A Comparative Study of Customer Perception Factory Outlet and Departmental Stores

Table of Content

Comparing customers’ perception and purchasing preferences between factory outlet stores and traditional department stores.

In addition, the research examines how preferences for factory outlet stores and traditional department stores vary among different demographics. The study assesses four key factors that greatly impact customers’ opinions of both types of retail establishments. The findings are derived from a mall intercept survey consisting of 100 customers from diverse demographic backgrounds. The results suggest that factory outlet stores are viewed as having lower prices and appealing promotions in comparison to traditional department stores. However, traditional department stores possess competitive advantages in the remaining three factors.

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Different demographic characteristics have been found to have a significant impact on the variation in customer perceptions of various store types. These findings suggest that factory outlet stores are viewed in a positive light, emphasizing the need for them to develop marketing strategies that align with this perception. In contemporary times, more and more customers are opting for factory outlet stores as an alternative shopping destination, moving away from traditional department stores.

With the growing emphasis on customer loyalty for achieving sales performance goals, traditional department stores are facing a significant challenge from the increasing popularity of factory outlet stores as an alternative choice. Factory outlet stores are owned and operated by manufacturers, selling only their own brand of merchandise. In contrast, traditional department stores do not manufacture products but instead offer a range of products from independent firms.

The manufacturer has complete control over the product offering, in-store customer service, product quality, product price, and store appearance in a factory outlet store. On the other hand, traditional department stores are owned and operated separately from manufacturers. In these stores, manufacturers have limited control over in-store customer service, product prices, and store appearance.

Initially, factory outlet stores were created to provide discounted end-of-line goods and seconds (Lombart, 2004). This made them popular among lower socio-economic groups. Over time, these outlets have gained acceptance from a wider range of customers, partly because of annual sale promotions that started in the 1980s (Lombart, 2004). The development of factory outlet stores has been further fueled by customers’ growing focus on value (Lombart, 2004). This trend has been particularly pronounced in the United States.

Today, there are more than 10,000 factory outlet stores operating in the United States (Meyers, 1995). These outlet stores have become increasingly popular among customers, offering a similar selection of brand name merchandise as traditional department stores (Fernie and Fernie, 1997). However, it is not clear if customer opinions of factory outlet stores compared to traditional department stores vary in general and among different demographic groups, and how these differences manifest.

The purpose of this study is to aid marketers, specifically those who work for manufacturers, in comprehending how customers perceive traditional department stores and factory outlet stores. This understanding will enable marketers to establish more appropriate customer-focused marketing strategies and business goals, leading to improved financial performance and marketing effectiveness in the retail industry. The following section is a review of literature comparing factory outlet stores and traditional department stores.

The construction of factory outlet stores has been on the rise to serve different purposes. Some stores focus on selling seconds’ products, while others function as discount stores associated with new distribution channels. Additionally, manufacturers have designed some outlets to lower their product prices through savings on overhead costs (Parker et al., 2002). These efforts aim to appeal to price-oriented and price-sensitive markets, as well as meet the diverse needs and wants of current and potential customers (Parker et al., 2002).

Initially, the factory outlet store was established as an off-price retailer in order to sell discounted products, reduce overhead costs, carry out sales promotions, create flexibility of stock running, and achieve brand promotion (Joshi, 2003). However, the roles and functions of factory outlet stores have evolved over time. In addition to offering low prices, they are now used for branded product promotions, especially in Europe and the US. Manufacturers of popular brands such as Reebok, Levi, Gap, and Warnaco consider brand promotion to be a key function of their factory outlet stores (Joshi, 2003). These stores are also designed as second’s stores and discount stores and can be found in many major cities in Japan (Joshi, 2003). Since 1990, there has been a 62% increase in the number of factory outlet stores, and this upward trend is expected to continue (Rudnitsky, 1994).

Factory outlet stores have been created to offer products at attractive prices and a relaxed shopping environment. They combine elements of traditional shopping centers to cater to price-conscious customers (Golub and Winston, 1983). In recent years, these stores have gained a larger market share by implementing price reductions that target the mass market (Hellofs and Jacobson, 1999, p. 33).

Thus, it is crucial for factory outlet stores to enhance customer satisfaction and maintain the quality of products in line with their established brand image (Parker et al., 2002). Generally, the progress in the development of factory outlet stores is commendable. As evidenced by a survey highlighted in Happy Campers at Outlets (Rauch, 2005), approximately 84% of customers acknowledged that the prices offered in these stores met or surpassed their expectations.

According to Rauch (2005), nearly 93% of the customers expressed their intention to return. Generally, factory outlet stores are growing quickly as they are perceived to provide affordable prices compared to traditional department stores, along with an improved shopping environment and atmosphere. As a result, the sales performance of factory outlet stores has been satisfying, with a tendency for positive maintenance and continual growth in this type of retail store.

Traditional department stores are facing a significant threat due to the decreasing number of consumers who shop there, despite their increased sales (Nasri, 1999; Li, 2003). This decline in customers puts these stores in an endangered situation and reduces their share of total retail sales. As a result, there has been a noticeable decrease in the overall number of department stores (Li, 2003).

According to Johnson (1994), traditional department stores are perceived by customers as having a distinctive role in fashion and offering a wide range of current fashion items at reasonable prices. Additionally, they are known for providing exceptional customer service and creating an enjoyable shopping atmosphere. In comparison to outlet stores, traditional department stores tend to generate more excitement and emotional attachment, resulting in increased visits and purchases from customers. As stated by Facenda (2005), these stores are specifically designed to cater to the diverse needs of customers with different ages and fashion preferences.

Traditional department stores have the opportunity to use this as a way to attract and retain customers, as well as protect their market share from factory outlet stores. Unlike discount stores, traditional department stores face the challenge of finding the right mix of customers, merchandise, service, and price expectations instead of solely targeting bargain-seeking customers through niche marketing (Coward, 2003).

Loyal customers who hold strong and positive images of a brand are difficult to change and result in long-term sales revenue (Wyner, 2003). The brand’s reputation plays a significant role in customer perceptions (Ailawadi and Keller, 2004). Retailers have the ideal opportunity to create positive experiences for customers (Schmitt, 2003). Brand images should be used to connect merchandise ranges and store design (Brookman, 2004). Good brand imagery leads to higher sales revenues (Parker et al., 2002). Branding directly influences customer perceptions of retailer imagery, supported by extensive research (Ailawadi and Keller, 2004). Different branded product ranges are associated with various retail stores according to customers (Inman et al., 2004). Customer perceptions of different branded products and services impact store image significantly (Ailawadi and Keller, 004). The wider range of products and services offered by a retail store attracts more customers, as it provides a convenient shopping experience (Messinger and Narasimhan, 1997).In addition, the breadth of brand products within a category plays a significant role in shaping customers’ perceptions of a store’s image and can heavily influence their decision to choose that store (Ailawadi and Keller, 2004).

To enhance customer perceptions of store image and drive sales, it is crucial to develop a diverse selection of branded products across various styles and categories (Dreze et al., 1994). This applies to both factory outlet stores and traditional department stores, as the design of brand-name products plays a significant role in shaping the store’s image. The quality of the manufactured product brands heavily impacts how customers perceive retail stores in a positive manner (Ailawadi and Keller, 2004).

According to Jacoby and Mazursky (1984), having strong positive images of brands can enhance the positive image of retail stores. They also found that in the current saturated retail market, it is easier to increase sales and gain market share by improving both brand and retail store images. However, Jacoby and Mazursky (1984) cautioned that a good brand image can be negatively affected if it is associated with a poorly perceived retail store.

The design and management of brand products in retail stores play a vital role in influencing customer perceptions and enhancing loyalty. Whether it’s at conventional department stores or factory outlet stores, customers who have a positive perception of a brand are more inclined to stay devoted. Furthermore, customers seeking top-notch branded goods may compare the quality and value of products available in traditional retail stores with those offered in factory outlet stores (Parker et al., 2002). This has a considerable impact on the overall image of the retail store.

The significance of the store image in generating profit and retaining customer loyalty cannot be underestimated. According to Parker et al. (2002), the store image can significantly shape customer perceptions. A store with a strong and favorable image can set itself apart from competitors, foster customer loyalty, and drive profitability. Conversely, a poor-quality store image can lead to price wars as customers become more price-sensitive (Hallanan, 1994). Martineau (1958) further concludes that retail stores must cultivate a positive, distinctive, and appealing self-image to successfully compete in the minds of customers.

It is crucial to comprehend the influence of a product’s brand image and how retailers should position themselves in order to create a retail store’s image (Ailawadi et al., 1995). A retail store’s image is established by offering goods and services that are distinctly different from those of competitors, thereby enhancing customer satisfaction (Keller, 2003). Numerous attributes have a significant impact on store image.

According to Lindquist (1974), the factors that impact customer perceptions of retail stores include the quality of merchandise and services, store appearance, quality of purchase service, physical facilities, behavior and service of employees, price levels, depth and frequency of promotions, and store shopping atmosphere. Ailawadi and Keller (2004, p. 333) identified two main dimensions for analyzing store image: in-store atmosphere and price and promotion. Among these dimensions, in-store atmosphere is considered one of the most crucial factors affecting customer perceptions of retail stores.

According to Baker et al. (2002), the shopping environment of a store is crucial in informing and assisting customers and plays a major role in shaping the store’s image. The physical aspects of the in-store environment, including merchandise pricing, quality, store design, and layout, as well as social service facilities such as employees’ service and friendliness, and food-court service can impact customers’ economic and psychological shopping behaviors.

Certainly, the store environment has a significant impact on providing informational cues and signals to customers about the type of products and services they should expect (Parker et al., 2002). The quality of merchandise and service is crucial in influencing the perception of the store (Parker et al., 2002). Therefore, service attributes play a vital role in building the store’s brand image and greatly impact consumer purchasing behavior (Hicks, 2000). Consequently, this ultimately leads to the generation of long-term sales revenue and profitability (Hicks, 2000).

Additionally, the in-store experience is vital for establishing retailer brand image when multiple retailers offer comparable products and brands (Ailawadi and Keller, 2004). This study examines the in-store atmospheres of factory outlet stores and traditional department stores, focusing on physical characteristics and social service features. Furthermore, customer perceptions of different retail stores and their images are directly influenced by price and promotion.

A store’s reputation regarding price and promotion is affected by average price levels, seasonal price fluctuations, and the frequency and extent of promotions (Dickson and Sawyer, 1990). Different customers have varying perceptions of store options based on their distinct store images. For instance, frequent shoppers prefer stores that offer everyday low prices, whereas occasional shoppers prefer stores with high-low promotional pricing (Bell and Lattin, 1998).

Traditional department stores aim to create a desirable shopping experience through a variety of customers and merchandise, service expectations, and price points (Coward, 2003, p. 27). Coward (2003) recommended that stores reconsider their convenient designs, return policies, and commission policies in order to enhance flexibility and customer satisfaction. Parker et al. (2002) emphasized the strong relationship between price levels and customer perceptions of product brand images and store images.

According to Parker et al. (2002), lower prices can result in customers forming negative perceptions of retail stores. The study focuses on various factors such as in-store customer service, brand images, physical features, price, and promotion. Both factory outlet stores and traditional department stores are considered to be effective in attracting customers and contributing to economic and social development by encouraging the purchase and use of branded products.

Factory outlet stores are believed to offer lower prices and more enticing promotions compared to traditional department stores. As a result, they have competitive advantages in terms of gender, education, and income. However, age does not appear to have any noticeable impact on perceptions of the two types of outlets. Currently, factory outlets are considered more effective than traditional department stores because they are strategically planned by factory managers and provide better service and cost benefits to customers.

Traditional Departmental Stores should maintain their competitive position by offering attractive physical features, good in-store customer service, and reputable branded products. Factory outlet stores, on the other hand, need to learn from the competitive disadvantage of Traditional Departmental stores and enhance their current perceived competitiveness through lower prices and promotions. This study aims to investigate customer perception of factory outlet stores compared to traditional departmental stores. The objectives of the study are as follows:

  1. To conduct a comparative analysis of customer perception of factory outlet stores and departmental stores.

To investigate the demographic variables influencing customer perception of factory outlet stores compared to traditional department stores. Additionally, to examine customer preferences across demographics regarding perceptions of these two types of stores.


The research will take place in Indore, a mid-sized multicultural city with a variety of local and international retailers, including traditional department stores and factory outlet stores. A questionnaire was created using Parker et al.’s (2002) nineteen-item scale for assessing store characteristics. This questionnaire measured preferences for generic stores.

The questionnaire utilized a five-point scale, with 1 indicating “very poor” and 5 indicating “very good.” Four additional items were included to gather demographic characteristics of the respondents. Intercept surveys were employed to collect the data. Respondents were selected evenly from both types of retail outlets. The design may incorporate various sampling techniques such as quota sampling and simple random sampling. The sample consisted of 100 customers in Indore, with the majority of respondents being under the age of forty-five. Data for the study was derived from various sources.

Primary source – A structured questionnaire
Secondary source – The secondary source consists of readily available data and is already compiled statistical statements and reports. Secondary data is collected from business magazines, the internet, and journals.
Data analysis: The data will be analyzed using percentage-based analysis with the help of bar graphs and pie charts. If necessary, hypothesis techniques such as ANOVA and T-test may also be used.
References: Ailawadi, K. L. and Keller, K. L (2004). Understanding retail branding: conceptual insights and research priorities.

Journal of Retailing, Vol. 80 (4), pp. 331-342. Ailawadi, K. L., Borin, N. and Farris, P. (1995). Market power and performance: A cross-industry analysis of manufacturers and retailers. Journal of Retailing, Vol. 71 (3), pp. 211–248. Baker, J., Parsuraman, A., Grewal, D. and Glenn, B. (2002). The influence of multiple store environment cues on perceived merchandise value and patronage intentions. Journal of Marketing, Vol 66 (4), pp. 120–141. Bell, D. and Lattin, J. M. (1998). Shopping behavior and consumer response to retail price format: Why large basket shoppers prefer EDLP.

In a study published in Marketing Science (Vol 17 (1), pp.66-88), Brookman (2004) explores how retailers are becoming more strategic in their approaches to displays. Coward (2003) suggests that department stores should support a customer-created shopping experience, as discussed in Display & Design Ideas (Vol. 15 (6), p. 27). Dickson and Sawyer (1990) examine the price knowledge and search behavior of supermarket shoppers in the Journal of Marketing (Vol. 54 (3), pp.42-53). Dreze, Hoch, and Purk (1994) discuss the concept of shelf management and space elasticity in the Journal of Retailing (Vol. 0 (4), pp.301-326). Facenda (2005) explores new fashion trends for the season in Retail Merchandiser (Vol. 45 (8), p.10). Fernie and Fernie (1997) analyze the development of a US retail format in Europe, specifically factory outlet centers, in the International Journal of Retail & Distribution Management (Vol. 25 (11), pp.342-350). Golub and Winston (1983) examine outlet malls in the Appraisal Journal (Vol. 51 (3), p.452). Hallanan (1994) discusses the importance of quality in store brands, as well as the impact it has on customers’ perception, as mentioned on http://www.gsb.stanford.edu/research/faculty/news_releases/rajiv.lal/lal.htm (no specific volume or page number provided). Hellofs and Jacobson (1999) examine the relationship between market share and customers’ perceptions of quality in the Journal of Marketing (Vol. 63 (1), pp.16-25). Hicks (2000) discusses how smart staffing can help build a brand in SGB: Sporting Goods Business (Vol. 33 (9), p.14). Inman, Venkatesh, and Roselline (2004) explore the reinvention of department stores.The article “Who’s buying at factory outlets?” by Joshi (2003) from Discount Merchandiser, Vol.34 (5), pp.54-55, discusses the customers who shop at factory outlets. This information was retrieved from Financial Daily, a publication by THE HINDU group, on May 12, 2005. Additionally, Keller (2003) also provides insights on this topic.

Strategic brand management: Building, measuring, and managing brand equity (2nd ed. ). Upper Saddle River, NJ: Prentice-Hall. Kulpa, J. (1998). Service levels are key for Medic customer loyalty. Drug Store News, Vol. 20 (7), p. 204. Li, J. (2003). Sincere plotting turnaround in cut-throat times. Hong Kong iMail (China). Lindquist, J. D. (1974). Meaning of image. Journal of Retailing, Vol 50 (4), pp. 29-38. Lombart, C. (2004). Factory Outlet Centres in Belgium. European Retail Digest, Vol. 41 (Spring), pp. 1-3. Martineau, P. (1958). The Personality of a Retail Store. Harvard Business Review, Vol. 36 (1), pp. 7-55. Messinger, P. R. and Narasimhan, C. (1997). A model of retail formats based on consumers’ economizing on shopping time. Marketing Science, Vol. 16 (1), pp. 1-23. Meyers, C. R. (1995). Attracting factory outlet stores can spell success for a community. Economic Development Review, Vol. 13 (2), pp. 51-55. Nasri, J. (1999). Traditional Retailers Prepare To Confront E-Commerce Challenge. Weekly Corporate Growth Report, Vol. 10 (172), pp. 10505-10507. Nunnally, J. C. (1978). Psychometric Theory (2nd ed.). New York: McGraw Hill.
Parker, R.S., Pettijohn, C., Pettijohn, L., and Kent, J.(2002). 12 (5), pp. 6-7.

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