The outlet store long con

One of the hottest sectors in retail is the “off-price” or outlet segment. Established players like TJX, Ross and Nordstrom Rack continue to open stores at a solid clip while also expanding their e-commerce capabilities. Neiman Marcus, Saks and Macy’s have identified their outlet store strategy as a growth platform. Scores of fashion designers and other manufacturers have joined Ralph Lauren and Nike in filling up outlet centers across the globe. And despite their stumbles, so-called “flash-sales” sites like Gilt and HauteLook have developed significant market share.

Clearly there are aspirational customers at every price point, not to mention plenty of people who just simply hate to pay full price. For both types of customer segments the outlet store value proposition is straight-forward and compelling: well-known brand names at 20-60% off the regular price.

The appeal to brands can be compelling as well. An off-price strategy can be a sensible way of creating an “opening price” point format that generates incremental growth while bringing new customers into the brand’s eco-system. And to be completely transparent, I strongly advocated precisely this type of approach when I headed strategy at the Neiman Marcus Group–a version of which they have been implementing in recent years.

Yet with all the touted strategic benefits, not to mention all the hype that surrounds the sector, there is more and more deception and denial creeping in. I suspect it won’t be long before we see a major recalibration of the prospects for the sector and many of its participants. Here’s why.

The product con. While the industry tries hard to create the impression that the product in outlets is the same as the consumer would find in full-price stores, that is rarely the case. In fact, whether we are talking about Neiman Marcus’ Last Call Studio, Saks Off 5th or the Gap Factory Outlet stores, the vast majority of the merchandise carried is made specifically for those channels. For more on this check out this story on Racked.

The price con. So if most of the product was never for sale anywhere else how does the retailer come up with the  “compare at” price to calculate those big savings? Great question. Here’s the answer: They make it up–or as TJ Maxx likes to say,  it’s “estimated.”

The brand con. Any time a strong brand launches a derivative, lower-priced version they are entering treacherous waters. Done properly, the core brand suffers no loss of equity and benefits from a growing customer base. Done poorly, the effort can be highly dilutive, confusing and ultimately unprofitable. Nordstrom has done a masterful job of segmenting its customer base for the full-line and Rack stores and has been able, thus far, to make the strategy additive. But not every brand has been so disciplined (I’m looking at you Coach) and many are now opening outlet stores at such a rate–and out of proportion to their full-price business–that red flags need to be raised, even at Nordstrom.

The growth con. When the core business is stagnant, it’s easy for retailers to chase the growing bright shiny object. Yet it’s hard to escape the reality that North America is severely over-stored and that overall retail spending is barely growing above the rate of inflation. So for the many retailers opening many outlet stores over the next few years it’s mostly about grabbing market share. That’s fairly easy when it’s a few new locations. It’s not so easy when everyone is opening a lot of new stores and there are many new competing business models. When some of these new stores don’t make their numbers there will be pressure to “open the aperture” on product, pricing and promotion. And it’s Coach all over again.

Of course it’s fair to say that even if consumers knew the whole story they might not care. It’s fair to say that given the challenges to the traditional department store model, many of these retailers have no choice but to double down on outlet stores.

But it’s also fair to say that we’ve seen many of these companies overshoot the runway before. And it’s fair to say that in what’s becoming a zero-sum game not everyone can be a winner.

 

One thought on “The outlet store long con

  1. Pingback: If you accepted the truth would you change your mind? | Steve Dennis' Blog

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