It's long been known that middle-income shoppers making aspirational purchases have helped to drive sales at luxury department and specialty store retailers. Now, with the economy in a state of extreme uncertainty, even the well heeled are cutting back on purchases, leaving upscale merchants looking for ways to remain competitive until business picks up again.
For many, including Saks and Nordstrom, part of the answer has been expanding the number of discount outlet stores these companies operate while moderating the pace of full line locations.
Carissa Nava is a consumer who window shops at Saks Fifth Avenue in Manhattan and then goes shopping at the department store's Off Fifth outlet in the suburbs.
"I only wear Seven or True Religion jeans, and I get them here for $149," she told BusinessWeek on a recent trip to an Off Fifth store. "Why would I pay $216 for the same exact ones at the main store?"
Saks is opening more of its Off Fifth stores than in the past. Last year, the department store chain opened only one outlet store. Just during the fall months of this year, the company plans to open three new locations. It also has three on the board for next year.
"We're clearly seeing continued outsized growth in our Off Fifth business," said Stephen Sadove, CEO of Saks.
Nordstrom has opened six new Nordstrom Rack stores this year and plans ribbon cuttings on eight more in 2009. The company only opened one Rack store in 2007.
"The Rack division has had a multiyear run of strong performance with solid mid-single-digit to double-digit same-store sales [growth] in each year since 2002," Michael Koppel, CFO of Nordstrom, told analysts in a conference call last month.
Erin Armendinger, managing director of the Jay H. Baker Retailing Initiative at the Wharton School at the University of Pennsylvania, sees the logic to luxury retailers offering outlets. "Only stores that scream value are getting consumers in," she said.
Discussion Questions: Do outlets represent a competitive risk to their own mainline stores? Do you see outlet stores starting to be shuttered by luxury retailers once the economy begins to come back?