For the past two holiday seasons, I’ve worked part time in a retail location to earn extra money for Christmas goodies.  Each year has been vastly different, highly impacted by the location I’ve been working and the company I’ve been working for.  Last year, for example, I worked for a shopping mall jewelry store which, despite its location, was relatively high end.  Most recently I’ve been working for a mid- to high-end clothing company.

Both experiences have taught me a great deal about customers, shopping behavior, and the overall mindset of “retail” on both sides of the counter.

Branded retail, specifically outlet stores, is something that most companies are getting into.  Rather than selling thier goods to another merchant, they are trying to sell directly to the end user.  This cuts out the middle man and raises margins, but can destroy your brand if you’re not careful!

Consider two different companies that both make t-shirts.  We’ll call the lower end company “Lows” and the higher end company “Highs” (hopefully the names are obvious).  They both start out selling through large, big-box clothing retailers like Sears and JC Penny’s.  Things are going well, but both companies want higher margins to support a push to global expansion.

In today’s world, it seems that both companies will open a branded store.  This is a bad decision for Lows.  While their product sells well when juxtaposed with higher-end, more expensive goods on the rack at Sears it will probably not sell well in isolation.  Competing on price does not work well when you don’t have the competition nearby to explain the differences.  A branded “Lows” store would not draw customers away from the branded big-box retailers elsewhere in town.  Lows can improve its bottom line by becoming more competitive on price – either by cutting costs or negotiating to increase sales volumes.

Highs, on the other hand, can strengthen their brand by developing a branded store.  People don’t have to wade through scores of lower-end goods to find the classy t-shirt they want, and might even be willing to pay a little bit more to experience the brand on its own turf.  The emotional story behind Highs’ brand can be fleshed out in a Highs-exclusive context and will strengthen its relationship with customers.  Highs can leave some of its product in the big-box world to remind less attentive customers who they are, but keeping products exclusive to their own locations will create a higher draw for their customers.

In reality, though, both companies will open retail stores.  Highs will even be enticed to compete directly with Lows on price and will open a branded “outlet” store for its factory seconds and outdated designs.  This is the absolutely worst thing Highs could do.  An outlet store, with markdowns between 40% and 90% of retail price raises questions in the customers’ minds.  ”Is this shirt that I bought really worth the $45 I paid last year?  Why didn’t I just wait until now and get it for $5?”

I’ve been talking a lot about habits lately.  Remember, you want the decision to buy your product to be automatic, not something the customer has to consider and debate each time.  By opening a branded outlet store, Highs is inviting loyal customers to question the value of their products.  Sales in the outlet might increase as customers become aware of the savings and competitiveness with Lows, but sales in the branded retail (first-quality product) store will decline and level off.  Highs’ brand will become associated more with the outlet model of shopping in a crowded space for discouts amidst other bargain hunters in a store so busy that “brand” becomes a distant afterthought.

Is your business more a Highs or a Lows?  Where on the development scale (selling through third parties — selling through branded retail stores) are you at now?  Are you moving in a direction that will strengthen your brand or weaken it?