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How Outlet Malls Have Convinced Shoppers into Thinking They're Getting a Sweet Deal

Are America's 55 million outlet shoppers scoring great deals on expensive brandname products, or getting less than they're bargaining for?

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Today, Coach is a $2 billion operation. And according to Cahn, most of the company's profits stem from its seventy-five-plus factory outlet stores. The first Coach bag discount outlet was in East Hampton, Long Island, a side project Cahn concocted to unload bags with slight defects. Run by Cahn's children, the outlet was incredibly successful, with inventory frequently selling out within hours after the store opened. "We wanted to be fair to our customers, and we figured that selling slightly defective goods at half price was a reasonable thing," Cahn said. "The customers agreed."

Some brands continue to stick to this formula, offering deep discounts on damaged or slightly blemished goods. Others sell last year's line or, in the case of electronics, refurbished or floor models or returned goods. But Coach, the Gap, Brooks Brothers, Ann Taylor, and Donna Karan, among others, add to their mix items made explicitly for the outlets. Generally these items are cheaper to produce, have fewer details, and are of lesser quality. Still, they carry the brand name, and therefore seem to be worth if not the reference price, then certainly more than the asking price. Lichtenstein put it this way: "Outlet malls today are the absolute epitome of the reference pricing scam."

When Naylor and I visited the Coach store at the Las Vegas Premium Outlet Mall, no shoppers seemed interested in the $85 shapeless brown canvas sacks heaped on a table in the center of the store. Neither of us recalled seeing bags like this in Coach's regular store, but a salesclerk assured us that every item here was also available in the full-price Coach stores. Naylor raised an eyebrow and then took me on a tour. The tags on the brown bags and on most of the other merchandise was branded with an F for "factory outlet." (The one exception was a display of green and pink summer canvas purses, four months out of season.) Naylor pulled from the shelf a large slouchy leather bag. It didn't take a magnifying glass to see it lacked the finish, feel, and details of a luxury brand. Good quality, yes, with the heft and look of a department store private label, but not luxury. Roughly 80 percent of the goods sold at Coach outlets are lower-end pieces manufactured specifically for these stores.

The linking of quality with brands extends back to ancient Roman craftsmen and, even before that, to ancient Egyptian seals.In modern marketing, brand equity refers to the extent to which a brand's characteristics exceed expectations among other products in its category. A branded suit implies to the consumer a higher quality than an unbranded suit. In the early days of outlets, manufacturers ripped labels from items because they were reluctant to link their brand with the cut-rate price. But today many discounters do just the opposite, trumpeting goods under brand names to give the impression of quality while not necessarily backing that claim in a meaningful way. Online marketer eBay has tested the outer limits of this tactic by auctioning off brand-name merchandise at absurdly low prices.

In 2004 high-end jeweler Tiffany sued eBay in New York's federal court, claiming that 80 percent of goods sold on the site under the Tiffany label were fakes. In 2006, luxury purveyor LVMH filed a similar suit in Paris, claiming that up to 90 percent of Vuitton and Dior items peddled on the site were counterfeit. Four years later a Paris judge fined eBay almost 40 million euros ($63 million), arguing that the Internet auctioneer didn't do enough to stop the sale of counterfeit goods. The French court also ruled that eBay was not qualified to sell LVMH perfumes, which it said should be distributed only through selected retailers with trained staff. In New York a couple of weeks later, the Tiffany case was decided in eBay's favor; the judge made clear that in the United States it is the manufacturer's responsibility to protect its own brand, something that in the face of cutthroat price competition fewer and fewer manufacturers appear willing to do.

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