Outlets are re-emerging as a prominent retail strategy, with retailers from Nordstrom to Gap investing in and expanding their off-price strategy. Since the “Great Recession,” consumers have turned to outlets to shop the brands they love at prices they could afford, demanding more value. Retailers are responding and recognize that the outlet channel provides an optimal venue to answer the customer’s need for value. However, similar to the early days of e-commerce, retailers are trying to determine the right way to leverage this channel without cannibalizing its broader brand business. Which begs the question: how should loyalty programs fit in this space? Should it be the same value proposition the flagship stores offer?

We think there is a lot of opportunity for a loyalty presence in this space, with certain factors taken into consideration:

Profit Margins

  • Some retailers’ outlet margins may be too thin to take on any promotional or program activity. There will be variance between mono-brands like J.Crew, Tommy Bahama, or Gap who have a manufacturing margin plus the retail margin, versus a retailer like Nordstrom who buys wholesale and doesn’t realize a manufacturing margin.
  • Retailers with thin margins should consider ramping up the service experience in the outlet channel short term, and look at a different pricing and merchandising strategy to realize a better return on the off-price channel in the long term.

Cannibalization of the broader brand

  • To avoid cheapening and/or cannibalizing the broader brand image, retailers should develop an outlet-focused loyalty strategy catered to the different consumer segments that shop this channel.
  • The idea of engaging a customer through the outlet and graduating them to the flagship brand should be top of mind when developing the loyalty strategy.

Creating non-transactional value

  • An outlet loyalty program, just like any other, should balance soft benefits tailored to the outlet shoppers with minimal transactional benefits, given the already deeply discounted merchandise.
  • Examples include: Rewards for social activity (sharing great finds, check-ins, etc.), Outfit Ideas based on customer profile preferences, Early access to new arrivals, Wish list integration (consumers create wish lists based on flagship brand merchandise and are notified when the merchandise hits the outlet and/or goes on sale)  

Multi-channel approach

  • With 67% of U.S. consumers shopping online, the “digital outlets” like Gilt Groupe, Haute Look, Amazon, etc. are more of a threat than ever. Traditional brick and mortar outlet retailers must have a digital strategy to compete. At this point, most outlets don’t even have dedicated ecommerce which is widely expected from consumers. 

A stand out and leader in this channel is J.Crew. They are one of the few retailers with dedicated outlet e-commerce, and have just launched a tender neutral, outlet-only program called Factory First. It’s right on brand and offers great soft benefits tailored to outlet shoppers – early access to new arrivals, free shipping periods, exclusive deals, and outfit ideas for adults and children (through Crewcuts).

With 40% of Americans visiting at least one outlet mall in a given year, and outlet shoppers spending up to 79% more per visit at outlets than regional malls, we expect to see other retailers follow J.Crew’s lead as this channel becomes increasingly profitable.

[1]Pwc 2012

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