Outlet invasion: Upscale stores head downmarket

Two headless mannequins are seen near Nordstrom signage at its store.

The traditional image of Nordstrom, Saks and Bloomingdale's is that of big, anchor stores in wealthier malls. Pianos, brown bags, fancy cafes and upscale clientele come to mind. But a recent report from Bloomberg has found a major shift: High-end department store chains like Saks and Nordstrom now have the majority of their stores in outlet malls.

Outlet locations offer up a lot to Saks, Nordstrom and Bloomingdale's, says Nancy Koehn from the Harvard Business School. To some extent, they help expand the customer base of the brand. In addition, though, Koehn points out that there are also some hidden business bonuses.

"They offer a power of scale," says Koehn. These national store brands buy lots and lots of clothes, and having a place to move slower-selling merchandise helps them turn their product over quicker.

Some analysts worry that outlet sales can also eat into the profits of the flagship stores.

But remember, says Koehn, "most of these outlets are located at least 60 miles from a Nordstrom or Saks store. So it's a lot of driving, a lot of time, a lot of planning and inconvenience for our hunting-gathering customer."

American shoppers, of course, are happy to make the trek if they think they are getting a deal: Hence the popularity of the mega outlet mall, where we can go and make a day of it.

"Even some of our high-end customers want the thrill of victory of grabbing the great bargain," says Koehn. "There is this whole new ethos about 'Look what I just got for 40 percent off.'"

With the revenue per square foot reaching 40 percent more than traditional stores, it looks like the outlet is here to stay.

According to Bloomberg, 13 of the 15 new Saks stores planned to open in the next two years will be outlets, while 17 Nordstrom Rack locations are looking to open by the end of 2013.

About the author

Nancy Koehn is a historian at the Harvard Business School.

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