Factory outlets are brands’ most profitable retail distribution method; and a bricks-&-mortar market still growing. We shed light on the outlet strategy of top brands.
Today Düsseldorf witnessed a unique and crazy retail premiere. The grand dame of New York department store retail, Saks 5th Avenue landed its first store in Europe, Saks OFF 5th: an outlet.
SAKS’ Düsseldorf Outlet at the Opening Morning (photo brand pilots)
Saks’ attempt is ‘unique’, because the last US department store trying to retail in Europe was over 40 years ago; and ‘crazy’ because with an ailing department store industry, it seems rather hazardous to go to Germany with outlets, where discount retailers are world champions and department stores have their own struggles. So in any case, Saks’ opening is a strategic event.
Speaking about the event itself though, the opening was rather normal with a reasonably crowded store, but possibly less than you would have expected for a grand opening.
There is much that one could criticise – about the assortment, or the store’s appearance, but to be fair it is the pilot store that Saks’ investors at Hudson’s Bay Company (HBC) wanted. Saks’ German sister company Kaufhof owns a number of locations that need a new strategic purpose. By opening downtown outlets, Kaufhof pilots a retail format outside of its own department store ‘home zone’. The future will show whether HBC will succeed and how much more Saks outlets we will see in Germany. The more interesting question is will Kaufhof/Saks get the time and money to evolve and develope a business model that can compete against the off-prices professionals at TK Maxx, Vente-Privee and the many outlet centres?
McArthur Glen’s outlet centre in Neumünster: One of Europe’s 200 or more Outlet Centres that provide an attractive alternative to Saks OFF 5th (Photo: Brand Pilots)
Outlet Retail Growth – Beauty and the Beast
One thing though is certain, Saks couldn’t have better strategic timing for the market entry. Germany’s consumer confidence reached an all-time high this spring. Lifestyle brands across Europe operate more than 70,000 stores from Madrid to Moscow and create a growing number of seasonal leftovers. And, many brands have over-expanded their own retail network. So the outlet market has been growing across Europe.
Consumers across Europe have fallen in love with off price retail in their many and varied forms.
The European off-price market provides many opportunities to move excess stock. But not everything can work commercially, nor are all solutions good for brand health (Graphic: Brand Pilots)
The market may grow even more dynamically, with the exploding number of internet shops seeking ways to get rid of consumer returns. So it comes at no surprise that outlet retail is currently the only growing bricks-&-mortar retail market segment.
Is Your Outlet Strategy ‘Beautiful’?
We calculate that the European market alone is a €20 billion business (not including the items in regular High Street stores probably discounted up to 30%). Own factory stores (e.g. Herzogenaurach), own premium outlets (e.g. Bicester), off-price retailers (e.g.TK Maxx), online price clubs (e.g Vente-Privee) and sales to surplus dealers, are just some of the many off-price distribution channels a brands can choose from. But, the own outlet store distribution is by far the strongest and most successful option.
Though most brands don’t publicly report revenue and profits of their outlets, many of the annual reports show how brands bank on a strong outlet distribution.
Outlet Strategy in Action (graphic: brand pilots)
These are portfolios of American brands, but trust me when I say that European brands and their full price vs outlet portfolios don’t look that different. The strategic truth is, that in more than just a few cases outlets make up 30% of stores, 50% of sales, and more than 75% of the retail profits. Outlet retail is financially a ‘princess’, but strategically a ‘Cinderella’ you’d rather hide in your kitchen.
But a growing outlet market doesn’t automatically mean that all brands grow commercially successful. The outlet distribution we strategically experience generally splits into two groups:
A ‘Cinderella Store’, likely with mediocre retail KPIs (Photo: O. Kirchhof)
Ugly Portfolios – With Many Outlet ‘Beasts’
These are store portfolios that grew opportunistically, mainly to sell seasonal leftovers from wholesale and direct to consumer business. Only randomly are buyers allowed to develop special outlet collections. Assortment ranges in size and colour are incomplete, merchandise mixes are unbalanced and store looks are ugly. As is the store’s P&L.
A ‘princess store’, inspiring consumers and the brand’s CFO (Photo: Brand Pilots)
Healthy Portfolios – With Many Outlet ‘Beauties’
These are brands with a clear outlet commitment, an outlet strategy, a dedicated outlet organisation and special outlet collections offering an attractive consumer experience. Brands that allow mainly ‘beasts’, swill truggle to keep things profitable.
Outlet Distribution and How to Make it Successful?
Having assisted on many brand distribution strategies, my experience is that most brands have the right outlet knowledge in-house, but lack a clear strategic and organisational commitment. My short advice is this:
- For heads of retail: insist that outlet and full price store business is never aggregated in one own single retail report and the board will give stronger strategic commitments towards outlet growth.
- For CSOs: returns and leftovers are natural ingredients of brand distribution 2020. You’ll make your brand life healthier and things easier for your wholesale partner, if you allow a strategic proactive approach to returns and outlets.
- For CFOs: smart outlet strategies have an early and high financial payback. Outlet channels of advanced US and European brands regularly achieve 10% higher store EBITs than full price stores.
- For CEOs: make (at least in house) a clear strategic commitment to grow outlet distribution. It will support a financially successful brand growth. No other channel will allow you to safeguard a healthy brand development, especially in tougher years to come.
From the look of the store, you couldn’t tell if it was outlet or full price?. But consumers and your controller will enjoy this outlet ‘beauty’ (Photo: Brand Pilots)
The Future of Off-Price Distribution is Multichannel and it’s Growing
Whether Saks Off 5th will be a part of your brand’s outlet strategy or you prefer to distribute via Vente Privee, all the third-party channels should be only a small side aspect of your outlet strategy. Third party channels are successful when they buy your merchandise below your cost of goods. That can’t be your primary interest. Operating strong and successful outlet channels provides you with more flexibility to sell your seasonal leftovers in consumer inspiring retail environments.
Whether future outlet growth is more in Europe, Russia, China, Middle East, the space for premium outlet centres is still growing, even in the US.
The newly opened Dubai Outlet Village brings premium outlet retailing to the Middle East (Photo: Brand Pilots)
In many countries, outlet centres are only at the beginning of their growth, but the demand of local consumers and international tourists will ensure that we will see long-term growth developments. Strategically advanced brands prepare for that growth by developing a proactive outlet strategy and building dedicated outlet teams.
The next three years we will see the first brands exceeding 1000 global outlet stores – hopefully publicly celebrating that special day. Whether your reach 1000 outlets or just 50, in any case it is time you free Cinderella from the kitchen.
About the Author
Whether growing outlet retail, full price, partner retail or wholesale, Guido is a fan of qualitative multichannel growth. As a strategy and finance professional, he strongly believes outlet retail still holds many uncovered brand growth and profit opportunities. If you want to exchange some thoughts with him, feel free to reach him by email.
