Luxury Brands Have a Big Problem - Their Own Outlet Stores

Outlet stores have expanded the market for fashion designers. But undercutting your own higher priced products suggests a lack of confidence in the strength of the brand. And it's beginning to hurt. JL

Ashley Lutz reports in Business Insider:

Brands are essentially selling knockoffs of their own products. Outlet items are “based on (full-price) products sold in previous seasons.” These cheaper goods are made specifically for the outlets and might not have been sold in the brand's regular retail stores at all. They erode brand perception.

Many aspirational retail brands are in crisis. Companies such as Ralph Lauren, Coach, and Michael Kors have reported disappointing earnings recently. Shares for all three companies have declined in the past year. 

Many of the companies' struggles can be traced back to one mistake: opening too many outlet stores. 

Outlet stores sell the labels' clothing for cheaper than department stores, giving the brands a wider audience. But widespread popularity is the “kiss of death for trendy fashion brands, particularly those positioned in the up-market younger consumer sectors,” industry expert Robin Lewis writes on his blog. Lewis compares Michael Kors to Tommy Hilfiger, which reached its peak in the late 1990s. 

All companies have several brands at different price points, a strategy that could easily backfire, Lewis says. Kors has a high-end department-store brand, a middle-market brand, and a brand for discount outlet stores. “Some would argue all of those segments will simply end up competing with each other, thus cannibalizing the top end of the spectrum,” he writes.

In other words, consumers will not pay $300 for a Michael Kors or Coach bag in a department store when they can get one at the outlet mall for half the price. 

Michael Kors in particular illustrates the perils of outlets. The company enjoyed an impressive rise in popularity in recent years thanks to its trendy handbags and watches. But growth has been slowing lately, and the company has reported a weak outlook for the future.

Shares are down more than 50 percent in the past year. Despite overall strength in the apparel industry, the fashion company is the only major specialty retailer not trading above the five-year median right now, according to a recent report by Morgan Stanley.

The brand is now available in 4,133 locations around the world, including boutiques, department stores, and discount outlets. That compares with 2,913 stores at the beginning of 2013. Michael Kors has said it could still add hundreds of locations to its roster. 

While being available in more stores can drive profits in the short term, it can also hurt the brand. Michael Kors, like Ralph Lauren and Coach, is considered an aspirational brand, with consumers paying a premium for its label. Once everyone has the product, it is no longer considered cool. Other brands that have experienced this phenomenon include Juicy Couture and Jordache.

And although outlets are an easy way for retailers to make a quick dollar, they might erode brand perception over time. Many “deals” at outlet stores aren't what they seem, Business Insider's Pamela Engel reported last year. In a way, these brands are essentially selling knockoffs of their own products.

BuzzFeed notes that J. Crew's outlet items are, according to the company, “based on (full-price) products sold in previous seasons.” These cheaper goods are made specifically for the outlets and might not have been sold in the brand's regular retail stores at all.

Michael Kors should focus on getting customers to pay a premium for its products.