Global Supply Hits a Local Nerve: The Rise of TJX Companies

Global Supply Hits a Local Nerve,

The Rise of TJX Companies

First, it was socks and underwear. Then the occasional shirt, perhaps a pair of pants. Then I was earnestly perusing the isles looking for a new paring knife or a hand held juicer for when I made guacamole. Soon I looked down and realized my whole outfit, all my kitchen accessories not to mention my socks and underwear were all from Marshalls. How did this happen? According to a 2014 article from "Fortune," TJX companies the parent company of Marshalls has enjoyed 18 consecutive years of earning per share growth. I suppose it was only inevitable. In fact, in the year 2000, it ranked 126^th on the "Fortune 500" list. As of 2016, it has climbed to number 89. Through the economic downturn and the preceding years of uncertainty it showed strong growth. The company is doing a booming global business. How is TJX doing so well in the notoriously finicky retail market? Let's start with the basics.

Nuts and Bolts

The current CEO of TJX Companies is Ernie L. Herman, however, the company owes it's current success to Carol Meyrowitz who started with the company as a buyer over 30 years ago and rose to CEO in 2007. Presumably, she knew the company inside and out. What was more, she knew the business of buying merchandise, a key element to the TJX model. Revenue for the fiscal year 2016 is USD 30 million. Sales growth is 6.2%. It holds assets of USD 11.5 million. The transfer of power from Meyrowitz to Herman has been smooth. In fact, the company has recently announced that it will raise it's minimum wage to $9/hr; following in the footsteps of companies like Wal-Mart. TJX's headquarters are based in Framingham Massachusetts. With its year on year growth, TJX has expanded from 1,700 stores in 2011 to 3,600 in 2016. Domestically, the companies brands consist of TJ Maxx, Marshalls, HomeGoods and Sierra Trading Post online. In Europe, the brand operates under the name T.K Maxx in Austria, The Netherlands, Poland, The UK, Ireland and Germany. In Australia, they recently acquired Trade Secret and Home Secret, sister stores that sell clothing and home furnishings.

Much as been written about TJX companies success.

Rival retail chains and department stores have been watching with disbelief as they flounder to stay in the black while TJX soars past them. There is more than one reason for its success. The economic downturn changed many shoppers attitudes and shopping choices. In addition, TJX has been able to capitalize on the up to the minute fashion trends of consumers through its network of flexible supply chains and intrepid buyers. Thirdly it has connected with consumers and adapted to their needs in a way that old-school department stores have been unable.

Stretching the All-Mighty Dollar

The global recession hit the middle classes hard. Consumers who were used to shopping at stores like Macy’s, Nordstrom, and Sacks 5^th Avenue could no longer afford to spend their money on full price, brand name merchandise. Consumers needed their dollars to stretch further, more than that they also wanted to wear clothes that were fashionable and of the moment. Stores like TJ Maxx and Marshalls provided the consumer with many of the same brands they could find in higher end stores, for 20%-60% off the department store price. While quality is a concern for some, according to an article in USA today, people look for style and brand name first, considering quality second. There is no doubt that “throw-away culture” has bolstered TJX’s revenues. TJX prides itself on passing value on to its customers.

It’s not all good news, however. Bizarrely, when merchandise is sold so cheaply to the consumer, it’s long term value drops drastically. The trend of disposable clothes leads to global waste and over-consumption. As global manufacturers try to compete with a lower and lower price point, they are often forced to cut corners in their factories, which sometimes leads to unsafe working conditions and terribly low wages for workers. According to analysts that have tracked the rise of TJX, consumers no longer buy shoes or pants with the intention of keeping them for an extended period of time. If a pair of shoes only sets you back $50, there is no impetus to have them repaired.

Responding to the Market

The secret to TJX's success is its ability to work quickly and efficiently within local and global supply chains. TJX’s army of “buyers” are empowered to make deals with designers and manufacturers without checking in with the home office at every turn. They are trained to start from an “in store” price point and find the best deals that match that price. When TJX says to a designer “We’ll take the entire inventory of your polo shirts” for instance, the designer hears music. TJX can spread that inventory around to their multitude of stores, shifting merchandise around until it has all sold. If it is still doesn’t sell they can discount it further, or write it off and pass it on to a thrift store.

TJX has severely undercut department store revenues. According to an article on mental-floss.com off-price retailers like Marshalls and TJ-Maxx take advantage of a buyback clause. It is likened to insurance for the department store. For instance, a company like Macy’s will purchase an entire spring inventory that goes on sale in February. The designer or manufacturer must buy back that leftover merchandise if it isn’t sold by the time summer stock goes on the rack. This is where TJX’s intrepid buyers come in. They purchase those pants and shirts without a buyback clause, which makes them cheaper because they are purchased without that "insurance."

Buyers at TJX are highly trained, shrewd negotiators. In some instances, buyers wait until the last possible minute to purchase stock, which enables them to buy exactly what is in demand for the current season. Unlike single huge shipments that arrive at department stores, TJX stores take daily deliveries of merchandise, bought piecemeal depending on market demand. According to an article on fortune.com, many buyers leave the job not because they don’t like the work, but because they cannot keep up the pace of near constant international and domestic travel. From Delhi, India to Dulles International, they are constantly looking for deals 365 days a year.

The flexibility and adaptability of the off-price retail model are perfectly suited for the fast-paced globalized world. When the buyers at Marshalls realize men’s pastel shorts are flying off the shelves, they have the ability to find sellers who have a surplus anywhere in the world, make the deal and have the shorts on the rack in downtown crossing by the end of the week.

Endorphins, Symbiosis and Unspoken Relationships

According to the former CEO, the average income of a TJX shopper is around $40,000, however, some earn considerably more. How does the company cater to such an economically diverse clientele? The trick is, everyone loves to hunt. One does not take a trip to HomeGoods looking for a specific item, the inventory is too changeable from week to week. The motivation lies in the idea you may find a diamond in the rough. In the retail industry, this is called "Treasure Hunting." The promise, the hope that you will find something you didn't even know you needed, but cannot pass up because the deal is too good. In fact, the variety in their stores almost ensures you will walk away feeling satisfied. Perhaps you didn't find a lamp, but how can you go wrong with some eggnog flavored coffee? TJX has become masters of the thrill of the hunt. Buyers also make sure there areof plenty of deeply discounted items in the store, however, they pepper the isles with higher priced items as well, catering to modest and extravagant budgets alike.

The variety on the shelves would not be possible without their network of global vendors. TJX has become masters at making something out of nothing. Let's say in their vast network of buyer-vendor connections they discover that a Polo Ralph Lauren Factory has a surplus of leftover denim fabric from a new line of jeans. TJX will contact the vendor and request they make the same style of jean for them as well. The word style is important here, because while the jeans will have the same “POLO” tag on them, they will be made just slightly differently, perhaps to simpler specifications, and without a high level of detail. TJX gathers together the global scraps, the odds and ends and makes deals beneficial first to them, then to the consumer. Maybe the vendor can’t make 500,000 pairs of bargain jeans, but they can make 50,000. That’s perfect, TJX will take them all.

All through this process negotiations are taking place between TJX and Ralph Lauren or Izod or Coach Bags. Or are they? In all the resources I’ve found not one luxury brand will admit to working with TJX. Why? Because they have to protect the integrity of their luxury status in the global marketplace. How can they claim to be a luxury brand and sell a dress in a department store in Dubai for $600 when you can find the same dress at a T.K. Maxx in Germany for half the price?

The truth is luxury brands count on the off-price stores for their survival. They are concerned primarily with turning a profit, wherever they find it. The brands use these discount outlets to control the supply and demand of their goods. They will make a small number of dresses in a high-quality material and show a model wearing that dress on a billboard in every major city from New York to Geneva. The high-quality version of that dress will show up in upscale department stores worldwide (eventually, it will make it's way to Marshalls if it doesn’t sell). A similar version of that dress, made of a cheaper material, but the same brand name will show up in off-price stores at exactly the same time. Everyone gets to wear the latest fashion, with a price point that suits them. The American dream realized.

TJX Companies had become a master at many crafts. Supplying the consumer with perceived value. Manipulating, employing and creating global supply chains, and providing an addicting shopping experience for a broad consumer base. They have empowered their buyers to act autonomously thereby securing the best deal before it’s gone. In a way buyers stocking the shelves and consumers depleting them share the same characteristics. Make the purchase before it’s gone forever. This model has seen enormous success and continues to grow. I confess I still buy my socks, underwear and whatever else at Marshalls. Something beyond the scope of this analysis, yet an important question to ask is: what moral imperative does global consumer culture hold for us? At what point have we consumed enough?