Brand and Price As Shortcut Quality Indicators & The Coach Factory Outlet Trick

I’m currently reading the book Cheap: The High Cost of Discount Culture by Ellen Ruppel Shell, which is very well researched and a good read so far. One of the major themes of the book is how our culture is losing the ability to discern quality for ourselves. As a result, we use brand names and prices as shortcut indicators of quality.

First, take brand names. In general, we love brand names, because each of them allows a mental shortcut as to what to expect. Mercedez Benz. Rolex. Nike. This is why outlet malls are so popular. Since brands = quality, and outlet = low prices, we get insanely excited. Outlet malls are greater tourist attraction draws than national monuments.

As for prices, how often do you see a huge number on a shirt price tag, but with a slash through it? Retail Price: $80. Your Price: Only $19.99. Even better, make it one-day only like Groupon or Woot.com. The Manufacturers Suggested Retail Price (MSRP) is often purely a marketing scheme to make you feel like you’re getting a deal. This is called the reference price. You may not know anything about fabrics or stitching, but hey, this shirt used to cost $80, so it must be pretty good quality. I’m saving over 75% off the original price, how can I lose?

Coach is given as a great example of a well-recognized brand name that uses these tendencies to its advantage. Starting out in 1941 as a small leather workshop in New York, Coach is a maker of “affordable luxury” leather purses and other accessories complete with trademarked logos. Most manufacturing is now done in China and other cheap-labor countries. In fact, the gross margins across the company are now a huge 70-75%. (Gross margin is the difference between selling price and the cost to produce.)

Traditionally, outlet and factory stores sold slightly damaged or defective examples of their regular products at a steep discount. However, it may surprise you that now many brands make goods designed specifically for their outlet stores. At a Coach Factory Store, 80% of the stuff inside is sold exclusively in those stores. These are lower-quality versions, intended to be sold only at outlets for a lower price. You can’t return outlet purchases at a regular store, because they aren’t the same thing and are subtly marked as such (also because they want to make it harder to return).

Would it surprise you further to know that Coach makes more profit from its factory stores than its full retail stores? Per this article, Coach had 347 retail stores and 129 factory stores in North America. In a way, you could say that the main purpose of the full-price Coach stores in upscale shopping centers is to keep up the facade of quality. Meanwhile, the Coach Factory Outlets provide all the profit. The glitzy stores create that critical reference price ($800 purse!), so you think the Factory Store price is a good one. A $149 Coach? What a deal. If you own Coach bags or know people who do, think about it. How many did you buy at a “real” store vs. a Factory store?

Over time, this practice should dilute Coach’s brand equity. However, if we are indeed unable to judge quality and are just interested in brand names anyway, then it will take a while.

Comments

  1. Money Beagle says:

    It makes sense that stores make money from outlet stores because they can eliminate the middle man. Targeted outlet locations make sense for a handful of locations, though it can’t be a full business model. That’s why you see outlet stores, because they cluster together which provides the full impact and draws customers.

  2. I never shop at the “outlets” because it’s just hard to find a good deal these days and they just try to lure you in by calling it an “outlet”.

    But other people get so excited about their trips to these places — I just don’t have the heart to tell them they can find the same stuff for less online or at Marshalls/TJ Maxx, etc.

  3. I do notice quality differences between the merchandise produced for the regular stored and ones that produce specifically outlet stores. In outlet stores, I usually find two types of merchandise, one that are produced for regular store that couldn’t be sold. These typically have price tags that looks like they’ve been through Balkan wars and they are of the same qualify of the regular stores although they could be of funky colors or styles. The second are items produced specifically for outlet stores and these have the MSRP prices listed and pre-crossed out and they “saving” prices listed. These are definitely of lower quality.

    I just bought a Coach bag at Macy’s. Upon learning that they have 70-75% gross margin, gosh, I think I paid too much for it…. It has nice large Coach insignia though :)

  4. Eric Jacobson says:

    I think it was Bill Gates who said we’ll soon have “perfect information” thanks to the Internet. In many ways that’s true. We are now able to check hotel and product reviews, user feedback, things to do in a different town, and other aspects of other users’ satisfaction with a product, place, or service.

    I believe we now have access to lots of data but we are only in the beginning stage of fully utilizing this information. One example – Consumer Reports rankings of auto reliability. When I bring this up with some people I know, I often get the inevitable “Yeah, I know the ratings on this car are poor but I still bought it because I have a friend who had good luck with these cars”. A recent WSJ article also said something to the effect, If everyone bought cars based on CR ratings, it would be a boring world. I can understand when one makes trade-offs based on individual tastes or simply doesn’t have access to the information, but irrational decision making is hard to understand.

    Nice post, Jonathan!

  5. @thuy – LOL at the Balkan war line. I also had noticed that stores like Gap had “Gap Factory Store” price tags, but thought they just relabeled them with new tags. Turns out you’re right, Gap also makes outlet-only clothing.

  6. Jenna, Adaptu Community Manager says:

    Can’t this be said about any factory store? Gap, Nike, Ralph Lauren?

  7. Banana Republic uses the same “trick”. The BR factory stores carry items specifically designed or targeted for it. Although I guess this goes along with the above comment regarding GAP since they are the same company. Fun Fact: Old Navy clothes are the only brand GAP designs in house.

  8. The thing that always bothered me was the money spent GETTING TO the outlet stores. Usually the outlet stores are located in the outer areas of a metro and you have to drive to get there. You know the drill…spend X money on gas…and then find a parking spot…after a few hours of shopping the family gets hungry and we end up eating out somewhere. So, all that extra money we spent for the outlet price was actually more in the long run.

  9. It comes down to knowing what you want and what is a price that fits your desire – private valuation. Having had clothes custom made in Thailand during a visit I’m positive I can get quality for far less than I pay in the USA. But I also have a feeling of say what a nice pair of pants usually runs in Nordstrom. So if an outlet with a coupon gets me the same quality for 75% less than that amount it’s an easy valuation for me. The look and feel of pants costing over $100 but for only $25? Easy decision.

    As for brand dilution…don’t care. I buy brands that fit me the way I want. The trick is finding what you like and then finding a price you’re willing to pay.

  10. @eric – I disagree. The information online is always flawed. I read Yelp reviews but still will go to restaurants ranked low. Often highly ranked places are, to me, crap. Movies, cars, hotels…in the end the only opinion I can trust is my own. I read the reviews and still do what I was going to do anyway…

  11. Captain Cheapo says:

    Coach outlet quality might be inferior to the original, but they do honor their lifetime warranty just as their high-end retail store does. I bought a $40 belt from a factory store at least 7 years ago. The buckle broke about 4 months ago. I got a brand new $75 belt of similar appearance, no questions asked and without a receipt. If they continue this policy, I don’t mind that the quality is lower than their retail store. As long as the product hold up better than a Jaguar.

  12. So the obvious read about how they get away with this is “Predictably Irrational”.

    However, if we are indeed unable to judge quality and are just interested in brand names anyway, then it will take a while…

    Honestly, most people really don’t care about quality, let alone know how to judge it. But to be fair, most people would not be able to afford “premier” versions of 90% of the stuff they own.

    So if you can’t own really expensive stuff, or you don’t want stuff that lasts for years, then why pay a premium?

    You want a dining room table made from real hardwood that will last for 50 years? (with a sanding or two) We have those, but they cost thousands of dollars, not $699. You want seating that will last for 25 years? We can make you some, but then people will consider is boring after 15 years.

    You want a crystal clear sound system, a keyboard that will last 20 years, an amazing desk chair, cookware that cooks evenly, …?

    We have all of these things, but they’re way out of most “normal” price range. I have a $150 UNICOMP keyboard on my desk. That’s a serious multiple, you could buy 10 or 20 “normal” keyboards for that price. And I’m eyeing a $250 one. You can’t even buy these in Best Buy.

    My point here is that most people live on stuff that’s way less than premier quality. And everyone likes to think they’re getting a “good deal”, so they’ll look at price tags and ignore the fact that they’re buying crappy clothes. And why not? Almost nobody can afford “really good clothes” anyways.

  13. vijaianand says:

    Good one! We always expects to buy everything cheap and when it comes to branded we jump up and down if we find some good deals 50%-75%. But if some is giving 50-70% off, are they giving out on their loss. No way, they either reduce their margin or may thats their real margin. Who knows? These outlet malls/stores concept was spoiled and as you mentioned every big chain has store in the outlet. We visit now and then especially to Carters store because we have to younger kids. We do feel the prices are comparatively cheaper than buying carters in walmart or their own store. But we never compared the quality which we might have to. You never know we might find differences.

    At end, Brand names shouldn’t be used as quality mark anymore.

    Vijai

  14. Coach (COH) is a great stock to own due to its success in “affordable luxury”.

  15. @Jenna: I work at a factory outlet store. The merchandise we carry is of first quality, the exact same that you would buy at Macy’s or Bloomingdale’s. (It is hard goods, housewares, not apparel, though). Our prices are generally in the same ballpark as the “sale” price at the big stores — but we price them that way every day. We also use promotional coupons and sales that the regular stores do not, so I can honestly say that you can indeed get an excellent deal at my store. However, we are a minority! Most of the stores sell only “outlet only” merch, which can be a good deal if you shop sales and use coupons, but you have to pay attention.
    I have been saying for years that the Coach outlet sells crap — I would never pay $150.00 for a purse that, to me, looks like the same quality you could buy at Kohl’s for $25 — or worse — it looks like the knockoffs you can buy in Chinatown! I can spot an Outlet Coach in a minute, I can see the differences immediately.

  16. When I was in high school I bought a lot of clothes. Over the years, those clothes have deteriorated. I have had the opportunity to discern quality through experience. I still wear ribbed fitted Ts that I bought 13 years ago from Old Navy for $11 each. And I have gone through some dress shirts that I bought from Benetton for $29 4 years ago.

    Through trial and error, I have found brands that have high quality and those that don’t and I tend to stick within those brands. I shop Old Navy for clothes that are going to get heavy wear: Jeans, fitted Tees. And I get my Shoes from Clarks. $65 for some genuine leather REALLY comfortable business casual walking shoes that will last upwards to 5 years. BTW, their belts are crap, don’t buy them. Probably why they will replace them free, haha.

    What I have learned is that if you are getting apparel that will get some heavy ware, get heavy material and REALLY inspect the stitching. Soft material feels nice, but it doesn’t last. So it should be for more formal occasions. I’m not an expert on stitching so I just kinda look at it and think, hmmm….does it FEEL flimsy when I pull on it?

    Just my 2 cents. :)

    Love your blog. Haven’t read in awhile.

  17. Recently I purchased a Coach Factory bag, knowing that the $250 bag would be of lower quality than its $400 cousins, but, hey, at even the lower price point I expect “good” quality. Wrong! After two weeks the shoulder strap split off from both sides. If this is indicative, Coach’s brand will lose equity very quickly.

  18. PEOPLE PLEASE! These retailers are not being deceptive… look at this another way. Just a few years ago big brands were being KILLED by knock offs. You could be coach on a dirty blanket spread out on the sidewalk in Times Square! These outlets have basically squashed that madness. Now you can get some assurance of quality (not top shelf), a safe and legal selling environment and a beautiful product — THAT CAN BE RETURNED WHERE YOU BOUGHT IT!
    NO … I DO NOT WORK FOR COACH. But I am a Marketing and Sales executive who understands “The Game”.
    I just bought my first bag from Coach Factory. It is exactly what I wanted at a fair price and “Good” enough quality.

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