New Economic Realities   //   March 19, 2024

‘It’s very difficult to play catch-up’: Why many middle-tier retailers are struggling

On Monday, the arts and crafts retailer Joann filed for bankruptcy after quarter upon quarter of financial trouble. It’s the latest middle-tier retailer — or, those that offer a wide range of products and brands at a mid-level price point — to suffer from slipping sales and lack of demand, a phenomenon that has ramped up in recent years as consumers pare back on non-essentials.

Right now, sources told Modern Retail, a “bifurcation” is occurring within the retail landscape. In other words, retailers that appeal to either luxury or discount shoppers are doing well. For instance, with inflation still a concern, many shoppers are flocking to off-price retailers. Last month, TJ Maxx said it saw record revenue in 2023, while Ross Stores recently announced plans to open 90 new locations in 2024. On the other side of the equation, luxury brands are starting to stage a comeback after feeling a pinch last year, and department stores are betting on new stores and private styling services to win over more luxury shoppers.

The retailers in between the two tiers — or, what “Remarkable Retail” author and podcast host Steve Dennis calls “the unremarkable middle” — are now having to get creative to appeal to everyone else. Some, like Target, are betting more on private-label products or rolling out new membership models, while others, like JCPenney, are redoing their website and app, carrying out store upgrades and creating a new inventory management system.

Either way, a reshuffling of some sort is becoming necessary to increase the odds of survival, sources say. “To the extent the economy slows down, that just puts more and more pressure on those retailers that are fundamentally disadvantaged or are weak,” Dennis told Modern Retail.

In the past couple of years, many middle-tier retailers, including Bed Bath & Beyond, Party City and Rite Aid, have filed for bankruptcy. Joann, which benefitted from the pandemic-era craft boom, only to see sales fall, cited its decision to file for Chapter 11 as “a significant step forward in addressing Joann’s capital structure needs.” Department stores, a long-standing member of this middle tier, have also struggled. Last month, Macy’s announced it would close 150 department stores to focus on better-performing parts of its business such as Bloomingdale’s and Blue Mercury.

Neil Saunders, managing director of GlobalData Retail, told Modern Retail that there is “definitely a pattern” of middle-market players slowing down.

“The middle part of the market is the arena that’s most squeezed,” he said. “It’s the part of the market that’s under the most pressure, because it doesn’t necessarily have the allure of the luxury market, nor does it have the sharp bargain prices of the value end of the market. So, it’s neither fish nor fowl. And that’s the bit where people can sort of say, ‘Well, I’ll leave that rather than buying it.'”

Stuck in the middle

Dennis said that this collapse of the middle stems from retailers’ decisions going back more than two decades. Before the internet, he pointed out, stores’ main competition was other stores down the street. As e-commerce arose, more and more retailers entered the market, and consumers had the power of choice.

In response, retailers tried to differentiate themselves through deals, assortments and customer service. They also branched out into different segments, including off-price and beauty.Those who didn’t adapt “have gotten themselves in a situation where it’s very difficult to play catch-up,” Dennis said.

The changing retail landscape has also forced many middle-tier retailers to rethink their value propositions. For department stores, a staple of middle-tier retail, one of their biggest selling points used to be that they were the only place where people could find certain brands. Now, many of today’s direct-to-consumer startups are building their own stores and websites to keep a larger portion of their profits.

Today, some middle-tier companies are looking to follow the money by boosting the lower-tier or higher-end parts of their businesses. Target, for instance, introduced a new value-based line called Dealworthy that includes hundreds of items under $10. More beauty brands are going into off-price retailers, as well, with brands including Too Faced, The Ordinary and Mac now sitting side-by-side in places such as Nordstrom Rack.

Trying to go lower-end can be risky, though, Dennis explained, saying that retailers have to be sure to avoid a “race to the bottom.” For retailers trying to compete with the likes of TJ Maxx, “you’re not going to win price unless you’re willing to take a lot lower profits,” Dennis said. “And I’m not sure why you would invest a bunch of money to open a bunch of [lower-price] stores to earn a terrible return.”

There are other options, though. Some middle-tier players have been able to grow their audiences by incorporating customer feedback when plotting out new product lines and services, to the point that they are able to overhaul their image. Abercrombie & Fitch is an example of this. In 2016, Abercrombie & Fitch was named America’s “most hated retail brand” by the American Customer Satisfaction Index. Since 2017, Abercrombie & Fitch has hired a new CEO, revamped its influencer program, focused on modern styles and silhouettes and relied more on data analysis and features like BOPIS. It became the best-performing stock on the S&P Index in 2023.

American Eagle, too, has managed to grow by boosting its well-performing Aerie business. Earlier this month, American Eagle reported that it recorded a record revenue of $1.7 billion during the fourth quarter. “We’re laying out a path to consistent 3 to 5 percent revenue growth,” American Eagle Outfitters’ chief financial officer told WWD earlier this month. “We spent several years on inventory optimization and efficiencies that have taken hold. We’ve really structured ourselves and put a governance process in place around cost management, expense management.”

With this in mind, being a middle-tier company at this time is challenging, but it isn’t a death sentence, Saunders said. “You can still perform in the middle part of the market, but you have to be very customer-centric and very focused on what the customer wants to buy,” he explained. “You have to chase trends and make sure that you are offering really good value for money. Those things are very important.” Saunders praised Abercrombie & Fitch in particular for rolling out a wedding shop in response to customer feedback.

Many middle-tier retailers that run into trouble are often given a second chance through new owners. Toys R’ Us, for example, filed for bankruptcy in 2017 before being sold in a liquidation sale to Tru Kids Inc. in 2018. In 2021, WHP Global took over Toys R’ Us and now plans to open 24 Toys R’ Us stores across the U.S. this year. Meanwhile, Barnes & Noble launched a comeback after fans feared it would go the way of Borders. It opened 30 stores in 2023 and re-did its membership program.

Joann, for its part, is confident even after declaring bankruptcy. “We are excited by our progress on both top and bottom-line initiatives in the past year and are confident the steps we are taking will allow Joann to drive long-term growth,” Chris DiTullio, Joann’s chief customer officer and co-lead of the interim office of the CEO, said in a statement.