They average over 200,000 square feet, with some up to five times that large. We drive past them all the time, their bright lights beckoning from just off our highways.

And even though about 40 percent of Americans visit at least outlet mall in a given year—sometimes on increasingly popular “bus tours” that leave from city centers—they are hardly unique to the United States, with a growing presence in Europe, Japan, and even the Middle East, where the Dubai Outlet Mall (at 1 million square feet) opened in August of 2007, housing Tommy Hilfiger, Guess, and Esprit stores among many others.

Manufacturers’ retail outlets have come a long way in size, geographic reach, and popularity since men’s-clothing-maker Anderson-Little opened the first non-factory-adjacent outlet stores in 1936. Until the 1970s such outlets, inevitably single stores located far from primary retail centers, served mainly to dispose of excess or damaged merchandise. But since then they have grown to include multiple manufacturer-branded and non-branded stores at the same site, great breadth of designer label offerings, and an increasing proportion of in-season alongside irregular and overstocked items.

And these trends show in outlet stores’ performance: manufacturers’ outlets in the United States generated $15 billion annual revenue by 2003, which represented 250 percent of 1990 sales. Importantly, outlet malls’ sales per square foot often outstrip those of conventional malls; shoppers spend up to 79 percent more per visit at outlets than regional malls and, though they are still typically located outside of city retail centers, they are moving closer to central commercial districts. Or, more accurately, urban sprawl is bringing retail districts closer to the outlet malls, raising the threat of channel conflict between manufacturers’ outlets and their primary retailers (e.g., department stores).

Outlet stores, far from representing a dumping ground for unsold goods, are a sound distribution channel for fashion and other merchandise.

These trends raise an important question: How viable a channel strategy is distribution through outlet stores in addition to primary retailers? With this exact query in mind, Kellogg School of Management marketing professor Anne Coughlan and co-author David Soberman presented several rationales for retail outlets, along with an assessment of their current state and future trends, in a 2005 article in the International Journal of Research in Marketing. Here we consider each of these areas, in turn.

The Case for Retail Outlets

Coughlan and Soberman present several reasons that outlet stores are more than just “dumping grounds” for unforeseen overstocks, end-of-season leftovers, and damaged products. Indeed, they cite research showing that the last category makes up only about 15 percent of all outlet merchandise. A stronger rationale for outlets is that they actually “expand market coverage by serving a previously unserved set of consumers,” as the authors put it; these buyers are typically too price-sensitive to frequent primary retail stores. As evidence for this reasoning, Coughlan and Soberman cite studies demonstrating that outlet malls attract segments that previously bought primarily unbranded items.

Outlet stores, far from representing a dumping ground for unsold goods, are a sound distribution channel for fashion and other merchandise. While Coughlan and Soberman acknowledge that manufacturers may use outlet malls in part to “challenge” their primary retailers’ power or keep them in line by offering the same merchandise simultaneously through retailers and outlets, they also propose what is perhaps the strongest rationale for outlets: “manufacturers can use outlet retailing to implement simple market segmentation through dual distribution.” In other words, while highly service-sensitive customers will continue to shop at primary retailers, those with less of a service focus will look easily past the no-frills environments of the outlets for their lower prices.

The Current State of Retail Outlets

To examine evidence for the rationales above and consider other features of retail outlets, Coughlan and Soberman collected data on merchandise price/availability and other dimensions in late 1998 from eighteen apparel outlet stores at two Chicago-area malls, and then compared these to information gathered from primary malls in the region. Their observations were revealing in multiple ways. For example, seven of the eighteen stores were run by manufacturers that also operated their own shops (e.g., J. Crew, Casual Corner) in primary retail areas (e.g., conventional malls), indicating that the outlet channel is not just for manufacturers distributing solely through department stores or downtown boutiques. In addition, half of the stores sampled offered at least some in-season merchandise, with some like Jones New York taking distinct pride in this fact, while others such as Polo Ralph Lauren ensuring a delay of up to a year in outlet-store product availability—using warehousing as necessary to achieve this.

“Manufacturers view outlet-mall retailing as a viable channel strategy to strategically segment increasingly heterogeneous markets.”

Although Coughlan and Soberman found a 24 percent average price discount across outlet stores, some merchandise was actually priced at the same or lower levels at the primary retailer than at the outlet store at the time of observation. But this was usually because the product had been available for some time at the primary retailer, resulting in a markdown. A comparison between Dana Buchman primary retail and outlet stores illuminates this clearly. According to Coughlan and Soberman, Dana Buchman merchandise is first available only at the primary retailer—for full list price and with a high level of service. Some weeks later, the same items appear as “New Arrivals” at the outlet store, at a 40 percent discount. Meanwhile, any units still on the racks of the primary retailer are also marked down 40 percent. The authors suggest that this practice reflects an “understanding between the designer and the primary retailers that a lead time of a certain number of weeks will be allowed before the designer will offer the product [at a specific discount] in the outlet store.” Because the primary retailer knows the discount at which the product will be available at the outlet, they are likely to choose a similar markdown for remaining items. Coughlan and Soberman also use the Dana Buchman example to infer that outlet-store prices are not far from the primary retailer’s cost, given that the list price for retail apparel typically reflects a mark-up of 50 percent.

The Dana Buchman example also suggests another dimension on which to compare primary retailers and outlet stores: service. As Coughlan and Soberman note, “While the sales clerks at outlet stores are pleasant, the level of service is definitely lower at the outlet stores. It is generally up to the shopper to match items of clothing, and the retail environment is much less luxurious than in an upscale department or specialty store.” While today’s outlets feature more amenities (e.g., dressing rooms) than those of the past, they are a far cry from the live piano music and personal shopping assistants now standard-issue at Nordstrom.

Coughlan and Soberman further this line of comparison by considering brands that are either completely unavailable through outlet channels or appear on the shelves and racks of only a few outlet stores nationwide. Specifically, the researchers presented a list of merchants located on Chicago’s exclusive north end of Michigan Avenue to highlight that “retailers with few or zero outlet stores tend to be ones . . . serving upscale consumers almost exclusively.” Not surprisingly, these included brands such as Chanel, Ermenegildo Zegna, and Hermes. For such high-end retailers, the authors argue that the outlet channel, if used at all, plays a more limited role—typically toward disposal of overstocks—and thus requires a very small network of stores. Less exclusive competitors such as Jones New York (150 outlet stores at the time of the research) and Gap (141 outlet stores), are much more likely to use outlets to serve a large customer segment with lower service needs, thus representing a more strategic and important channel strategy.

The Future of Retail Outlets

Based on their observations, Coughlan and Soberman argue that “manufacturers view outlet-mall retailing as a viable channel strategy to strategically segment increasingly heterogeneous markets,” and that even if technology-based production management improves significantly, “outlet malls will not disappear because they are much more than an on-again, off-again method for manufacturers to dispose of unwanted inventory.” While outlet-mall retailing is less viable in markets characterized by high service-sensitivity, it will continue to be profitable in catering to segments with less of a service focus and greater emphasis on finding low prices.

In the context of this overall rosy picture for retail outlets, Coughlan and Soberman present several specific and testable hypotheses and predictions for this arena:

• Manufacturers will benefit more from using an outlet channel when they tend to serve a broader group of segments, including groups that value low prices more than high-quality service.

• The level of outlet-store activity should increase in markets where dispersion in income and average age increase over time. This is especially relevant to the United States, where the aging population will become increasingly price-sensitive, on average.

• In metropolitan areas marked by urban sprawl, outlet-store retailing will decrease, with outlet stores converted to traditional malls. Coughlan and Soberman suggest that over time, the ability of an outlet mall located closer to the “center of gravity for major urban agglomerations” to deliver a clean segmentation will decline, reducing its effectiveness and making it a candidate for conversion.

• Urban-area outlet-store retailing will increase with the rise in more diverse forms of outlet malls. The new trend toward “shoppertainment,” or the combination of shopping and entertainment provided by large malls, will allow multiple types of outlet malls to co-exist. For example, the Chicago area’s Gurnee Mills (shoppertainment-focused) and Prime Outlets (a pure outlet mall) are just fifteen miles apart.

• In categories marked by a rapid rise in outlet store distribution, primary retailers will be increasingly aggressive in developing retail or private label brands. As outlet stores become more upscale, their distinction from primary retailers will weaken, leading retailers to increase emphasis on private label or retail branded offerings. This may help to explain the steady increase in private label offerings from J.C. Penney, Bloomingdales, and others.

As these predictions make clear, Coughlan and Soberman believe that outlet malls will fragment significantly, and that “hybrid retailing centers that develop may have little in common with the ‘original outlet mall’ as developed in the 1980s.” Though the exact changes this channel will undergo are not clear, one thing is: outlet stores, far from representing a dumping ground for unsold goods, are a sound distribution channel for fashion and other merchandise in the United States and beyond, and will likely continue to thrive in whatever form they take.