Bargain Hunting: Luxury Retailers Find an Outlet


With sales at their main locations sagging, Saks, Nordstrom, and others are tapping budget-conscious shoppers by expanding their outlet stores

On a recent morning at the Woodbury Commons Outlet mall an hour north of New York City, Carissa Nava is looking over a red wraparound dress by Diane Von Furstenberg at the Saks Fifth Avenue Off Fifth store. The dress retails for $365 at Saks' main store on in New York, but here it is selling for $126.99.

Nava, a pharmaceutical sales rep who lives in Manhattan, makes regular trips to Saks' flagship store on Fifth Avenue—sometimes to buy, but often just to check out the selection of big-name apparel. Then, at the earliest chance, she drives up to the Saks outlet to pick those items up at a significant discount. "I only wear Seven or True Religion jeans, and I get them here for $149," she says. "Why would I pay $216 for the same exact ones at the main store?"

There's a certain snob appeal that attaches to luxury retailers like Neiman Marcus, Saks (SKS), or Nordstrom (JWN). Which is why, even though almost all of them have operated discount outlet stores for years, they never talked much about them. Saks went to the extent of keeping its name off the outlets, calling them "Off Fifth."

Out of the Shadows

But today, with the economy stalled and consumer spending in free fall, snobbery is a bit harder to pull off. Even the most upscale shoppers are hunting for bargains. So luxury retail executives are taking their off-price operations out of the shadows and launching their most aggressive expansion plans in years. Increasingly, the outlets also are offering not just discontinued or leftover inventory from a previous season, but many items currently available at the mainline stores.

"Only stores that scream value are getting consumers in," says Erin Armendinger, managing director of the Jay H. Baker Retailing Initiative at the Wharton School at the University of Pennsylvania.

Over the past 12 months, Saks changed the name of its 48 outlet stores to Saks Fifth Avenue Off Fifth. After opening only one outlet last year, Saks is opening three in the fall season alone. It plans three more new outlets for 2009. Saks wouldn't provide specific sales growth numbers, so it's hard to tell if the investment is paying off. The chain will only say it is seeing a larger number of customers walk into the outlet stores, and they're spending more during each visit.

"We're clearly seeing continued outsized growth in our Off Fifth business," says Saks CEO Stephen I. Sadove.

Strong performance

Nordstrom cut ribbons on six new Nordstrom Rack outlet stores in 2008 and plans to open eight more in 2009. That compares with only one Nordstrom Rack opening last year. And the Racks are certainly helping the numbers—in its second quarter ended Aug. 2, Nordstrom's sales fell 6%, but same-store sales at Nordstrom Rack rose 6.3%.

"The Rack division has had a multiyear run of strong performance with solid mid-single-digit to double-digit same-store sales [growth] in each year since 2002," noted Michael G. Koppel, CFO of Nordstrom, in a conference call with analysts on Aug. 14.

Outlets provided welcome additional revenue when times were good. But in an environment where only bargains will do, the off-price option may prove crucial. It helps that the discount stores are easier and less expensive to run. A large free-standing luxury department store requires fancy window dressing and dazzling displays of couture and designers. Hundreds of dedicated staff and tip-top customer service are needed to ensure a store experience that befits the snob value.

However, a presentable store layout is probably all that's required at an outlet store. "People are going to an outlet store only for price, and their expectations on customer service are dialed down," says Robert Passikoff, CEO of Brand Keys, a New York brand consulting firm.

Expanding the Brand

No other luxury brand has managed its off-price stores better than Coach (COH), the maker and seller of fine leather handbags. The company discovered in the early part of this decade that not only were outlet stores a good way to liquidate unsold inventory, they also helped lure a wider array of shoppers to Coach products. Over the past few years, Coach has aggressively opened what it calls factory stores.

Today Coach has 297 regular stores and 102 factory stores. In its fiscal year ended June 28, fewer customers visited regular Coach stores, and those who did spent less than last year. But Coach's factory stores recorded a higher number of visitors, and they spent more on average than in the previous year. In recent months Coach has offered deeper discounts at its factory stores, especially because it doesn't put its handbags on sale at its full-price stores.

"We use the full-price channel to drive the brand forward," says Coach CEO Lew Frankfort. "We have more marketing flexibility in our factory stores."

Gogoi is a contributing writer for BusinessWeek.com.

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