Retail Distribution Strategy with Outlet Stores

Abstract

Traditionally, outlet stores were situated away from main stores in order to provide older, less desirable products at discounted prices. More recently, some firms have featured an outlet-within-a-store concept and offer consumers the experience of outlet shopping at the same location. With an interest in examining the effect of location differentiation on a firm’s distribution strategy, we model a firm with an existing main store and study its motivation on whether or not to open an outlet store, and where to locate it. When consumers are homogeneous in their travel sensitivity, our analysis shows that as consumers’ willingness to travel decreases, it becomes more likely for the firm to offer outlet stores at or near main store locations. This observation is consistent with the anecdotal evidence of an outlet-within-a-store strategy adopted by department stores such as Macy’s, who in contrast to single brand firms (such as Coach) have more uncertainty in consumers’ taste for product offerings leading to a lower willingness to travel. We also show that the introduction of outlet stores leads to higher quality offerings at the main store. When there is fit uncertainty in product offering at the outlet store, in contrast to intuition, as product fit increases, the firm builds the outlet store closer to the main store but increases both product quality and price to take advantage of their increased attraction. We also extend the model to consider consumer heterogeneity in travel sensitivity and the growing trend of urban sprawl.