TK Maxx, the retail giant making a fortune from rivals’ errors

The best time to visit TK Maxx is as soon as the shop opens its doors. This is well known among the dozens of canny bargain hunters who had descended on the retailer’s branch in Croydon, south London by mid-morning one recent weekday.
The mix of families, pensioners and students know that to get first dibs on the best bargains, and to browse in relative peace, you need to rummage through the rails before anybody else.
Property manager Angela, 70, is the sort of “treasure hunter” that TK Maxx has been luring into its shops for 30 years. “I’m not supposed to be here, my husband would kill me, but when I see a TK Maxx I have to look. I’m addicted,” she says. “You never know what you’re going to find.”
TJX, the American giant behind TK Maxx, has exploited gaping inefficiencies in the fashion industry’s buying operations to build one of the world’s most successful retailers.
Traditional fashion retailers commit to orders more than six months in advance, with limited insight into where fashion trends, let alone the weather, will be, once they are on sale.
When they err, which they often do, TK Maxx’s army of buyers quietly buy up their unsold stock at steep discounts and feed it into their 358 stores on a daily basis. Shoppers can get their hands on top brands at discounts of up to 60 per cent — and, right now, there’s plenty of choice.
The damp start to this year’s spring/summer selling season left traditional fashion retailers struggling to shift the bikinis, shorts and summer dresses that they had ordered months in advance. Among the “treasures” on offer in Croydon were dresses from Whistles for £39.99 and a Chloé designer beach bag for £399.99.
TK Maxx, which tends to prosper when its high-street rivals struggle, last year reported record pretax profits of £172.4 million on sales of £3.9 billion.
It’s not just about the canny buying, though. TK Maxx stores are designed to exploit our consumerist impulses, right down to the colour of the signs and the shapes of the labels.
Most of the shoppers seduced into parting with their cash will be oblivious to what some in the industry call TK Maxx’s “dirty little secret”: a significant portion of the clothes on its rails are not sourced from retailers’ unsold stock piles but are, in fact, produced especially for TK Maxx. Value for money on these products is questionable at best.
TJX, based in Framingham, Massachusetts, operates its distinctive “off price” retail model in more than 5,000 shops in nine countries. Over the past five years, aided by the demise of department stores on both sides of the Atlantic, the group’s shares have more than doubled to $119.83, valuing the group at $133 billion, 14 times the size of Marks & Spencer.
The mastermind behind its global expansion was Bernard “Ben” Cammarata, who was hired in 1976 by TJX’s forerunner, Zayre Group, a discount retailer, and tasked with building an “off price” retail chain. TJ Maxx, as the US equivalent is known, professionalised what mom and pop stores were doing routinely: buying up out-of-season stock and selling it at a discount.
Last year, the group, led by company lifer Ernie Herrman, raked in $4.47 billion of net profit on sales of $54.2 billion. Its first UK outpost, opened in Bristol in 1994, was named TK Maxx to avoid confusion with discount department store chain TJ Hughes. HomeSense, the group’s home furnishings chain, arrived in 2008.
If shoppers walk into a TK Maxx store without knowing that there are bargains to be had, they’ll soon find out. Signs with slogans, such as “Big labels small prices” and “Amazing savings”, are everywhere you look. Cathrine Jansson-Boyd, a consumer psychologist, said the stores showed a remarkable attention to detail, right down to the round signs dotted along the clothing rails.
“Academic research shows that women, who make up the majority of its customers, are drawn more to round signs than angular ones,” said Jansson-Boyd, who added that the reasons why remained unknown.
TK Maxx constantly refreshes its product ranges to keep customers coming back. Once stock arrives in its warehouses it gets moved through the business quickly. In America, employees work to the mantra of “door to floor in 24”. Deliveries containing thousands of new items arrive in stores several times a week; store managers themselves often do not know what is in them until they turn up.
On the shop floor, clothes are grouped by product type — T-shirts, jeans, dresses — rather than by brand. The rails are on wheels, meaning that they can be moved around the store, adding to the sense of an ever-changing array of clothes.
Irene Scopelliti, professor of marketing and behavioural science at Bayes Business School in London, said TK Maxx’s practice of printing the “original price” or “RRP” (recommended retail price) next to its own price on labels encouraged shoppers to behave irrationally.
“When buying something we should focus on ‘acquisition utility’, how much we value a product compared to its cost, but in TK Maxx the focus shifts to ‘transaction utility’, how much something costs compared to what you would expect to pay. The perception of finding a good deal often overshadows considerations of how much we actually value what we’re buying.”
TK Maxx’s stores are busy — they typically generate more than twice the amount of sales per square foot as traditional fashion retailers — so as the day goes on they begin to resemble a jumble sale. While this is a turn-off for some, plenty of shoppers find their senses are heightened by the thrill of the hunt, and driven by Fomo (fear of missing out).
“Customers don’t go in there with a particular mission but if they see something they like, they know they need to buy it. If you don’t, someone else will,” said Richard Hyman of Thought Provoking Consulting.
A common complaint among shoppers in Croydon was the size of the queues at the till, but they are no accident. The narrow, winding route to the checkout is lined with impulse purchases ranging from board games to wireless headphones and bags of coffee. Discounts here are in short supply, but it does not stop customers stuffing one more item into their baskets.
The till is not the only place where the bargains at TK Maxx are not all they may seem. Some of the brands in stores, such as Frederik Anderson of Copenhagen, are actually developed by TK Maxx itself. And, sources estimate, between a quarter and a third of clothes in its stores are produced by brands especially for TK Maxx.
“Some merchandise we sell is developed for us, particularly when what we are seeing in the marketplace isn’t the right value for our customers … and this carries no RRP,” the company said. “Operating with integrity is at the heart of our business”.
The potential to produce for TK Maxx is one of the reasons that many brands see the discounter as more friend than foe. Another is its ability to make problems disappear.
“When brands have over-ordered, TK Maxx gives them a way of quietly cleaning away their mistakes. They don’t advertise specific brands and they can come to your warehouse and write you a cheque that day,” said a consultant who works with the company. “The downside is that if they pay you 30 per cent of your retail price, you are doing very, very well.”
Neil Saunders, managing director of consultant GlobalData, said TJX’s buyers were well trained, well connected and given plenty of autonomy over what they buy. They source clothes from a vast global network of more than 21,000 brands and retailers worldwide.
Buyers often buy in small quantities and ramp up orders of stock that sells. One former buyer said they were encouraged to run their individual operation as if it was their own small business. TJX’s vast scale and international network means that products can come into the UK from across Europe and beyond.
“A lot of people would be on the defensive when they met us because they would assume we were trying to rip them off,” they recalled. “We were taught to try and connect with them and build a rapport. The ethos was ‘be the nicest person in the room’ because we weren’t going to be offering the best prices.”
So, is there anything that can halt the TJX juggernaut? One risk is the prospect of traditional rivals harnessing new technology to reduce the human error baked into their buying operation. Another is that the business simply reaches its saturation point. For now, though, TK Maxx is simply doing what it has done for the past three decades.
“They are utterly focused on a specific customer, bargain hunters, and they have never tried to deviate from that,” Hyman said. “They know exactly what they are and never try to be something else.”
Additional reporting by Sharin Hussain