Without outlet stores, profits would decline 23%

Young woman holding shopping bags
In a study of one fashion brand, outlet stores lifted flagship sales by 23%.

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

According to a recent study by Donald Ngwe of the Harvard Business School, which was published by INFORMS (Institute for Operations Research and the Management Sciences), the case is actually the opposite. In fact, Ngwe's "Why Outlet Stores Exist: Averting Cannibalization in Product Line Extensions," argues that the outlet store lifts the sales and profits of the flagship brand.  

The results showed that the rate of new product introduction in regular stores would fall by 16% if outlet stores were closed, and variable profits would decline by 23%. 

"These results imply that the existence of outlet stores may enable firms to improve quality in their regular channels, thus counteracting brand dilution effects," Ngwe states in the study's abstract. 

The motivation for the study was to understand why some fashion brands choose to sell through outlet stores. In his research, he closely examined five years of sales data for one major U.S. fashion brand that has hundreds of stores across the U.S.

What Ngwe discovered about this brand, with outlet stores typically an hour from a city center, was that distance did not seem to deter consumers who were willing to drive to investigate new product options. 

Donald Ngwe

“The twist is that outlet stores were in no way a drain on the brand image,” Ngwe told FierceRetail. “In fact, it can actually help to improve it and freshen the brand image.” 

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

Ngwe noted three surprising results in his study. First, that there were many apparel items that were just being produced for the outlet, not the main store—again, creating that draw for consumers to drive and find unique pieces.

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Second, items that were sold both at the flagship and the outlet sold through more units at the outlet than the main channel.

“This clearly points to the sheer importance of the outlet store,” Ngwe said. “It makes up either half of this brand’s business, or at least is a major part.”

And third, Ngwe expected flagship store shoppers to come from higher-income zip codes and outlet shoppers from less wealthy zip codes, but there was barely a difference in which neighborhoods shopped at each channel.

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In conclusion, Ngwe found that the brand is not at all hurt by the presence of an outlet, as some core customers are not willing to trade down and some customers will continue to buy at full price. In fact, a key to the brand's success was that the outlet store merchandise was undesirable enough or old enough that it would not poach shoppers from the main store. 

Ngwe made one final point about the importance that e-commerce plays in this store dynamic. 

“Everything is shifting to e-commerce, but this 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 some barriers so that cannibalization will be limited."