Wednesday October 30, 2013
10:30AM - 12:30PM
Title: Why Outlet Stores Exist: Reducing Cannibalization While Extending Markets
Abstract: Many firms sell goods through outlet stores in addition to primary stores, particularly in the fashion industry. Outlet stores offer attractive pricing and are usually located far from central shopping districts. The main perspectives as to why outlet stores exist can be broadly classified into inventory management, geographic segmentation, and price discrimination through consumer self-selection. I evaluate these hypotheses in the context of a major fashion goods firm using newly available and highly granular data from Coach, Inc. Model-free evidence suggests that inventory management and geographic segmentation are not the main drivers for outlet store use. Consumers who shop at outlet stores also do not differ significantly from those who shop at primary stores in terms of income. I use a structural demand model to show that consumers are heterogeneous mainly in their sensitivity to travel distance and taste for product newness. I then develop a supply model to predict product development responses to changes in store locations. Through policy simulations, I find that the firm uses outlet stores to serve lower-value consumers, who self-select by traveling to outlet stores from central shopping districts. The firm stocks outlet stores with older merchandise to prevent cannibalization of primary store revenues by means of exploiting the positive correlation between consumers' travel sensitivity and taste for new products. I find that the rate of product introduction in primary stores would fall by 13% if outlet stores were closed down, while profits would decline by 19%.