The Outlet Mall

Dumping ground, cannibal channel or smart strategy?

Based on the research of Professor Anne T. Coughlan and David A. Soberman

By Sachin Waikar

	Professor Anne Coughlan  Photos © Evanston Photographic Studios
	Watch an interview with Professor Coughlan at Kellogg Insight
	Insight insights: selections from the Kellogg online faculty research digest To find more articles, including faculty biographies and suggestions for further reading, or to join the conversation by leaving your own comments, visit Kellogg Insight.

Manufacturers' retail outlets have come a long way in size, geographic reach and popularity since the first non-factory-adjacent outlet stores opened in 1936. Outlets often were single stores located far from primary retail centers and served mainly to dispose of excess or damaged merchandise. They have evolved to multiple stores at one site with designer offerings stocked with in-season, irregular and overstocked items.

U.S. outlets generated $15 billion in revenue in 2003 with shoppers spending up to 79 percent more per visit at outlets than at regional malls. Urban sprawl is bringing retail districts closer to the outlets, which typically are located outside of city retail centers. This is raising the threat of channel conflict between manufacturers' outlets and their primary retailers (e.g., department stores).

These trends raise a question: Is distribution through outlets a viable adjunct to distribution through primary retail channels? Kellogg School Professor of Marketing Anne Coughlan and co-author David Soberman presented several rationales for retail outlets and an assessment of their current state and future trends in a 2005 International Journal of Research in Marketing article.

Coughlan and Soberman regard outlet stores as more than "dumping grounds" for overstocks, end-of-season leftovers and damaged products. Instead, outlets "expand market coverage by serving a previously unserved set of consumers." Manufacturers also can use outlets to "implement simple market segmentation through dual distribution." While highly service-sensitive customers will continue to shop at primary retailers, customers with less service focus will shop at the no-frills outlet for lower prices.

Coughlan collected data on such details as merchandise price and availability in 1998 from 18 apparel outlet stores at two Chicago-area malls and compared them to information from the region's primary malls. Seven of the 18 stores were run by manufacturers that also operated their own shops in primary retail areas, indicating that the outlet channel is not just for manufacturers distributing solely through department stores or boutiques.

Although the researchers found a 24 percent discount on average across outlets, some merchandise was priced the same or lower at the primary retailer. This markdown was usually the result of a product having been available for some time via the primary retailer. The discount reflects an "understanding between the designer and the primary retailers that a lead time of a certain number of weeks will be allowed before the designer will offer the product [at a specific discount] in the outlet store."

For high-end retailers like Chanel that serve mostly upscale consumers, the outlet plays a more limited role — typically overstock disposal — and requires a very small store network. Less exclusive competitors, such as Jones New York and Gap, (both with more than 140 outlets) are more likely to use outlets as an important strategic channel to serve a large customer segment that has lower service needs.

Coughlan and Soberman argue that "manufacturers view outlet-mall retailing as a viable channel strategy to strategically segment increasingly heterogeneous markets." Outlet-mall retailing should continue to be profitable in catering to segments with less of a service focus and greater price sensitivity.

The authors present several testable hypotheses and predictions, including:

• Manufacturers will benefit more from using an outlet channel when they tend to serve a broader group of segments, including groups that value low prices more than high-quality service.
• Outlet-store activity should increase in markets where dispersion in income and average age increase over time.
• In areas marked by urban sprawl, outlet-store retailing will decrease, with outlet stores converted to traditional malls.
• Urban outlet-store retailing will increase with the rise in diverse forms of outlet malls.
• Primary retailers will be increasingly aggressive in developing retail or private label brands as outlet stores become more upscale.

Coughlan and Soberman believe that outlets will fragment, and that "hybrid retailing centers that develop may have little in common with the 'original outlet mall.'" In any case, it's apparent that outlets are a sound distribution channel for fashion and other merchandise and will likely continue to thrive.

Sachin Waikar is a freelance business writer living in Evanston, Ill.