October 15, 2014
Chains mix and match flagships and outlets
It was big news back in 2012 when Nordstrom opened one of its Rack stores "a crosswalk away" from its flagship in downtown Seattle. Today, others including Neiman Marcus and Saks are opening outlets within walking distance of their flagships in an effort to increase sales.
When Nordstrom first opened its Rack location near its flagship in Seattle, the concern was that profits would be reduced as sales of full price merchandise were siphoned off through the sale of discounted goods.
At the time, the company said it had found that the two concepts were complementary to one another and that the strategy helped attract new customers to the Nordstrom brand through its outlets.
Then president of the chain, Blake Nordstrom, told The Seattle Times, "What we’ve learned is that our Racks do well when they’re closest to our flagships."
According to a Wall Street Journal report, Saks plans to open a new full line store in downtown New York City in 2016. In 2017, it will open an Off Fifth outlet store a mere seven-minute walk away. Neiman Marcus is opening its Last Call outlets in cities such as Dallas, Houston and New Orleans where it has flagships.
While many still disagree with the concept of operating outlet stores in close proxity to flagships, Nordstrom has taken its view that the formats are complementary online. Back in May, the company launched nordstromrack.com. The new site and mobile app paired Rack merchandise with HauteLook flash sales events.
BrainTrust
Recent Discussions
Discussion Questions
Are department store chains making the right move or a mistake by opening outlets near flagship locations? What do you expect to happen if chains continue pursuing this approach?
Poll
It’s hard to answer the question without knowing the facts: Specifically, did the nearby Rack location eat into sales at the Nordstrom flagship? Or did the company do incrementally more business in downtown Seattle as a result? Surely there are high-volume Nordstrom anchors within a stone’s throw of Rack stores (in Bellevue, Washington and Chicago as prime examples). The mission and merchandising of the two chains are clearly different.
Not every department store chain has an off-price division in the works—unlike the luxury and near-luxury chains like Nordstrom, Saks and Neiman Marcus. Those companies have a valid expansion strategy as long as they don’t overdo it, as long as the anchor stores are less vulnerable to cannibalization, and as long as the market density and demographics can support it.
Off-price seems to be working. T.J. Maxx is doing well and Nordstrom Rack is currently the engine powering the company, but think each chain needs to evaluate for themselves how this works within their business model. Following the pack might not be the best course of action, as imitation, while flattering, probably isn’t going to work for everyone.
It seems to me that outlets, rather than serving as clearing houses for distressed product, have become their own distinct channel of distribution and simply leverage the parent brand name to help establish their image. Consequently the product in the outlet is different than the product in the full-line store, not simply older. In my experience there is less than a 10 percent customer cross-over between the two channels. Conversely, the more channels of a brand shopped by a customer the greater their spend, and it increases exponentially. Great success can be had if companies can get the customer to spend in full-line, outlet, and dot-com in terms of brand loyalty and share of wallet. Intuitive I guess that it’s better for Saks or Nordstrom to capture that customer in their own outlet rather than lose them to T.J. Maxx or someone else.
Continuing to call these stores outlets or off-price is really a misnomer. Although it varies by retailer, a large share of these stores aren’t a clearance channel for unsold merchandise from full-line stores. They are a lower-price format that benefit from the halo of the overall brand. Some efforts have been made to ensure the assortment reflects the fashion perspective of the parent brand, but as there tends to be little crossover in the shopper bases of the two formats, brands are getting away with putting some pretty underwhelming merchandise on the sales floors and most shoppers are none the wiser. And despite the frequent consumer-focused articles written on outlets/off-price, consumers continue to lap them up. Behavioral economics at its finest.
The dirty little secret of outlet stores is that they’re profitable. In my neighborhood, there’s a Cartier, a Tiffany, a Saks—and a T.J. Maxx and a Nordstrom Rack. The economic downturn that battered the industry in 2007 also made discounting acceptable, even chic. I’ll predict that customer behavior will be shaped by this for many years to come.
I’m completely with Don Uselman on this. The more the merrier, and if it’s your own brand, all the better. This way you stay in the customer’s mind, have cross-visiting, and more potential sales. I can’t see any downside to this.
Of course they’re making the right move. If a well sited outlet earns $2, who—other than a department manager—cares that one of those dollars would have been earned at the flagship? It’s still a net gain. I would go even further and argue the same building isn’t too close—if there were idle space sitting around—since they’re akin to the “basement stores” of yore.
What Mr. Nordstrom did not say was what happened to their full line sales. Having said that, it most likely IS a good move to make, and to make the two concepts a brand destination for the shopper. Overall traffic will increase with shoppers crossing the street just to see what is on the other side.
I don’t see why it won’t work for, at least, all A and B store volumes!
Department/flagship stores will do well to protect their flanks with their own brands, as opposed to facing a TJ Maxx or Marshall’s in their shadow.
Learn from the challenges that the dollar stores and chains like BIG Lots ! have thrown up at Walmart and Kmart. This retail channel has successfully siphoned off revenue from their big box brethren, while enjoying reduced rents and shared parking.
It’s called competition.
I think it is a GREAT idea. There will be shoppers who will only venture into the main brand but a LOT of shoppers will venture into the off side and a LOT of shoppers will end up doing a little of both. If you can capture people who you otherwise might lose, then get them. Better into your off store than Marshalls, TJ Maxx, or Ross—ALL of whom are doing a GREAT job at off price! A purchase from you is a purchase FOR YOU—whether in full or off format—it is still a plus.
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It’s hard to answer the question without knowing the facts: Specifically, did the nearby Rack location eat into sales at the Nordstrom flagship? Or did the company do incrementally more business in downtown Seattle as a result? Surely there are high-volume Nordstrom anchors within a stone’s throw of Rack stores (in Bellevue, Washington and Chicago as prime examples). The mission and merchandising of the two chains are clearly different.
Not every department store chain has an off-price division in the works—unlike the luxury and near-luxury chains like Nordstrom, Saks and Neiman Marcus. Those companies have a valid expansion strategy as long as they don’t overdo it, as long as the anchor stores are less vulnerable to cannibalization, and as long as the market density and demographics can support it.
Off-price seems to be working. T.J. Maxx is doing well and Nordstrom Rack is currently the engine powering the company, but think each chain needs to evaluate for themselves how this works within their business model. Following the pack might not be the best course of action, as imitation, while flattering, probably isn’t going to work for everyone.
It seems to me that outlets, rather than serving as clearing houses for distressed product, have become their own distinct channel of distribution and simply leverage the parent brand name to help establish their image. Consequently the product in the outlet is different than the product in the full-line store, not simply older. In my experience there is less than a 10 percent customer cross-over between the two channels. Conversely, the more channels of a brand shopped by a customer the greater their spend, and it increases exponentially. Great success can be had if companies can get the customer to spend in full-line, outlet, and dot-com in terms of brand loyalty and share of wallet. Intuitive I guess that it’s better for Saks or Nordstrom to capture that customer in their own outlet rather than lose them to T.J. Maxx or someone else.
Continuing to call these stores outlets or off-price is really a misnomer. Although it varies by retailer, a large share of these stores aren’t a clearance channel for unsold merchandise from full-line stores. They are a lower-price format that benefit from the halo of the overall brand. Some efforts have been made to ensure the assortment reflects the fashion perspective of the parent brand, but as there tends to be little crossover in the shopper bases of the two formats, brands are getting away with putting some pretty underwhelming merchandise on the sales floors and most shoppers are none the wiser. And despite the frequent consumer-focused articles written on outlets/off-price, consumers continue to lap them up. Behavioral economics at its finest.
The dirty little secret of outlet stores is that they’re profitable. In my neighborhood, there’s a Cartier, a Tiffany, a Saks—and a T.J. Maxx and a Nordstrom Rack. The economic downturn that battered the industry in 2007 also made discounting acceptable, even chic. I’ll predict that customer behavior will be shaped by this for many years to come.
I’m completely with Don Uselman on this. The more the merrier, and if it’s your own brand, all the better. This way you stay in the customer’s mind, have cross-visiting, and more potential sales. I can’t see any downside to this.
Of course they’re making the right move. If a well sited outlet earns $2, who—other than a department manager—cares that one of those dollars would have been earned at the flagship? It’s still a net gain. I would go even further and argue the same building isn’t too close—if there were idle space sitting around—since they’re akin to the “basement stores” of yore.
What Mr. Nordstrom did not say was what happened to their full line sales. Having said that, it most likely IS a good move to make, and to make the two concepts a brand destination for the shopper. Overall traffic will increase with shoppers crossing the street just to see what is on the other side.
I don’t see why it won’t work for, at least, all A and B store volumes!
Department/flagship stores will do well to protect their flanks with their own brands, as opposed to facing a TJ Maxx or Marshall’s in their shadow.
Learn from the challenges that the dollar stores and chains like BIG Lots ! have thrown up at Walmart and Kmart. This retail channel has successfully siphoned off revenue from their big box brethren, while enjoying reduced rents and shared parking.
It’s called competition.
I think it is a GREAT idea. There will be shoppers who will only venture into the main brand but a LOT of shoppers will venture into the off side and a LOT of shoppers will end up doing a little of both. If you can capture people who you otherwise might lose, then get them. Better into your off store than Marshalls, TJ Maxx, or Ross—ALL of whom are doing a GREAT job at off price! A purchase from you is a purchase FOR YOU—whether in full or off format—it is still a plus.