Did you know that in today’s competitive market an average fashion brand sells a good 40% of its assortment discounted? Do you know exactly what share of your merchandise is sold discounted? And are you in control of its development? If you want to be fully in control, here’s how: follow the example of leading brands and actively build your own outlet division, design special makeup (SMU) outlet collections, develop an outlet supply chain and aggressively increase the number of your own outlet stores! It’s as simple as that – maybe not easy, but simple. That’s how Europe’s leading brands manage their supply chains, turn overstock and markdown problems into a growing and profitable business area and in some cases exceed €200m in sales. Off-price retail as a strategic distribution channel According to FSP, Europe has become home to almost 200 outlet centres with 3.3 million m² in total floor space (gross leasable area or GLA). From Madrid to Moscow, brands operate more than 70,000 retail stores including a huge share of outlets, boasting an estimated €20bn in sales and a dynamic annual growth rate of 15%. What began for many as an opportunistic retail format has turned into a key strategic distribution channel. Still, some CEOs are concerned that outlets harm a brand’s image. But, do you believe Nike or Levi’s have a brand problem? Both of these brands operate more than 100 outlets in Europe. Outlets make up 60% of Ralph Lauren’s retail portfolio, while Hugo Boss is estimated to make 40% of retail sales in outlet business. These four brands are not exactly known for growth or image problems – rather the opposite. They have discovered the true strategic secret: Outlets make wholesale and retail distribution simpler and more successful. Wholesale customers become outlet fans This success creates appetite for more. According to ecostra, more than 50 new outlet centres are planned in Europe, most of which can be certain of finding tenants without difficulty. What began for many brands as a hidden and ugly form of retail has turned into a pretty princess – a Cinderella story if there ever was one. Even department stores and other multibrand key accounts are starting to like it. Why? Because they have learned that a brand with an outlet division is significantly more flexible with in-seasonal returns. Outlets offer the chance to digest excess inventory that would otherwise be discounted downtown. A look at an average European high street reveals that brands are on sale for a minimum of four months (VIP preseason sale, midseason sale and season end). In addition, TK Maxx, Vente Privee and other competitive offline and online brand discount stores have arrived. We estimate that more than 40% of brands’ merchandise sold downtown is discounted. Brands don’t like it and nor do retailers. Can brands actually control this development? Yes. With outlets, brands can react more flexibly with returns and support wholesale, partner stores or own store sales. This also takes pressure off downtown POS. Imagine what this does for brand health. And to top it all off, with high-quality outlet merchandise management, it allows superior retail profits – in many cases achieving 10 percentage points over full-price retail. From Cinderella to princess in 3 steps Our observation: Brands that succeed in turning their outlet business into a princess follow three simple principles:
- Strategic commitment and dedicated resources
Outlets are locked in a difficult love-hate relationship with other internal business areas. Be it the full-price division or the wholesale colleagues, everybody likes outlets as problem solver, but not as a strong business division. If management is serious about awakening the princess in the brand’s outlet business, it needs a strategic commitment and dedicated resources, including people who understand the specifics of outlet business and have the authority to drive it. Compared to high street locations, good spaces are very rare. So if you want to succeed in a very competitive environment, get a focused outlet team. If you ask the retail people to do it on the side, there is a good chance that Cinderella will remain a one-dollar-store store.
- Special outlet collection (SOC) and supply chain
Now here’s the fun part for the brand people: Your outlet stores become most successful if you turn them from a rummage table with mixed sizes into a polished brand appearance with compelling assortments built intelligently out of excess inventory and SMU products for the outlet. Top outlet performers operate with an SMU share between 50% and 80% depending on the season and how well their downtown business is doing. In any case, superior gross margins of 60% need substantial outlet collections and an appropriate supply chain. Special outlet collections should be mainly made up of bestseller selections from the previous year’s wholesale lineup. If you combine this with sourcing from a new supply chain with different suppliers, it provides a nice gross profit. Having an SOC not only saves COGS but also prevents trouble with your key account relationships.
- Sales performance management
Luxury brands have discovered premium outlets and their growing presence is putting pressure on midmarket brands. Your sales performance may be higher than €8,000/m², your L4L development may be excellent, but this is no longer enough for some top performing outlet centres. The outlet market is small and there are usually plenty of applying tenants to choose from. That’s why you need a clear blueprint and active sales performance management – outlets are volume machines and have to be managed accordingly. KPIs, tools, peak times and processes are different from full-price stores, so make sure you have professional operations, fully focused on outlet business.