all three and offers them at retail
* two sell really well, Macy’s orders more
* one does not, and starts piling up in MK’s warehouse
* TJ Maxx comes along, buys them at a steep discount, and offers it for $50
Retail prices are hugely marked up — 100-200%. So there is plenty of margin for sales, etc. And if things don’t get sold in regular retail channels (say Macy’s or a brand store), either the manufacturer or full price retailers will liquidate to discounter chains like the stores you mentioned. So they’re paying a discounted wholesale price. They’re also running no-frills stores with fewer employees than a higher end store.
So a $100 Polo sweater might cost Macy’s $50. They might sell it at full price or on sale, say 20% off = $80. Or, when nobody buys the brown ones they sell them to Ross for $40 and cut their losses. Ross then liquidates it for $60.
Normal “retail” prices are marked up heavily above the actual wholesale price the store buys them for. That allows them to heavily discount retail prices and still make a profit
Normal retail prices are actually a lot more than what the company buys them for, they just mark up the price. When you go and buy a shirt you’re buying 1 product from the store but when the company buys a shirt they actually buy a couple hundred of them so they not only get a cheaper, pre-markup price but they also get discounts from the manufacturer for buying in bulk. Because of how capitalism works there are even some products that the companies get for less than a cent a piece but sell for upwards of 20 bucks.
They sell overflow product with the major stores they are affiliated with over order, old stock their affiliated stores or the manufacturers themselves were not able to sell, and stock with minor problems like a missing button or slightly misaligned seam that the major stores reject but that still look good and can be worn without issue. All of these are purchased at steep discount due to the
The normal process for a retail good goes something like this.
It costs $1 to produce a thing. The company that produces the thing has some other costs to cover plus they want to make a profit so they sell the thing for $2.
A store buys it for $2. The company who made the thing suggests a price of $3 for sale to the end user. The store sometimes sells for that, other times they might mark the item down. Sometimes a store will sell an item at or below cost because it’s helpful to get the customers into the store to buy other things. Grocery stores do this with the items that basically all people purchase, like bread, where they sell it at a very low cost hoping that you buy all your grossness at the store.
Now lets add a layer of complexity. Most stores don’t buy their items straight from the manufacturer, rather there are other layers of businesses that exist between the manufacturer and the retail store. These businesses are known as wholesalers or distributors.
At each level of this process every company pays X for the item and resells it for more than X thereby covering their costs along with a profit.
Now, here’s a problem. If a wholesaler purchased a thing for $5 and wanted to sell it for $10 but it’s just not selling. The items are sitting in the warehouse. Things sitting in a warehouse actually cost money, you need to pay for the warehouse and for the employees to move the stuff. But also you might have spent a lot of money on that inventory and you can’t buy new inventory until the money comes back in from the old inventory.
So the wholesaler sells the items for cost just to be rid of them. No one wants them at $10 each but at $5 each they all sell to TJ Maxx who then sells them at a price where the retailer makes a profit is still WAY below what the consumers would otherwise pay.
Latest Answers