Wall Street Journal: Professor Sheri Bridges Discusses Luxury Retail Outlets

As Their Outlet Stores Proliferate, U.S. Luxury Retailers Risk Tarnished Image
Reposted from Wall Street Journal | By Karen Talley

Luxury retailers in the U.S. are finding their outlet stores are starting to outnumber their traditional stores, a development that could up-end the way upper-end shopping is perceived.

For decades, names such as Saks Inc. (SKS) and Nordstrom Inc. (JWN) stood for the very best a consumer could afford. In recent years, though, luxury retailers have opened scores of much-smaller outlet stores. While the locations, in many cases, were at first used to house full-line stores’ cast-offs, they now are shopping destinations in their own right. The outlets still generally carry the full-line stores’ products but also have lower-costing designer wares, as well as a variety of other products.

“When you open full-line stores, they are bigger projects,” said Nordstrom spokesman Colin Johnson. Outlets “get up and running quickly and generate very strong returns,” Mr. Johnson said.

Nordstrom by the end of this year will see the number of its Nordstrom Rack outlets outdistance its full-line stores, 119 to 117, and the retailer expects to have more than 230 outlets by 2016.

During a conference call to discuss Nordstrom’s second-quarter earnings, Chief Financial Officer Mike Koppel said outlet stores generate lower gross profit, but selling, general and administrative costs are also lower. The result is that margins on earnings before interest and taxes tend to be “slightly better” than full-line stores, Mr. Koppel said.

According to the most recently available data, Nordstrom’s full-line stores generated $1.7 billion in sales in the first quarter, while Rack outlets had sales of $557 million.

A concern, though, is that the increasing number of outlets–with products considered of lesser quality than those sold in full-line stores–could dent the stores’ reputation.

Luxury retailers “are taking a high-risk approach,” said Eugene Fram, professor emeritus at the Rochester Institute of Technology’s E. Philip Saunders College of Business. “You have the potential for changing shoppers’ perception to one of a lower-priced operation.”

This is a problem because, “Once you lose your image, it’s hard to get it back and it also causes confusion,” Mr. Fram said.

Luxury stores “are known for catering to certain kinds of customers,” said Sheri Bridges, faculty director of Wake Forest University’s Center for Retail Innovation. “Outlets lessen this exclusivity, so the name starts to stand for something else. Everyone can have it.”

As a result, the retailers and their merchandise “are no longer status brands,” Ms. Bridges said.

Luxury retailers have worked hard to maintain their images as they expand their outlets.

“Outlets try to keep to the experience of a full-line store, and there are core items they sell in their stores they will never sell in an outlet,” said Stephen Wyss, partner in the retail practice at BDO USA.

Saks has been operating more outlets than full-line stores for the past couple of years and by the end of 2012 will have a ratio of 66 Saks Fifth Avenue Off 5th outlets to 45 full-line stores.

For Saks, there are only a limited number of markets in the U.S. that make sense for a full-line store “and we already have a presence in the vast majority of those markets,” spokeswoman Julia Bentley said. “Typically, you need a major metro area with a large, affluent population and/or a robust tourist industry.”

Plus, there is very little traditional mall expansion going on, Ms. Bentley said. Luxury retailers often serve as anchor tenants for malls, while outlets are frequently huddled into centers with similar stores or located in off-mall locations.

Meanwhile, retailers have scant plans for full-line locations. Saks has tentative plans for one in Puerto Rico in 2015, and Nordstrom has one planned for San Juan in late 2014. Nordstrom is also looking in Canada for sites, although the company declined to say if it was for full-line stores or Racks or both.

Among other upper-end retailers, Coach Inc. (COH) operates full-line stores and also sells through its outlets and department stores. Neiman Marcus Group Inc. has a mix of full-line stores and outlets.