When overstock isn’t overstock

Outlet stores are supposed to be, you know, outlets for excess inventory, right? Well, next time you’re in one, check out a random tag. If that style number appears nowhere on the brand’s website, if the sub-line has a name you’ve never heard, if the logo carries one extra mark, that item was never overstock. It’s a lower-quality version made just to be sold cheap at the outlet store. Once you see it, you’ll notice it’s most of the floor.

What’s that about? Isn’t the whole bargain that if you make that long drive, and dig through those messy racks, and stumble over those loose hangers on the floor, you can save big on the exact same products sold at regular stores? Didn’t we have a deal?

Originally, yes. And sometimes that’s still the case. But brick-and-mortar outlet stores succeeded too well at doing another job: introducing customers to new brands. You probably wouldn’t spend $200 for a jacket on a whim, but you might spend $20. Then, when you fall in love with it, you’re that much more likely to walk into the real store next season on purpose. That brand rakes in new customers for the rock-bottom acquisition cost of running a no-frills store on the cheapest dirt in the county.

The problem is, overstock isn’t a steady supply. Fashion closeouts land in March. Tech overstock hits in January. Kitchen stuff, maybe September. What about that customer who spends a Tuesday morning in July on the interstate? These stores can’t just hang out the GONE FISHIN’ sign and let those full wallets walk away. So cut-rate filler merchandise is quietly manufactured to keep the outlet store stocked. If this seems upside-down to you, you’re not crazy.

From humble detour to lucrative destination

Speaking of which, those far-flung exurban locations were intended to introduce some friction and mystery, to keep those low prices from devaluing the merchandise at their full-price stores, to sort for only the most dedicated deal-hunters while Mr. & Ms. Typical Customer continued paying full price.

But outlet shoppers turned those outposts into destinations. Private equity figured out that if they cluster a hundred of those destination stores around one patch of asphalt, they’ve got a steady source of cash flow. Brands would have to go where the outlet shoppers are. That cheap dirt just got a lot more valuable. Thus the outlet mall was born.

The physical distance that was intended to protect prices is now a fundamental asset. The strategic detour was optimized until it became the destination. Which is why outlet malls haven’t worked online. By making everything equally discoverable, the Internet collapses distance. And that collapses the whole business model.

Whose customers are they anyway?

That absence left a clear shot for outsiders to bring the original core appeal of outlet stores online: steep discounts on clearance inventory, direct from the brands, that you can only find by showing up. A couple of near-misses are instructive.

One of the first was by, um, us. We launched Woot in 2004 selling one closeout a day at midnight. No building, no filler, nothing but whatever a brand actually needed gone. It cleared inventory, it delivered deals, and the crowd that showed every night treated an empty-handed visit as part of the sport. It also grew into something people loved more than anything it sold.

A second good run at this was by Gilt Groupe, in 2007. Gated sales, luxury markdowns, closing when the good stuff was gone, and for three years the most exciting thing on the internet. What Gilt kept was the relationship. Millions of shoppers sat on Gilt’s list while brands received a check and a wall between themselves and the person who bought.

Where did they go wrong? Both Woot and Gilt made it all about them rather than the brands. The stores kept the customers. The stores built their own brands. They were great at moving inventory and customers loved them… until the manufacturers realized the equation wasn’t working for them without that direct customer connection. The best inventory dried up and the excitement soon followed.

The only way for Woot and Gilt to survive, let alone scale up, was to be less unique: widen their focus and lower their standards. The sense of exclusivity and occasion withered away. They evolved into regular old discount stores fighting over the same scraps as every other discount store. They survived, they do their best, but the glory days are long gone.

Overstock lots, not parking lots

What both Woot and Gilt got right was how to bring friction to online shopping. Instead of a long drive, a short window to nab a deal. You can’t find them by asking a search engine. Nothing is indexed, syndicated, scraped, fed to shopping agents, or blasted out by browser extensions. The feed tells you what’s good right now. It will never tell you where to get the lowest price on the jacket you already want.

Because it’s not for the shopper who wants a specific thing right now. It’s for those willing to show up nine times and walk away empty-handed in return for striking gold on that tenth visit. Instead of time and gas, you “pay” for these deals with patience and persistence.

What if you could combine that positive friction with a direct connection to the brands and thus direct access to their inventory? The online outlet store gets (actual) closeouts, the brand gets the customers. That was the equation that drove outlet stores in the first place, before they became a real-estate play. So that’s what we do.

Moving the factory seconds from the factory to out off the interstate was supposed to be strategically helpful. Instead the tail started wagging the dog. The asphalt appreciated, new merchandise got manufactured to fuel it, and all these years later the parking lot is the product.

Well, good for them, but that’s not our business. We’re bringing back what made outlet stores work for brands and customers, not commercial real estate investors. Welcome to OutletStores™.