The Difference Between a Factory Outlet Store and a Company Retail Store

Outlet malls are popular shopping destinations in the United States and many other countries. Shoppers flock to these malls for the opportunity to buy designer goods at low prices, but many can't accurately articulate the difference between outlet and stores operated as retail establishments. There are a few similarities between factory outlets and retail stores as well as plenty of differences that make them distinct experiences for shoppers and employees. Understanding these differences can enable a shopper to become savvier with their purchases.

Tip

Factory outlet stores sell items that can't be sold in retail stores, often at a steep discount.

The primary difference between a factory outlet store and a retail store is the goods sold in each. A retail store, like a clothing store in a shopping mall, sells a retailer’s current lineup of items. These items may be from one brand or from many. The same exact goods, manufactured to the same exact specifications, can be found in every one of a retail store’s locations across the country.

A factory outlet is a bit different. In a factory outlet, only the items produced by one factory or one brand are sold. For example, Jockey factory outlet stores only sell Jockey brand undergarments, whereas Jockey brand items can be found alongside many other brands in department stores. To use another example, Nike sneakers can be found on department and shoe store shelves alongside Adidas, Reebok and other sneaker brands, but at a Nike factory outlet, Nike is the only brand available.

It can be easier to understand the difference between factory and company retail stores by looking at a few examples of both. Another key to understanding the difference between outlet and store is understanding the history of factory outlets and the true factory outlet meaning.

Traditionally, factory outlets were store locations attached to factories that manufactured the goods sold within. When they weren't attached to the factories, they were located fairly close by. These stores sold the damaged and excess goods produced by the factory at sharp discounts, in some cases only to the company’s employees and in others, to the general public. A few notable factory outlets that operate on this model include:

• L.L. Bean Outlet
• REI Outlets
• Bose Outlets

Thus, the traditional factory outlet meaning literally is a store that sells a factory’s goods that can't be sold in the brand’s traditional retail stores. These stores were located far outside urban centers for a variety of reasons, such as:

• Taking advantage of cheaper land and retail space in sparsely populated areas.
• Preventing competition between the outlet and retail locations.
• Factories are typically far outside urban cores, and outlets needed to be near their factories.

Today, this isn't always the case. Many retailers, such as Nordstrom, operate discount retail locations. In Nordstrom’s case, discount locations operate under the name Nordstrom Rack. At stores like this, shoppers find a variety of items. These include:

• Clearance items from the brand’s full-price retail locations.
• Items that have been altered or refurbished for discount sale.
• Items that have been manufactured specifically for the discount retail location.

Items in this final category make up the bulk of the items sold at many of the stores in outlet malls across the United States and Canada. These items may be similar to those found in full-line retail locations but are manufactured with lower-quality material or construction methods to make it possible to sell them at a discounted price. Sometimes, brands create entirely separate lines to sell at outlet locations that are not sold in the retail locations.

Not all stores that sell damaged and excess goods are outlet stores, though. TJX Companies, the parent company behind TJ Maxx, Marshalls, HomeGoods and Sierra, operates thousands of off-price retailers around the world. These stores are often known as overstock retailers because, traditionally, they purchased merchandise that was “left over” at retail stores at the end of each season. Today, these stores primarily purchase their merchandise from the same suppliers that sell to traditional retailers but may buy it piecemeal or place orders more regularly.

The reason why overstock retailers can offer in-season goods at discounted prices is that, unlike traditional retailers, they're not subject to buy-back clauses. At the end of the season, a department store may be required to sell unsold merchandise back to its original supplier, whereas an overstock store typically has to keep unsold merchandise indefinitely. If the merchandise can't be sold on clearance in one store, it may be moved to a different store or donated.

A true factory outlet sells the damaged and excess items produced by a specific factory, which doesn't necessarily manufacture goods for only one company. Although factory outlets often only stock one brand’s items, stocking only one brand isn't what defines a factory outlet.

Factory outlets that only stock one brand are often outlets of factories owned by those brands. For example, the well-known L.L. Bean factory in Maine only manufactures L.L. Bean products. Other factories are owned by third parties and manufacture items for a variety of brands. Perhaps the most famous example of this model is Foxconn’s factories, which produce Apple, Sony and Nintendo products as well as a variety of other electronics sold by major brands.

Utilizing the difference between outlet and store locations is a key part of many companies’ business strategies. Often, the shoppers who typically make purchases at a brand’s retail locations aren't the same shoppers making purchases at its outlet stores. Outlets make it possible for middle- and lower-income shoppers to access aspirational brands that they'd otherwise be unable to afford.

One of the primary strategies used to encourage shoppers to patronize outlet stores is emphasizing the value of the savings to be had at these stores, even when that means inflating the savings. For example, an outlet store might sell a shirt that has an original MSRP of $60 printed on its tag but with a $35 sale price. That shirt might never have been listed at $60, and it might never have been sold in the brand’s retail stores. But when a buyer perceives the shirt as being almost 60 percent off, she's likely to feel she's getting a good deal and thus more likely to buy the shirt.

Outlet stores, both true factory outlets and the type of outlet stores generally found in outlet malls, also provide retailers with a means to recoup losses on excess, damaged or irregular items. Although the majority of items found at outlets today were manufactured specifically for outlet stores, some overstock and damaged goods still make their way into outlet stores.

The shift from stocking primarily excess and damaged goods to stocking outlet-specific lines occurred for a few reasons. One is that there's simply less overstock and fewer damaged goods available to sell at factory outlets today. Demand forecasting has evolved over the past few decades, and as it has evolved, retailers are less likely to order more goods than they'll sell. Because the majority of manufacturing is done overseas, most damaged goods never make it to the United States to be sent to outlet stores.