Outlet Stores Are In: How They Went from Overstock Bins to Au Courant


At Coach's (COH) outlet stores, a whopping 85% of the merchandise is made specifically for "factory consumers," featuring current-season merchandise, as opposed to goods from prior seasons, says a spokeswoman for the high-end handbag company.

Meanwhile, outlet chain Nordstrom Rack (JWN), which will double its store base by 2016, calls on the same clothing suppliers that can be found at its tony department stores -- Kate Spade, Hugo Boss, Vera Wang -- to whip up similar on-trend styles of the season for its discount spin-off, a spokeswoman says.

Outlet stores have come a long way, baby.

No longer mere repositories of last season's cast-offs, outlets -- or "factory stores" -- are hawking new, trendy merchandise made expressly for these lower-priced spin-off stores.

It's a sign of the times: The recession whetted consumers' appetite for outlet shopping, and the channel has remained one of the healthiest parts of the retail sector ever since.

"Outlets always saw an upswing during tough times. But something fundamentally changed with this downturn," Carrie Geldner, senior vice president and chief marketing officer of Tanger Outlets, tells DailyFinance. "The whole value equation is really embedded in the way consumers shop today and will be in our future."

Even well-heeled consumers.

Tanger's average shopper, for one, has a household income of $69,000, way above that of the average American family, which takes in about $48,500 a year.

It has become chic to shop at the outlets, and to say, 'I got this [designer] shirt for $49 instead of $100.'"

To cash in on the trend, outlet stores have been on an expansion binge.

Retailers like Nordstrom Rack, Saks Fifth Avenue's outlet Off 5th (SKS) and the Gap (GPS) are now opening more outlets than main-brand stores, just as chains like H&M and Under Armour spread their outlet-store wings.

At the same time, outlet malls, once to be found primarily in far-flung places, are ramping up their presence where more of us live -- closer to traditional shopping malls.

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"Outlets are expanding and coming closer to cities, closer to tourist spots, and expanding in general," Paul Swinand, equity analyst with Morningstar, tells DailyFinance. Just as "people are looking for value, outlets are giving retailers great returns," he says.

Tanger is penetrating big cities and larger markets; CEO Steve Tanger believes the company is in a better position than ever to compete with traditional malls. It will open outlet malls near Phoenix, Houston and Washington, D.C., late this year or early 2013.

Tanger pioneered the outlet center shopping concept, opening the first one in 1981 in Burlington, N.C. Today, it operates 39 upscale outlet centers featuring more than 2,500 stores and over 430 brands.

Upping the Fashion Game

As the outlet business continues to expand, Tanger is working to reach shoppers with the message that these designer discount depots are now destinations for hot new fashions.

Hyping that theme in TV, print and digital marketing, it aims to get the word out to fashionistas that they can put together a complete look -- as opposed to just picking up mismatched separates -- at its outlet stores.

Fashion "look books" on Tanger.com showcase outfits composed of pieces sold in its outlets while highlighting the key trends of the season, like leather and texture for this fall.

Tanger is also preaching the gospel by holding more fashion show events at its centers; it offered a number of special giveaways and promotions earlier this month tied to New York Fashion Week.

The idea is to reeducate shoppers: Contrary to popular belief, the majority of product sold at outlet centers today is new, on trend and in season, Geldner says.

Best Deals at the Outlets
Best Deals at the Outlets

The merchandise sold at Tanger's outlet stores - be it J. Crew, Kate Spade or Off Fifth -- is mostly made exclusively for outlet-store distribution, and is sold 30% to 70% below full retail price.

That means you'll find the same on-trend bright colors and silhouettes at J.Crew as its factory stores, for example, she says.

Of course, it wasn't always that way.

Go back 10 years or more, and the outlet store mix was primarily overruns from department stores, discontinued merchandise, goods from prior seasons and irregulars.

While overstock goods can still be found at outlet stores, "today, you can walk into almost any store at a Tanger Outlet Center and buy the latest current season goods, because brands are increasingly creating new, in-season product to sell at our stores," Geldner says.

They've had little choice in the matter.

After the economy tanked in 2008, department stores as well as apparel retailers and wholesalers began keeping their inventory levels tight, so there hasn't been much in the way of surplus goods.

"At the same time, brands continued to see strong profits and consumer traffic from their outlet center channels, so they started creating merchandise exclusively for their outlets to fill the void created by lack of excess inventory," she says.

Coach's outlet stores, for example, used to serve as a "disposition channel for product overruns." Today, most of their merchandise is made exclusively for the outlet division, says Andrea Shaw Resnick, a spokeswoman.

(While outlet stores have adapted to the dearth of overstock goods, closeout retailers such as Daffy's and Filene's Basement did not: The shift contributed to Daffy's and Filene's filing for bankruptcy, then shuttering their stores for good this year and in 2011, respectively.)

Nordstrom Rack
Nordstrom Rack

Tarnishing The Brand?

While many retailers have only recently begun beefing up their mix of outlet-only finds, Nordstrom Rack has always carried a hefty assortment of exclusive merchandise.

The Rack carries 47 of Nordstrom's top 50 brands at prices 30% to 70% below those of the parent chain.

"We're able to create that treasure-hunt experience because of our longstanding relationships with vendors who work with us to deliver on-trend fashion for the Rack," although the apparel might not be the precise color and design available at the mothership, Kendall Ault, a spokeswoman from the retailer, tells DailyFinance.

But as more and more outlet merchandise is made exclusively for the channel versus overstock goods, outlet stores run the risk of nullifying their signature appeal to shoppers: The promise of an upscale, designer frock for a fraction of the full price.

"The customer wants to think that they got the deal and there's no difference" between the quality of the merchandise sold in both places, Swinand says.

"They want to say that they got the same $500 designer bag or pair of shoes for $300 ... If somebody perceives that brand to be different, you're going to run into trouble. The big concern is that the merchandise is not the same level of quality."

There's good reason for merchants to be concerned about that.

The quality of outlet-only merchandise is often a notch below what's sold at brands' full line stores -- a difference that can be seen by taking a close look at the fabric, stitching, lining and buttons of a garment, experts say.

Whether that will eventually end up turning off shoppers remains to be seen.

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