– How are stores like Marshall’s, Ross, and TJ Maxx able to sell things for a cheaper than retail price?
In: Economics
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.
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