10 Things Outlet Malls Won't Tell You

By Jami Makan, SMARTMONEY MAGAZINE

1. "Recession? We hardly noticed."

Outlet stores date back more than a century, to when factories offered discounts on excess and damaged shoes and clothing to employees -- and later the public, too. Menswear manufacturer Anderson-Little opened one of the first off-site outlets in New Bedford, Mass., in 1950, and multistore centers appeared in the 1970s. In the following two decades, outlet malls took off, due to rising middle-class demand for branded apparel, says David Soberman, a University of Toronto marketing professor. Now, according to industry newsletter Value Retail News, 216 outlet centers dot the U.S., with 316 chains operating about 13,000 stores.


Outlets weathered the downturn by attracting cost-conscious shoppers. "There's been a resurgence of people looking for value," says Mark Libell, an outlet executive and author of the blog Factory Outlet Insiders. In 2009, Simon Property Group's Premium Outlet Centers, the U.S.'s largest collection of outlets, saw sales dip only slightly, to $500 per square foot from $509 a year earlier. And outlets could continue to thrive, since they give fashion labels access to millions who otherwise wouldn't shell out for designer duds.

2. "We're inconvenient on purpose."


Ready to make your holiday-shopping pilgrimage to an outlet mall? One reason outlets are out of the way is that distant land is cheaper, says David Ober, president of the Council of Developers of Outlet Centers and Retailers. It also makes sense for outlets to be in a spot that's accessible from multiple cities. And some remote towns offer tax breaks for the promise of new jobs and revenue. Most important, a brand's outlet needs to be far from its full-price stores, competitors and wholesale customers, like department stores. "Convenience is not their priority," says Ellen Ruppel Shell, author of Cheap: The High Cost of Discount Culture.

Consequently, a trip to an outlet mall is often a daylong affair -- not a problem for retailers, since shoppers tend to spend more once they've committed to the expense of getting to a far-off locale. How much more? One study found that visitors spent 79% more per visit at outlet centers than at ordinary malls, Soberman says. Tom Meyvis, a marketing professor at NYU's Stern School of Business, attributes this to a "sunk cost bias" on the part of shoppers. "Once you start investing in something," he explains, "you want to follow through with it."

3. "Sure, our stuff's cheaper, but not always in a good way."

Retailers have gotten better at forecasting demand, experts say, which has led to fewer production overruns. And because most manufacturing is now done overseas and damaged goods are weeded out before being shipped, fewer arrive in the U.S. These changes mean outlets are no longer a place to "dump the crummy stuff," says Anne Coughlan, a marketing professor at Northwestern's Kellogg School of Management. In fact, 82% of products at outlet centers are made specifically for the outlets, says NPD Group retail analyst Marshal Cohen.

Unfortunately, made-for-outlet products aren't always on par with their regular-store equivalents. They can be made of cotton instead of wool or lack details like reinforced buttonholes. Shell recommends inspecting tags for the letter F (for factory outlet) and checking the model number of small appliances online (a product modified for the outlet may have a different model number). For Shell, it's ultimately a philosophical question: If the manufacturer started watering down your favorite laundry detergent, she asks, would it still be the same as the original?

4. "Our big markdowns are often big fibs."

Signs, price tags and coupons touting big discounts (think "60% off") are common at outlet malls. Researchers say these visual cues plant so-called reference prices -- what folks think something is worth -- in the minds of shoppers. Because outlet shoppers pay less than the reference price, they end up feeling like they got a bargain. It's a powerful psychological effect. "Buyers perceive more value when something's discounted," says Kent Monroe, a pricing expert at the University of Richmond's Robins School of Business.

But reference prices can be misleading: An item with a suggested price of $150 may never have sold for that amount anywhere. While the Federal Trade Commission and the Council of Better Business Bureaus have detailed pricing guidelines and many states have pricing laws, Monroe says inflated reference prices are still common. The FTC's guidelines are not law and, a spokesperson says, it's often up to state attorneys general to take action. Mallory Duncan, the National Retail Federation's general counsel, says the problem exists but reputable retailers make a good effort to establish credible reference prices.

5. "Not all our stores are necessarily outlets."

In the U.S. there is no legal definition of the term outlet mall. The industry generally uses it to describe centers where at least 50% of the shops are outlets. Indeed, experts say, there are many cases where stores at outlet centers don't actually sell discounted products, which can be bad for the industry if it turns customers against outlet malls in general. "It only takes one visit and people don't shop there ever again," says Ober, of the Council of Developers of Outlet Centers and Retailers. "Consumers will only allow themselves to be fooled once."

One way outlet developers ensure that their stores are actually selling goods at a discount is through discounting requirements specified in the leases their retail tenants must sign. According to Doug Fleener, president of retail consultancy Dynamic Experiences Group, retail leases at outlet malls often require that 90% of a store's goods be discounted by at least 30%. Ober, who owns three outlet malls, says it's common for landlords like him to send teams to regularly inspect stores and the deals on offer. "We actually go in and do price checking," he says.

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6. "There may be hidden costs that come with our savings."

For big purchases, outlets offer big savings. According to the NPD Group, sales of major appliances were up 16% in the first half of 2010, compared with the same period last year. And outlets are grabbing a chunk of this business: The Appliance Outlet Center in Eden Prairie, Minn., which sells preowned, dented and scratched GE appliances for up to 40% off, has seen "at least" a 10% increase" in business since the recession, says manager Roger Pittman.

But shopper, beware. Unlike a handbag with a broken zipper, a faulty appliance can be a major headache. Just ask Jennifer Mitchell, who bought appliances from a Sears Outlet earlier this year after moving to Kensington, Md. The dryer made loud noises from day one, she says, and the washer started leaking a month after her first use. The refrigerator, meanwhile, couldn't make ice or dispense water, she says. When a replacement fridge also stopped working, "it cost us about $500 in lost food," Mitchell says. A spokesperson for Sears Outlets says it has offered to give Mitchell a full refund and that it has an "extensive" testing process in place to ensure the quality of its stores' products.

7. "Travelers are our next target."

Traveling and shopping go hand in hand. According to the U.S. Travel Association, half of leisure travelers went shopping during their 2009 trips. So it's no surprise outlets are trying to become mini tourist destinations. For Tanger Factory Outlet Centers, the country's second-biggest owner of outlet malls, that means giving gift cards to bus drivers and tour planners every time they bring a group -- and about 10,000 buses a year stop at its Barstow, Calif., location alone, says Carrie Geldner, senior VP of marketing. For Premium Outlets, owned by real estate giant Simon Property Group, it means offering outright cash: According to its Web site, it gives a $1,000 prize each quarter to the travel agency or tour operator that brings the most visitors to its centers.

The outreach extends to partnering with airlines and participating in international trade shows, says Karen Fluharty, until recently senior VP of marketing for Prime Outlets. (Simon Property Group recently inked a deal to buy a majority of Prime's properties.)

8. "To save more, sometimes you have to spend more."

Outlet-mall shoppers often use coupon books to score extra savings. Sometimes they're available for free at the customer-service desk. But often, visitors must pay: Prime Outlets charges $7 for its coupon books, while Tanger's are $5. And though the books generally provide a mix of store discounts and free gifts with purchase, they're not always worth the price. Up to 20% of stores in a given outlet center normally don't participate, the coupons may be redeemable only with a minimum purchase, and the free gifts can be cheap or useless.

For Natalie Baxter of Austin, Texas, avoiding coupon books is a matter of principle. "Part of my shopping philosophy is that I don't usually spend money to save money," says Baxter, who has been frequenting nearby outlet malls for many years. "People feel they're required to buy something once they buy the coupon book." But she doesn't rule out coupons completely. On her birthday last year, Baxter combined a 20% off coupon she found online for a Restoration Hardware outlet with a $20 gift certificate from the store's free loyalty club. She ended up paying $25 for a $56 bathroom light fixture, which the company claimed was worth $139 to begin with -- bringing her total savings to perhaps 80%.

9. "Some of the best deals are overseas."

The number of outlet malls abroad is growing. Since 2006, at least 28 have been built in China, with 15 more slated for construction this year. In Europe there are 148, says Brendon O'Reilly, head of the European Outlet Retailers and Developers Association. And he expects that number to double by 2020. European outlet malls tend to stock fewer made-for-outlet goods because of a continentwide "under capacity of outlets," he says, and some landlords prohibit such goods anyway. So shoppers there know they are getting the real thing. Plus, in certain countries like Germany, Belgium and Switzerland, it is illegal to show two prices on any item at the same time, he says, so shoppers are protected from deceptive reference pricing.

But don't expect American consumers to suddenly start doing their outlet shopping abroad. The weak dollar and unfavorable exchange rates mean foreign outlet malls mainly serve locals, O'Reilly says. And overall, "the U.S. centers are a much better experience," since they have a better mix of brands, he says. "The possible exception would be in Italy, where high brands are more prevalent."

10. "You might not find your favorite stores here."

Some companies, like Coach, already have a strong presence in outlet malls, while others, like Levi Strauss, are working to increase their outlet divisions. But experts say certain brands-usually very-high-end ones-don't have outlet stores and probably never will. Michael Levy, a professor of retail marketing at Babson College, says these brands are worried that making their products too accessible could reduce the number of customers willing to pay top dollar. "You're not going to find an outlet store for Rolex wristwatches," he says. It's the same reason why some companies take a tiered approach (think Giorgio Armani versus Armani Exchange).

Many Americans are passionate about the outlet-shopping experience itself, regardless of the shops within a center. "If I am going on a trip and I go past an outlet mall, I will make time in my schedule to stop there," says Karen Markey, a professor who lives near Detroit and no longer frequents regular malls. Not long ago, she was at a conference near a traditional mall. When she went shopping there, she was shocked at how expensive everything seemed. "I was just blown over," she says.

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