The Function of Outlet Stores
Description
Outlet stores are ubiquitous in the retail environment, and many firms sell goods through outlets as well as their primary stores. Using a highly detailed data set from a major U.S. luxury fashion goods firm, Professor Ngwe is able to look at market segmentation by underlying consumer tastes rather than by income—important because outlet shoppers do not differ significantly from primary store shoppers in this dimension. Rather, he finds that customers differ mainly in how far they are willing to travel and their desire for new products. Through simulations using the data set, Professor Ngwe finds that the firm uses its outlet stores to serve lower-value customers who are more willing to travel and care less about the latest designs. The firm therefore stocks its outlets with older merchandise to prevent cannibalization of its primary stores—and to make the best use of the primary stores. He estimates that the rate of new product introduction in primary stores would fall by 13 percent without the outlet stores.
Working with the same data set, Professor Ngwe also studies pricing strategies for newer and older products in terms of underlying consumer tastes, particularly their desire for novelty.