Published by MBA Skool Team, Last Updated: May 28, 2020
What is Factory Outlet?
Factory outlet, also known as a factory shop, is a store where manufacturers sell their products directly to the public at a heavily discounted price. A factory outlet center is a manufacturer-owned store selling that firm's stock directly to the public. The stock at a factory outlet can either be first-quality merchandise or discontinued, irregulars, cancelled orders at a very low price.
Traditionally, these outlets used to be a brick and mortar store besides the factory or warehouse but now along with the previous mode of operation, outlet centers are present in outlet malls and as online stores. The reason of heavily discounted price at factory outlet centers is attributed to elimination of distributor costs and retailer costs, the minor defects which may be present in the product, to clear up the surplus stock etc. Also, heavy discounts are given to clear the outdated stock to make place for the new stock.
Not all products manufactured by a company are of the benchmark quality and thus, they cannot be sold in retail stores. Also, some products are manufactured which have a minor defective or not perfect but still usable. Further, with such a dynamic market, a product which is in trend today may get outdated tomorrow and again it becomes undesirable at retail stores keeping in consideration the limited space at retail stores. So, what to do with all such products which are either discontinued, irregular or are in surplus? Here come the factory outlet centers. All the above mentioned categories which do not find itself a place at retail stores find itself a very good place at factory outlet centers. Instead of discarding all the products belonging to such categories, factory outlet centers sell them at heavily discounted prices which buyers are willing to pay and accept the little problems that these categories have. With the booming industry of outlet centers, manufacturers have started manufacturing products which are specifically for the purpose of such centers such that they do not compete with their retail stores.
Advantages of Factory Outlet Centers
Some advantages are:
1. They benefit customers as they get branded goods at affordable prices.
2. It helps companies get incremental revenue from goods which are out of fashion or slightly defective.
3. Factor outlet centers help companies save warehouse space as displaying at outlets leads to sale.
Disadvantages of Factory Outlet Centers
1. There are considerable chances that the products bought from factory outlet centers may get torn off or become unusable in a very short duration which in turn upset the customer and he might not turn up to this company or brand next time ever thus reducing the customer life time value.
2. Buyers turn up to have huge discounts and thus, to save money which many times do not turn up so in reality. They end up buying a good amount for a product which was supposed to last for years but may end up lasting just a few weeks which in fact costs the buyer even more.
3. One factor that distinguishes a regular company from a brand is the brand equity or the brand value. Selling a lower quality product through factory outlets lowers the brand value of the company.
Difference Between Factory Outlet, Outlet Mall, Retail Store
Factory outlet center is a store owned or rented by one company and is only for one company’s products. Whereas an outlet mall consists of a number of factory outlet stores of different brands organized in a mall fashion. These are generally located in the outskirts of a town or city and they offer huge discounts.
Factory outlet centre vs. retail store
1. Quality Difference: Generally, products sold at an outlet centers are of lower quality as compared to products sold in retail stores
2. Price Difference: The products sold at retail stores are either at MRP or at a certain percentage of discounts which in general is not that much. Whereas, products sold at factory outlet centers are at a lower prices and at a very huge discount.
3. State of stock: Mostly, the stock available at retail stores is the latest stock whereas it is common to find outdated stock at outlet centers.
Example of Factory Outlet Centers
At Nike factory outlet store, you may find a particular model of Nike shoes at 80$ after a 60% discount and which are of 200$ originally at a retail store. Note that the quality may not be the same of this purchase with the model available at the retail store. Also, possibility is that this might be an outdated model or have some irregularity in it.
The above representative image shows a factory outlet of an apparel brand, showcasing all its products & offerings.
Over the years, these outlets have transformed into Shopping center that groups more retailers in one location and mega companies that own many labels sell via these outlets. The discounts can range anywhere from 25 % to 75 %.all the year round.
Hence, this concludes the definition of Factory Outlet along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
Browse the definition and meaning of more similar terms. The Management Dictionary covers over 2000 business concepts from 5 categories.