THIS ISN’T THE LABEL YOU THINK IT IS
The littleknown product switcheroo that’s turning factory outlets into red-hot retail.
there’s something special about Canada’s Tommy bahama factory outlets: The three shops — two in Alberta and one in vaughan, Ont. — actually sell the same clothing you’ll find in their six other Canadian non-factory stores. It’s not necessarily their hottest new lines. but the discounted Hawaiian shirts and casualwear feature the same high-quality fabric and stitching as the pricier merchandise on their racks at luxury malls.
That may sound surprising to those consumers still under the impression that factory outlets are still off-the-highway clearing houses for leftover items that retailers couldn’t get shoppers to pay a higher price for at urban locations. but most retailers abandoned that model long ago: These days, a factory outlet may look like it sells the same merchandise as the regular stores, but it hardly ever does, or not exclusively, at any rate. but finding the same shirt at a Tommy bahama outlet as you might have seen previously at the upmarket store? That makes the brand a rare exception among retailers in the outlet game.
“We think price integrity goes hand-in-hand with the quality of our brand, so to actually dumb-down the product and put it in an outlet just doesn’t seem right for the brand,” said doug Wood, president and chief operating officer at Seattle-based Tommy bahama. “We don’t have clearance sales in our stores so we have to use outlets to clear aged inventory,” Wood explained. “I know that we are in the very small minority that do it this way.”
In the meantime, that ralph Lauren sweater you picked up at an outlet for half the price you think you would’ve paid at a department store? It’s probably not the same sweater — and probably never even graced the inside of a full-line store. It might be made of cheaper fabric. maybe there are fewer finishes, or points of tailoring. And once you take all that into account, the value-for-money equation may not even be that great a deal compared to the full-priced version. Shoppers may hit the outlet mall thinking they’re shrewdly outfoxing the higher priced retailer. In reality, retailers are usually one step ahead of the consumer.
“I don’t think that is a widely known fact at all that you are getting different things that are made specifically for the outlet,” said Alyssa Garrison, author of the Toronto-based fashion blog random Acts of Pastel. Garrison admits she didn’t realize that factory outlets had entirely different product lines; although she rarely shops at them, she generally regarded outlets as a place to unearth treasures at a good bargain.
“Knowing that now, I would probably avoid outlet shopping in the future, because I am willing to spend more if something is of better quality, and particularly if it is ethically made,” she said. “That said, I don’t know if the average consumer would care about getting something cheaper and of slightly lower quality if they still could have the brand’s label on there.”
And that’s exactly what the factory outlet has become: A place where retailers and manufacturers from J Crew to Adidas to ralph Lauren can reach into the pockets of an entire class of shoppers that otherwise aren’t able to pay for the higher-end brands they want, or at least not very frequently, but want to be seen in the brands just the same.
“There is no cannibalization — it’s just the opposite,” says Jonathan Greller who, as president of outlets at Hudson’s Bay Co., oversees Saks Off Fifth, the outlet version of HBC’s haute New york retailer Saks Fifth Avenue.
“We look at it as an entryway for customers to get familiar with the brand,” he said, adding the company’s average outlet customers are about 10 years younger than those who shop at its full-line department stores. “They come in (to outlets) to get exposed to the brands, and then we want to graduate them into the full-line department stores.”
The aspirational hunger that middle-class shoppers have for wearing higher-priced brand names has HBC preparing to open 25 Saks Off Fifth stores in Canada, with the first three opening in spring 2016 in Ottawa, Niagara-on-the-Lake, and vaughan, Ont. Nordstrom will follow suit in 2017, opening its first Nordstrom rack stores in Canada. meanwhile, demand continues to boom at “offprice” retailers such as Winners and banana republic Factory Store, with no signs of slowing down.
And Hudson’s bay is further doubling-down on the sector in the u.S. with the launch of a new off-price chain selling brand-name fashions from its American Lord & Taylor department store, advertised at 30 to 70 per cent off suggested retail prices. The first of seven Find @ Lord & Taylor outlets will open on Nov. 19 at the retail-outlet mecca that is Paramus, N.J.
Today, North America has 215 outlet malls, but the pace of openings has accelerated in recent years, with 41 outlet centres opening since 2012, and more than 60 new outlet projects and expansions are currently in the works, according to the International Council of Shopping Centres.
Factory outlets really did get their start in the 1930s as a way for department stores and manufacturers to unload racks of unsold or damaged inventory. but good retailers have got so much better at clearing inventory through smart merchandising, mathematically perfected price adjustments, and data mining that can help them transfer inventory to stores where it will sell better, that most of them would never have enough excess product to keep their growing factory outlets flush.
Last year, The Wall Street Journal calculated how many regular-versus-factory outlet stores various u.S. brands had: Saks and Nordstrom both had more outlets than department stores — in Saks’ case twice as many — while Neiman marcus had just three more regular stores than factory outlets. Coach had 332 traditional stores and 207 factory outlets but closed a number of locations in a bid to recapture some of the brand’s past lustre after executives admitted the brand had become promotional and overexposed. At the end of its fiscal year on June 27, Coach operated 258 retail stores and 204 outlet stores.
When Holt renfrew launched its off-price store Hr2 in 2013, it did so intending to have literally no overlap between the outlet store and the swanky stores that cater to Canada’s richest shoppers. None of the apparel and accessories carried at Hr2 is typically unsold or damaged inventory coming from full-line Holts stores, and the two have completely separate buying teams. (In unique cases, some end-of-season goods — a few of one type of handbag, for example — may become available for Hr2 purchase.)
Still, there is a 70 per cent overlap in the brand names on the labels carried at Hr2 and Holts, so some shoppers may think they are walking away with a great bargain on a once-pricey luxury Holt renfrew item. Some retailers give customers an indication, albeit a subtle one, that they are buying the lower-tier merchandise. All apparel made for Gap and J Crew’s factory outlet stores have markings indicative of such on their labels: Gap factory apparel has three small dots and J Crew factory merchandise has two small diamonds.
“I think consumers may be getting a bit wiser to this, but then again if you are an outlet shopper, are you going to Saks in the first place?” asks bruce Sinclair, program coordinator for the Fashion management degree at Toronto’s Humber Institute of Technology and Advanced Learning.
Sinclair learned about the industry secret in the 1990s when he followed around a brooks brothers outlet store buyer for a day. “I was so shocked — I’d had no idea that was how outlets worked until then.”
He said consumers may be further confused by the fact that the amount of made-for-outlet merchandise varies — some outlets are stocked with exclusively new inventory intended for the factory stores, while a few others, such as Tory burch and Tommy bahama, keep their inventory quality consistent at both types of stores.
HBC will also sell some outlet-exclusive apparel at its Find @ Lord & Taylor, Greller confirmed, although up to 50 per cent of the regular assortment will come from excess inventory at Lord & Taylor and other department stores. Lord & Taylor is the third major department store chain in the u.S. to tap into off-price this year, after macy’s and Kohl’s. After the first six are open the company will assess opportunities in the u.S., Canada and other global markets, Greller said.
but it’s already clear that whether shoppers are aware or not that they’re frequently getting lower-end merchandise at outlets, they’re flocking to them just the same. In HBC’s second quarter ended Aug. 1, Saks Off Fifth posted a same-store sales increase of 12.7 per cent. The off-price banner vastly outperformed HBC’s other business segments in 2014, with samestore sales rising 15.1 per cent during the year compared with 1.5 per cent at Hudson’s bay and Lord & Taylor stores, and 2.1 per cent at Saks Fifth Avenue stores.
Anthony Karabus, CEO of retail consultancy HRC Advisory, noted that the North American population of middle-income earners who frequent outlet stores is much larger than the higher-income earners who shop at luxury stores and high-end department stores.
“There is often very little crossover between an outlet shopper and a fullprice shopper,” Karabus said. “The risk is modest if you are a Saks or a Nordstrom — those Saks customers are not shopping the outlets. And as a retailer, you are making a significantly better margin (on goods sold) at the outlet.”
The risk of overlap has also traditionally been mitigated by the distance between the stores. The bulk of the category relies on suburban power centres or outlet malls — entire developments devoted to off-price retail, where the rent is much cheaper than leasing space at a popular shopping centre. New york’s coveted Fifth Avenue strip, home to Saks’ flagship, averages higher than US$3,000 a square foot for rent. At North America’s 215 outlet malls, rent averages US$41.34 per square foot, according to the ICSC’s 2015 report, State of the Outlet Industry.
And yet it’s the outlets that can perform better than their department store counterparts, at least on a pure revenue basis. The average North American outlet mall is selling US$546.33 worth of merchandise per square foot, the ICSC said. Compare that to the last time HBC publicly reported its annual sales per square foot, ending Feb. 1, 2014: $145 at Hudson’s bay and Home Outfitters, and US$212 at Lord & Taylor.
That has naturally tempted retailers to just go ahead and plunk down factory outlets right in the heart of urban shopping districts, sometimes within blocks of their non-factory stores: HBC has said it plans to open a new full-line Saks store in manhattan next year, and then an Off Fifth store, just a few minutes away, in 2017.
The distance between Coach’s posh leather boutiques and its factory outlets had shrunk between 2004 and 2012 from between 50 and 100 miles to “roughly 30 miles or more,” The Wall Street Journal found. It also noted that sales per square foot at the full-price Coach stores had fallen 27 per cent over the same period.
but HBC appears to be encouraged by what it has already seen from its downtown store in San Francisco, since Greller has said he sees the Off Fifth concept working in all kinds of places, including malls and retail strips. So it’s not out of the question that its outlet-expansion plans could include vancouver’s robson Street or Toronto’s bloor Street (where there already is a Winners, wedged into yorkville’s so-called mink mile). Industry observers say there is still plenty of room for more off-price retail in Canada, given that the u.S. has 202 outlet shopping malls and Canada has just 10 — a far lower ratio than the 10 to one population difference between the two countries.
“The off-price market is underpenetrated,” Greller said. “We believe that there is so much room for growth in the sector, and we aren’t even close to saturation.”