Outlet stores

Without factory outlets, profits would decrease by 23%

Many fashion retailers and home goods stores are now introducing factory outlets to offset their flagship stores. But do these outlets risk cannibalizing the sales and profits of the original brand?

According to a recent study by Donald Ngwe of Harvard Business School, published by INFORMS (Institute for Operations Research and the Management Sciences), the case is in fact the opposite. In fact, Ngwe’s “Why Factory Outlets Exist: Avoiding Cannibalization in Product Line Extensions,” claims the outlet increases sales and profits for the flagship brand.

The results showed that the rate of new product introductions to regular stores would drop by 16% if factory outlets were closed, and variable profits would drop by 23%.

“These results imply that the existence of outlet stores can allow companies to improve the quality of their usual channels, thereby counteracting brand dilution effects,” Ngwe said in the study summary.

The motivation for the study was to understand why some fashion brands choose to sell in outlet stores. In his research, he looked at nearly five years of sales data for a major American fashion brand that has hundreds of stores across the United States.

What Ngwe found about this brand, with outlet stores typically an hour from a city center, was that the distance didn’t seem to deter consumers who were willing to drive to look for new options. of products.

Donald ngwe

“The twist is that the outlet stores in no way weighed on the brand’s image,” Ngwe told FierceRetail. “In fact, it can actually help improve it and refresh the brand image.”

He also concluded that the mall is a great opportunity for consumers to enjoy a brand they love but can’t afford at full price.

Ngwe noted three surprising results in his study. First, there were many clothing items that were produced just for the point of sale, not the main store – again, creating an appeal for consumers to drive around and find unique pieces.

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Second, items sold in both the flagship store and the point of sale sold in more units at the point of sale than in the main channel.

“This clearly shows the importance of the factory outlet,” said Ngwe. “This represents either half of the activity of this brand, or at least a significant part. “

And third, Ngwe expected flagship store shoppers to come from higher income postcodes and factory outlet shoppers from less wealthy postcodes, but there was hardly a difference in which neighborhoods did. their purchases in each channel.

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In conclusion, Ngwe found that the brand is not hurt at all by the presence of a point of sale, as some major customers are unwilling to sell down and some customers will continue to buy at a high price. In fact, one of the keys to the brand’s success was that the outlet store merchandise was junk enough or old enough not to poach buyers from the main store.

Ngwe made a final point on the importance of electronic commerce in this store dynamic.

“Everything is switching to e-commerce, but that model doesn’t work if you had an online factory store,” he said. “From the seller’s point of view, the goal is to create barriers so that cannibalization is limited. “

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