“Why Outlet Stores Exist: Averting Cannibalization in Product Line Extensions” by Donald Ngwe ( Joint Business-Economics Seminar)
Outlet stores are a large and growing component of many firms' retailing strategies, particularly in the fashion industry. Outlet stores offer attractive prices in locations far from central shopping districts. The main perspectives on why outlet stores exist can be broadly classified into inventory management, geographic segmentation, and price discrimination through consumer self-selection. I evaluate these perspectives in the context of a major fashion goods firm using newly available and highly granular data. Model-free evidence suggests that inventory management and geographic segmentation are not the main drivers for outlet store use. Consumers who shop at outlet stores also do not differ significantly from those who shop at regular stores in terms of income. I use a structural demand model to show that consumers are segmented according to their sensitivity to travel distance and taste for product newness. I then develop a supply model to predict product development responses to changes in store locations. Through policy simulations, I discover that the firm uses outlet stores to serve lower- value consumers who self-select by traveling to outlet stores from central shopping districts. The firm sells older, less desirable merchandise through outlet stores to prevent cannibalization of regular store revenues by means of exploiting the positive correlation between consumers' travel sensitivity and taste for new products. I find that the rate of new product introduction in regular stores would fall by 13% if outlet stores were closed down, while variable profits would decline by 19%. These results imply that the existence of outlet stores may enable firms to improve quality in their regular channels, thus counteracting brand dilution effects.