Outlet stores

Why do factory outlets exist?

Why do factory outlets exist? The answer may seem obvious to most shoppers: These are places where companies dump factory seconds or obsolete merchandise at rock bottom prices. Read: bargains, bargains, bargains. And indeed, this may have been the case when the stores first appeared in the 1930s, usually located in rural areas near the factory and selling damaged or irregular clothing, often to employees themselves. themselves.

Even though most clothing manufacturers have long since moved overseas, factory outlets have continued to exist, although they do not have a proper “point of sale”. And far from just selling junk goods, some companies even design specific product lines to sell there. So what is going on?

“We take it for granted that factory outlets exist, but if you think about it, it’s a little weird”

“We take it for granted that factory outlets exist, but if you think about it, it’s a little weird,” says Donald K. Ngwe, assistant professor in the Marketing Unit of Harvard Business School. “Why don’t companies just sell this commodity closer to their customers? Why do some businesses have a lot of outlet stores and others don’t? What’s the difference between having these stores and just having a sales display in the back? “

A doctoral student in economics at Columbia, Ngwe was fascinated by the incredible range of products that retailers offer to consumers and wondered how this practice had developed. He began to suspect that he had more to say about consumers than businesses. “Businesses need to know something about the way we behave that prompts them to adopt these retail strategies,” he says. “I see retail as a way to study consumer behavior outside of the lab. “

Ngwe’s research has been aided by the fact that companies are collecting more customer data than ever before, not only recording demographic information, but also details about every product purchase they make. “You pay so much attention to retail analysis that it’s like drinking from a fire hose,” he says. “Businesses have more data than they know what to do with it.”

Are points of sale cannibalizing?

A leading product manufacturer in the clothing and fashion accessories category has agreed to provide Ngwe with consumer data in exchange for a detailed analysis of its customers. Behind the company’s interest was a concern over whether its outlet stores were cannibalizing customers of its major retail stores, Ngwe explains.

Factory outlets tell us as much about consumer behavior as they do
on retail strategy.Photo: iStockPhoto

“In the business press it is all the rage to talk about how the downturn in the outlet market is hurting the brand,” he says. “Every time a business makes a foray into point of sale, it will win in the short term but damage the brand image in the long term.”

To see if this was the case, Ngwe separated customers by various characteristics, revealing that, in fact, those who shopped at retail stores and outlets were virtually identical in terms of demographics, including customers. income and postal codes. They differed on two important variables, however: their willingness to travel and the degree to which they cared about “quality,” which in fashion often means the novelty of the design of a particular item.

Ngwe found an almost perfect inverse correlation between the two attributes. In other words, the more likely a customer was to pay a higher price for the latest trends, the less likely they were to travel a long distance to a point of sale, and vice versa. “The people most willing to travel were the same people who cared the least about quality,” says Ngwe. It is important to note that consumer behavior concerned not only older items but also brand new items made in older, less fashionable designs that companies continued to produce for their outlet stores even afterwards. have stopped making them for their main stores.

“In fact, companies were making more old products, because if they made more new products for the factory outlets, it would cause cannibalization,” Ngwe explains. “You don’t want to expand the market to have more lower-value consumers at the cost of losing your higher-value consumers. “

By selling substandard models at lower prices in outlets, companies could avoid cannibalization of the latest models in their main retail stores. This is because the travel distance between retail stores and outlets serves as a buffer to separate the two different types of consumers and maximize overall profit.

Charity please?

“By going to a point of sale, you reveal something about yourself to the seller,” Ngwe explains. “By the fact that you drove there, the [retailer is] will offer you a good of lower quality. This does not mean, however, that companies are “cheating” consumers. In truth, Ngwe says, consumers end up winning by having more choice.

“From a consumer’s point of view, the fact that there are products that match different preferences is an improvement over a more limited sales strategy,” he says, which allows consumers to buy cheaper items, although less trendy, at a lower cost just driving a few hours.

Ngwe also used the same data to examine other companies’ pricing strategies, including the ubiquitous listing of items as “on sale” that are hardly ever offered at the actual price on the label. “A company will offer a $ 300 blouse at 30% off, but you couldn’t buy the $ 300 blouse even if you wanted to,” he says.

Rather than deceiving consumers, Ngwe says, these prices actually communicate information about the quality of the item, so customers are much more likely to buy a $ 300 shirt that sells for $ 200 than a shirt. listed regularly for $ 200. (This is what former JC Penney CEO Ron Johnson found to his regret when he cut sales and offered everyday low-priced merchandise, causing sales to drop sharply. was ousted in 2013.)

In fact, according to Ngwe, there was an exponential increase in sales as the “original” price differed from the “sale” price, without stabilizing within the price range examined. “This implies that these original prices are credible, indicating something tangible about the characteristics of the product to the buyer. There is content in that price, whether it is genuine or not.”

Grocery store prices

At HBS, Ngwe plans to continue studying pricing, investigating what he says about both companies ‘selling strategy and their customers’ buying preferences. His latest research explores grocery stores, a much more complicated and competitive environment than clothing.

“I want to see what happens, for example, when Whole Foods comes to town. Does this improve the situation for consumers by offering them more variety, or are they losing out because other grocery stores then increase their prices? “

Ngwe’s research helps unravel the sometimes mysterious world of how companies price their products and in so doing, reveal not only what they say about companies, but also what they do. say about us.