The very notion of an outlet store has changed. Once, they were distant outposts where high-end retailers could send overruns, flawed items, and end-of-season leftovers. Today, these appealing alternatives show up in popular shopping locations, with dedicated apparel filling their shelves. The reasons for the shift are many, but the risks might be just as numerous.

Traditionally, high-end retailers stringently avoided locating their outlet stores anywhere near their full price operations, seeking to avoid any contamination, cannibalization, or cross-over. But with the expansion of outlet malls, customers grew more accustomed to having outlet options readily available. These outlets also have been moving steadily closer to urban centers, such that 70 percent of those that opened in 2013 were in metropolitan areas populated by at least 1 million shoppers.

Retailers embrace the channel because of their constant need to shore up their revenue streams and continue to grow. Thus Saks maintains about 75 of its Off Fifth outlet stores, nearly twice the number of traditional stores it operates.

Yet the risk to these retailers is clear: If shoppers can choose easily between an outlet and a full-price store, both carrying similar merchandise, they seem likely to prefer the lower cost option. The high-end accessories brand Coach is testing this prediction. After suffering some substantial sales declines, potentially because it opened outlets in close proximity to its traditional stores, the retailer is planning a real-world experiment. It will close two of its outlets next year, then measure whether the shoppers switch to another nearby outlet or to the proximal full-price retail sites. Thus, “we’re going to be able to measure … will the consumer shift to another Coach channel, can we influence her or guide her to shift through targeted and strategic communication?” as Coach’s president of North American retail explained.

The outcome of this experiment will likely be of great interest to a lot of retailers. Coach predicts that only about 10 percent of its customers shop in both outlets and full-price stores. Similarly, Saks and Nordstrom assert that the people who visit Off Fifth or Nordstrom Rack are not the same shoppers who make a trip to their high-end retail locations. Instead, Nordstrom believes that expanding its outlets offers a benefit, in that its data show that consumers get introduced to the brand through the outlet, then move up to the full-service options over time.

In contrast, the CEO of Victoria’s Secret insists that outlets are a dangerous and slippery slope. Once customers lose their sense that a brand is prestigious and worth the high price—that is, once they think they can get basically the same things in an outlet—the damage to its reputation may be irreversible.

Discussion Questions:

1. Why are some retailers placing their outlet stores in close proximity to their main stores?
2. What are the potential risks of this outlet strategy? What are the potential rewards?
3. Explain, from a branding and market segmentation strategy, what a retailer must accomplish with its target market(s) to prevent cannibalization of sales at its flagship stores from outlets.

 

Source: Suzanne Kapner, The Wall Street Journal, October 12, 2014