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Why JoS. A. Bank Should Shelve Its Factory-Store Plan

Men's apparel retailer JoS. A. Bank Clothiers (JOSB) recently divulged plans to open up to 75 discount stores to complement its 470 full-price units, beginning with five new outlet stores this year. While some observers think the chain is better late than never to its outlet-mall strategy, JoS. A. Bank should proceed with caution, as adding a large number of outlet stores to a full-price chain is a dicey strategy that has sunk other apparel retailers.

Eddie Bauer is a useful example of brand erosion via outlet store proliferation. In 2003 the outdoor-wear apparel chain had 537 stores, 100 of them outlet stores. Hopes that discount customers would magically be entirely different people than patrons of the full-line stores were disappointed, and sales plummeted. After a trip through bankruptcy, Eddie Bauer survives today as a shadow of its former self with 370 stores and many of the outlet units shuttered. It downplays its outlet-mall presence too -- click on "clearance" on its Web site, and you're directed to a site online.

With JoS. A. Bank, which sells more upscale formalwear as well as casualwear, the margin-erosion risk is even greater than it was for Eddie Bauer.

Company president and CEO R. Neal Black said the company has created unique merchandise for these factory outlets, which will "have limited overlap with the customer base in our regular stores." Translation: We hope our customers won't notice our discount merchandise. Also, new costs are being incurred to design a whole new line for the discount stores, rather than the stores being a convenient place to get rid of unsold goods from regular stores. Done this way, outlet stores are a more expensive prospect, and customer confusion may result as shoppers will see different goods in the outlet stores.

It also means customers cannot go to JoS. A. Bank outlet stores hoping to get slightly post-season deals on the luxe merchandise from the full-line stores, the successful strategy employed by Nordstrom (JWN) for its Nordstrom Rack chain -- which is also the strategy for many upscale brands that have outlet stores. With Nordstrom, Rack doesn't dilute the department-store sales because you can't get the same item both places at the same time.

If JoS. A. Bank wants to connect with bargain shoppers, it can do it the 21st Century way -- save the store-lease costs and do it all online. Coldwater Creek (CWTR), for instance, runs a strong outlet business all online, where it can pinpoint-price its goods and sell them at the least possible discount. Sure beats throwing them on a table at an outlet store at 30 percent off while paying outlet-mall rent.

Having just a few factory stores, as JoS. A. Bank currently does, can be a great strategy. Visitors to these few stores have a real sense of bargain-hunting adventure, as they know there are few places they can get deals from this brand. There's a clear understanding that the brand is still primarily a full-price retailer, and most customers aren't in easy driving distance of an outlet store. Once outlet stores proliferate, though, the balance can quickly shift until shoppers only want the deals.

Photo via Flickr user Ivan Walsh