Retail Distribution Strategy with Outlet Stores
53 Pages Posted: 19 Oct 2018
Date Written: September 18, 2018
Traditionally, outlet stores were situated far away from main stores and were used to provide older, less desirable products at discounted prices. More recently, some firms have featured an outlet-within-a-store concept and offer consumers the experience of outlet shopping at the same location. With a particular interest in examining the effect of location differentiation on a firm's distribution strategy, we model the basic trade-offs faced by a firm with an existing main store and study its motivation on whether or not to open an outlet store, and where to locate it. The inclusion of outlet store location decision and its interplay with product quality (and pricing) differentiation strategy between the main and outlet stores differentiates our work from the extant literature. We start with the base model when consumers are homogeneous in their travel sensitivity and our analysis leads to a number of findings. As consumers' willingness to travel decreases, it becomes more likely for the firm to offer outlet stores at or near main store locations. This observation is consistent with the anecdotal evidence of an outlet-within-a-store strategy adopted by department stores such as Macy's, who in contrast to single brand firms (such as Coach), have more uncertainty in consumers' taste for product offerings leading to a lower willingness to travel. Interestingly, we show that product quality, prices, and location differentiation are not necessarily monotone in travel sensitivity. Moreover, the introduction of outlet stores leads to higher quality offerings at the main store which is consistent with the empirical evidence in the literature. We also consider two extensions -- first, we consider consumer heterogeneity in travel sensitivity and show that it can help the firm make higher profits in spite of high travel sensitivity for some consumers. Second, we examine the growing trend of urban sprawl and show that the findings from the base model are robust.
Keywords: Outlet Stores, Location Differentiation, Cannibalization, Quality Differentiation, Travel Sensitivity
JEL Classification: D40, C72, L14, M31
Suggested Citation: Suggested Citation