Is a Factory Outlet Good for the Bottom Line?

(Photo: Jon Konrath)

A new working paper (gated) by Yi Qian, Eric Anderson, and Duncan Simester looks at how a factory or outlet store affects a retailer’s regular-priced products. Using 12 years’ worth of data from a U.S. apparel retailer, they found that the factory store contributed positively to the business: 

We study how the opening of a factory store impacts a retailer’s demand in its other channels. It is possible that a factory store may damage a retailer’s brand image and lead to substitution away from its higher quality core channels. Alternatively, the opening of a factory store may have positive effects as it may attract new buyers and serve as a form of brand advertising. In this paper, we use a natural experiment that arises from a retailer introducing a factory store in 2002. We analyze data that spans all customers and all channels from 1995 to 2007. This allows for careful pre and post analysis of the factory store opening. We find that the introduction of the factory store led to substantial positive spillovers to the core channels that lasted for multiple years. Customers purchase more items from the higher priced, higher quality channels after the factory store is opened. These positive spillovers represent approximately 17% of all of the incremental sales that result from the factory store opening (the other 83% are contributed by sales in the factory store itself).

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COMMENTS: 4


  1. Eric M. Jones. says:

    An associated question is whether or not counterfeit goods increase or decrease the bottom line. Perhaps counterfeit goods increase the demand for luxury goods. Perhaps people buy fake Rolexes and when they strike it rich buy real Rolexes. Perhaps this is a net benefit to Rolex.

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    • Melissa Belvadi says:

      Distinguish “counterfeit” from “knock-off”. Generally, the buyer is aware that they are buying a fake in the latter case, but not the former. This is an important distinction in debates about the economic effectiveness of intellectual property laws.

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  2. Adriana says:

    In my opinion, there is too little information given about the specific company and its retail model (pre-factory store) in order to answer this properly. There may be short-term gains from factory store customers making occasional purchases in the next highest/low-end retail category and that may be a great way to add to the bottom line if we’re talking about Gap for example… A company whose low cost retail clothes are their bread and butter. The factory store is indeed more of a marketing tool to attract new customers and fits in line very well with everything they are about. Take something like Coach, or Gucci, however, and the cheapening of the brand alienates its core customers. When people spend a lot of money on something, they like the fact that they are now part of that exclusive club.Nothing is a bigger turnoff, than seeing $20 replicas sold at target for 3 weeks, or knowing that your wallet comes in green red and gold in a smaller size and will be 50% at the coach outlet next week. It just cheapens everything. Building a brand like Chanel, The Ritz Carlton, Mercedes Benz, Cartier, Apple, Christian Louboutin, Rolls Royce…. It is one of the hardest things to do mainly because of building dedicated customers who will always get the best. Dumbing down your products and services for a get quick rich scheme will only hurt your true source of value and cash flow in the long term. Just be prepared to fix any damage along the way if you choose to take the risky path. It can take a lifetime to build a brand, and another lifetime trying to rebuild it from a cheapening scheme. Every quick scheme has long term consequences.

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    • Mike says:

      Adriana, I’m going to have to disagree with several of the points you’ve made here. I think categorizing outlet/factory stores as “dumbing down product” – it’s the same product – or as a “get rich quick scheme” is a gross misrepresentation. I would agree with you that for high-end brands, opening a factory store would erode much of the value proposition, and this is why you will typically not see any Gucci outlets etc. There’s also no reason for very low-end brands to open factory stores; their goods are already cheap. Instead, I think we are looking mostly at middle of the market retailers – decent brands at a moderate price point. By opening factory stores, they set up a functional price-discrimination model. At the majority of their (regularly priced and centrally located) stores, supply and demand go to work and they sell what they sell. The outlet stores are typically located (the nearest to me is an hour drive) farther away and in lower income areas, so they won’t cannibalize sales from the full-price stores. It seems likely to me that what the retailers are trying to do is sell as much as they can at a higher price point, and then use factory stores to sell the same goods at a lower price point and capture an additional share of the market. These new customers then establish brand loyalty etc. and are probably much more inclined to make future purchases at the full-priced store.

      Another thought is that because cheap brands don’t have outlets, simply having a factory store gives off the impression that this is a brand ‘nice’ enough to warrant a discounted outlet, which increases demand. I’m imagining this as comparable to knockoffs in that only luxury goods warrant them. Thus, if people are seeing knockoffs of a product they don’t recognize they are inclined to think that the original is a nice brand. Similarly, knowing that a store has an outlet may drive up demand by creating a perceived image of higher quality.

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