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The Strategic role of outlet mall retailing (RV of 99/43/MKT)

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Today, many apparel manufacturers have opened shops in outlet malls or actively distribute products in "consumer" trade shows, in addition to selling through traditional retailers. As noted by Kotler (1997), a key motivation behind the increase in th enumber of channels is the desire to find a channel that fits theneeds of customers better. In a competitive context, this work examines whether and when manufacturers have an incentive to segment their market by distributing through low price/low service channels as well as though full service retailers. The focus of the analysis is apparel categories where the main differences between channels are teh level of in-store service (for example, sales advice, sales assistance, and chekout services) and prices. The authors develop an analytic model to investigate whether and under what circumstances differentiated, competing manufacturers would choose to sell through multiple retail channels. They assume the market is heterogeneous with consumers that differ on 2 dimensions (price sensitivity and service sensitivity), both of which are motivated by differences in the cost of time. The primary retail channel is comprised of regular retail outlets, which have higher prices and better service. Coughlan and Soberman assume that primary retailers make decisions about both retail prices and the level of in-store service to provide. The alternate channel is manufacturers' outlet stores. The primary insight of the paper is that the nature (not just the magnitude) of consumer heterogeneity affects the attractiveness of dual distribution. When price sensitivity is th eprimary dimension of heterogeneity, implementing outlet mall distribution will have a positive effect on the profits manufacturers. The outlet mall provides the opportunity to charge igher prices to consumers who remain in the primary channel. This outweihs the disadvantages of serving a significant fraction of consumers in highly competitive 'low priced' outlet malls. In contrast, when the primary dimension of heterogeneity in market is service sensitivity and not price sensitivity, implementing outlet mall distribution will reduce profits for both manufacturers and primary retailers. In this situation, the advantage of higher prices (that can be obtained by reduing the fraction of price-sensitive consumers in th eprimary market) is outweighed by unrestrained efforts of th eprimary channel to woo the remaining customers with high levels of service.

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