September 25, 2008
Luxury Retailers Offer Outlets for Bargain Hunters
It’s long been known that middle-income shoppers making aspirational purchases have helped to drive sales at luxury department and specialty store retailers. Now, with the economy in a state of extreme uncertainty, even the well heeled are cutting back on purchases, leaving upscale merchants looking for ways to remain competitive until business picks up again.
For many, including Saks and Nordstrom, part of the answer has been expanding the number of discount outlet stores these companies operate while moderating the pace of full line locations.
Carissa Nava is a consumer who window shops at Saks Fifth Avenue in Manhattan and then goes shopping at the department store’s Off Fifth outlet in the suburbs.
“I only wear Seven or True Religion jeans, and I get them here for $149,” she told BusinessWeek on a recent trip to an Off Fifth store. “Why would I pay $216 for the same exact ones at the main store?”
Saks is opening more of its Off Fifth stores than in the past. Last year, the department store chain opened only one outlet store. Just during the fall months of this year, the company plans to open three new locations. It also has three on the board for next year.
“We’re clearly seeing continued outsized growth in our Off Fifth business,” said Stephen Sadove, CEO of Saks.
Nordstrom has opened six new Nordstrom Rack stores this year and plans ribbon cuttings on eight more in 2009. The company only opened one Rack store in 2007.
“The Rack division has had a multiyear run of strong performance with solid mid-single-digit to double-digit same-store sales [growth] in each year since 2002,” Michael Koppel, CFO of Nordstrom, told analysts in a conference call last month.
Erin Armendinger, managing director of the Jay H. Baker Retailing Initiative at the Wharton School at the University of Pennsylvania, sees the logic to luxury retailers offering outlets. “Only stores that scream value are getting consumers in,” she said.
Discussion Questions: Do outlets represent a competitive risk to their own mainline stores? Do you see outlet stores starting to be shuttered by luxury retailers once the economy begins to come back?
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Opening outlets doesn’t have to spell disaster. The key is product. Outlets can sell “comparable” goods at a discount, while the rack business could focus on say, opening high-end designer kiosks with exclusive merchandise.
Later, if and when the economy recovers, who says all those outlets need to remain open?
Are outlets a slippery slope like other department store promotions? Remember when (15+ years ago) a Macy’s One Day Sale was at most a once or even twice a season event? Now it’s basically a weekly occurrence.
While outlets serve some of the same customers and deliver some of the same merchandise, they are not even remotely pure substitutes for the full line stores. They preserve pricing integrity for FLS by being a better place to offer merchandise marked down yet they also offer different (promotional) lines from FLS labels.
Of course they are going to do relatively better during tough times like now, assuming gas shortages don’t continue. The outlets in North Georgia are certainly not getting in-town customers while gas is scarce.
As the economy improves they will provide a venue for aspirational customers though even in tough times the core FLS customer who can (still) afford it will not go to an outlet as timeliness and merchandise quality are more important to her than savings. And as long as they are contributing profitably to top and bottom line, they will absolutely stay open!
It’s all about supply and demand. Right now, customers are demanding high end goods at cheaper prices so it makes perfect sense for Nordstrom and Saks to expand the discount chain. When the economy gets better and the demand scenario changes, allocation and focus will go back to the main line. But for right now, luxury retailers still have to sell stuff and if the margins are a little lower, so be it. Selling through a discount sub-brand is much better than tarnishing the main brand with cheaper goods.
This is dangerous ground for true luxury retailers. These companies have spent time and money to cultivate their market niche and they risk undermining their own efforts by “panicking” during a slowdown. Today’s shoppers are very savvy and any time you communicate a conflicting message, you run the risk of losing your base. Upscale outlets should be utilized for the previous year’s fashions or items that did not sell well in the main outlets.
It’s entirely possible that the ultra-high-end market has overexpanded in response to the second Gilded Age. If I were they, my concern at this point would be not that they were diluting their brand at those price points but that those price points are unsustainable–period.
How is it that we came to expect that women who make less than $50,000 a year should spend $200 and up on a handbag–and then replace it the next year with another one at the same price? Or that one of the criteria (aside from her lack of judicial experience) that made Harriet Meiers unfit for the Supreme Court was that she shopped at Talbots instead of Bergdorf?
All this in an economy where those $50,000 jobs could disappear–to China or India, or just to a kid out of college or spread among the survivors in a consolidated organization–on a whim of senior management, looking to add those salaries to their own bonuses?
Now even the very affluent may well find themselves tapped out, and oil could go to $500 a barrel. I’m not sure the integrity of the most expensive fashion brands will be a priority for as many shoppers as it might have been recently.
If I were Nordstrom, Saks and the others, I would start figuring out a business model based on a smaller number of those very high-end customers and a bigger proportion at a more sustainable price point over the next five to ten years.
Yes, outlets do represent a competitive risk to luxury retailers because outlets dilute the “exclusivity” of the luxury merchandise.
Just consider BMW, for example. Until recently it was offering “incentives” in the U.S. market to buy a BMW, but then the company found out that it was losing its appeal as an “exclusive” car, so BMW stopped offering incentives knowing full well that their sales will decline. So it is a choice between more money and exclusivity!
I take issue with the lead-in to this topic (so what’s new?). How do we know that “even the well heeled are cutting back on purchases?” Inquiring minds want to know–and my mind, too. At the risk of repeating myself, the Wall Street Journal during the 70s recession famously promoted their advertising clout by referencing the curious success of an upscale jukebox restorer/purveyor who advertised exclusively in their paper. The classic quote from the advertiser was, “Those who have money will always have money.” The well heeled don’t trade down. Further, the look-at-me swagger of customers exiting upscale stores while brandishing designer shopping bags just doesn’t attract enough personal attention in outlet stores. And attention is what it’s about after all.
This is just smart retailing. In 2008, the shopper’s value equation shifted toward a very simple “value = price”–even for upscale shoppers. These outlets help retailers maintain brand loyalty but at a better price for shoppers.
As for what happens when the economy improves, I don’t think we’ll see the economy improve for some time, i.e., this is the new reality. It’s changing how shoppers shop–they’re learning to save, and saving is addictive.
I don’t see any threat whatsoever to the major brands for stores like Nordstrom, Saks and others opening outlet stores. If anything, it expands their brand to those that either have never had access to their stores or limited access.
We have a Nordstrom’s Rack in our area. The nearest Nordstrom main store is 150 miles in one direction and 200 miles in another.
Personally, I love having it here. It gives me access to products not sold at any other store and has become nearly my single source for shoes–period. When you can buy Cole Hahn loafers or Sketchers for $19-$29, it’s great. You would never find them at that price anywhere, if in my market you can find that quality at all. These outlets offer these retailers an opportunity to expand their brand and sales in markets that they wouldn’t serve otherwise. Why shouldn’t they? It’s a great strategy.
Further, it influences me to make a special trip to their main store during the holiday season every year.
For the main store shoppers, it’s about the experience, just as much as it is about the products. The Rack store provides some great products at extremely discounted prices. The experience is more like a trip to Target or TJM.
Shoppers of the main venues of these retailers are looking for more. They always will be. They will seek retailers that provide the experience they expect. Even so, it will never hurt these retailers to expand their exposure into more and underserved markets in a way that is cost effective and efficient.
Oh, please–better ask do we think the natural instinct to get whatever you can and make as many bucks as possible and succumb to greed if and when you think you can get away with it is ever going to make a comback. Do we seriously think that any of the problems and lessons we are learning the hard way now won’t be instantly forgotten once people begin to think the economy has “bounced back”? Give me a break, as someone once said.
Based on what I’ve been seeing and reading in both the US and UK recently, stores selling second-hand high end clothes are thriving. They are the ones these outlet stores need to compete with. They are not cannibalising their own sales, they are simply trying to hold their own against a whole new type of retailer that consumers are finding and loving. Consumers who are buying good quality second hand clothes and consumers looking for a way to make money out of clothes they don’t want any more. What with those stores and new outlet stores, retailers are going to have to work pretty darned hard to convince anyone to pay full price for anything ever again. Which sure as shootin’ won’t stop them trying. Just closing down their outlet stores isn’t going to do it although they may try. Whether or not they’ll get away with it (or when) is the bigger question.
Opening outlet stores is a great idea. Most shoppers are looking for a particular brand and if they can get it cheaper at an outlet, that’s what they’ll do. The only downside is for fashionistas who are looking for new items from a particular designer’s seasonal/new collection, but that’s where Saks and Nordstrom can offer both solutions–the latest and greatest designer collections for the dedicated followers of fashion and the marked-down, overstocked brand names for more conservative shoppers.
To me, this is a market share issue as much as anything. The fact is that outlet centers have been strategically placed away from major malls and urban centers, yet still relatively close to significant pockets of disposable income. In eastern Massachusetts, the Wrentham Village Outlets are within an hours drive of Boston and a half dozen major malls, and you can’t get near the place on most Saturdays, even now.
Read the full Newsweek story and the customer quoted in the story in Manhattan drives an hour to get to the Off Fifth outlet.
Customers are seeking out value, as they define value, and retailers who fail to offer that value lose market share. Retailers like Saks and Nordstrom understand that you have to go where the customers are.
Flagship “window shoppers” who buy at outlets will always exist. They are an opportunity for informed merchants, and the reason outlets will survive. Luxury brands are about emotion. Retail is about leveraging that emotion regardless of their place on the economic pyramid.
The two strategies will coexist because they support each other. The consumers and assortments are fundamentally different.
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Opening outlets doesn’t have to spell disaster. The key is product. Outlets can sell “comparable” goods at a discount, while the rack business could focus on say, opening high-end designer kiosks with exclusive merchandise.
Later, if and when the economy recovers, who says all those outlets need to remain open?
Are outlets a slippery slope like other department store promotions? Remember when (15+ years ago) a Macy’s One Day Sale was at most a once or even twice a season event? Now it’s basically a weekly occurrence.
While outlets serve some of the same customers and deliver some of the same merchandise, they are not even remotely pure substitutes for the full line stores. They preserve pricing integrity for FLS by being a better place to offer merchandise marked down yet they also offer different (promotional) lines from FLS labels.
Of course they are going to do relatively better during tough times like now, assuming gas shortages don’t continue. The outlets in North Georgia are certainly not getting in-town customers while gas is scarce.
As the economy improves they will provide a venue for aspirational customers though even in tough times the core FLS customer who can (still) afford it will not go to an outlet as timeliness and merchandise quality are more important to her than savings. And as long as they are contributing profitably to top and bottom line, they will absolutely stay open!
It’s all about supply and demand. Right now, customers are demanding high end goods at cheaper prices so it makes perfect sense for Nordstrom and Saks to expand the discount chain. When the economy gets better and the demand scenario changes, allocation and focus will go back to the main line. But for right now, luxury retailers still have to sell stuff and if the margins are a little lower, so be it. Selling through a discount sub-brand is much better than tarnishing the main brand with cheaper goods.
This is dangerous ground for true luxury retailers. These companies have spent time and money to cultivate their market niche and they risk undermining their own efforts by “panicking” during a slowdown. Today’s shoppers are very savvy and any time you communicate a conflicting message, you run the risk of losing your base. Upscale outlets should be utilized for the previous year’s fashions or items that did not sell well in the main outlets.
It’s entirely possible that the ultra-high-end market has overexpanded in response to the second Gilded Age. If I were they, my concern at this point would be not that they were diluting their brand at those price points but that those price points are unsustainable–period.
How is it that we came to expect that women who make less than $50,000 a year should spend $200 and up on a handbag–and then replace it the next year with another one at the same price? Or that one of the criteria (aside from her lack of judicial experience) that made Harriet Meiers unfit for the Supreme Court was that she shopped at Talbots instead of Bergdorf?
All this in an economy where those $50,000 jobs could disappear–to China or India, or just to a kid out of college or spread among the survivors in a consolidated organization–on a whim of senior management, looking to add those salaries to their own bonuses?
Now even the very affluent may well find themselves tapped out, and oil could go to $500 a barrel. I’m not sure the integrity of the most expensive fashion brands will be a priority for as many shoppers as it might have been recently.
If I were Nordstrom, Saks and the others, I would start figuring out a business model based on a smaller number of those very high-end customers and a bigger proportion at a more sustainable price point over the next five to ten years.
Yes, outlets do represent a competitive risk to luxury retailers because outlets dilute the “exclusivity” of the luxury merchandise.
Just consider BMW, for example. Until recently it was offering “incentives” in the U.S. market to buy a BMW, but then the company found out that it was losing its appeal as an “exclusive” car, so BMW stopped offering incentives knowing full well that their sales will decline. So it is a choice between more money and exclusivity!
I take issue with the lead-in to this topic (so what’s new?). How do we know that “even the well heeled are cutting back on purchases?” Inquiring minds want to know–and my mind, too. At the risk of repeating myself, the Wall Street Journal during the 70s recession famously promoted their advertising clout by referencing the curious success of an upscale jukebox restorer/purveyor who advertised exclusively in their paper. The classic quote from the advertiser was, “Those who have money will always have money.” The well heeled don’t trade down. Further, the look-at-me swagger of customers exiting upscale stores while brandishing designer shopping bags just doesn’t attract enough personal attention in outlet stores. And attention is what it’s about after all.
This is just smart retailing. In 2008, the shopper’s value equation shifted toward a very simple “value = price”–even for upscale shoppers. These outlets help retailers maintain brand loyalty but at a better price for shoppers.
As for what happens when the economy improves, I don’t think we’ll see the economy improve for some time, i.e., this is the new reality. It’s changing how shoppers shop–they’re learning to save, and saving is addictive.
I don’t see any threat whatsoever to the major brands for stores like Nordstrom, Saks and others opening outlet stores. If anything, it expands their brand to those that either have never had access to their stores or limited access.
We have a Nordstrom’s Rack in our area. The nearest Nordstrom main store is 150 miles in one direction and 200 miles in another.
Personally, I love having it here. It gives me access to products not sold at any other store and has become nearly my single source for shoes–period. When you can buy Cole Hahn loafers or Sketchers for $19-$29, it’s great. You would never find them at that price anywhere, if in my market you can find that quality at all. These outlets offer these retailers an opportunity to expand their brand and sales in markets that they wouldn’t serve otherwise. Why shouldn’t they? It’s a great strategy.
Further, it influences me to make a special trip to their main store during the holiday season every year.
For the main store shoppers, it’s about the experience, just as much as it is about the products. The Rack store provides some great products at extremely discounted prices. The experience is more like a trip to Target or TJM.
Shoppers of the main venues of these retailers are looking for more. They always will be. They will seek retailers that provide the experience they expect. Even so, it will never hurt these retailers to expand their exposure into more and underserved markets in a way that is cost effective and efficient.
Oh, please–better ask do we think the natural instinct to get whatever you can and make as many bucks as possible and succumb to greed if and when you think you can get away with it is ever going to make a comback. Do we seriously think that any of the problems and lessons we are learning the hard way now won’t be instantly forgotten once people begin to think the economy has “bounced back”? Give me a break, as someone once said.
Based on what I’ve been seeing and reading in both the US and UK recently, stores selling second-hand high end clothes are thriving. They are the ones these outlet stores need to compete with. They are not cannibalising their own sales, they are simply trying to hold their own against a whole new type of retailer that consumers are finding and loving. Consumers who are buying good quality second hand clothes and consumers looking for a way to make money out of clothes they don’t want any more. What with those stores and new outlet stores, retailers are going to have to work pretty darned hard to convince anyone to pay full price for anything ever again. Which sure as shootin’ won’t stop them trying. Just closing down their outlet stores isn’t going to do it although they may try. Whether or not they’ll get away with it (or when) is the bigger question.
Opening outlet stores is a great idea. Most shoppers are looking for a particular brand and if they can get it cheaper at an outlet, that’s what they’ll do. The only downside is for fashionistas who are looking for new items from a particular designer’s seasonal/new collection, but that’s where Saks and Nordstrom can offer both solutions–the latest and greatest designer collections for the dedicated followers of fashion and the marked-down, overstocked brand names for more conservative shoppers.
To me, this is a market share issue as much as anything. The fact is that outlet centers have been strategically placed away from major malls and urban centers, yet still relatively close to significant pockets of disposable income. In eastern Massachusetts, the Wrentham Village Outlets are within an hours drive of Boston and a half dozen major malls, and you can’t get near the place on most Saturdays, even now.
Read the full Newsweek story and the customer quoted in the story in Manhattan drives an hour to get to the Off Fifth outlet.
Customers are seeking out value, as they define value, and retailers who fail to offer that value lose market share. Retailers like Saks and Nordstrom understand that you have to go where the customers are.
Flagship “window shoppers” who buy at outlets will always exist. They are an opportunity for informed merchants, and the reason outlets will survive. Luxury brands are about emotion. Retail is about leveraging that emotion regardless of their place on the economic pyramid.
The two strategies will coexist because they support each other. The consumers and assortments are fundamentally different.