Do you search through the racks at TJ Maxx and Nordstrom Rack for that elusive half-off designer label? Do you detour to hit the J. Crew and GAP outlets on weekend road trips? If you, like many Americans (myself included), love the feeling of getting a bargain you might want to stop reading now. Spoiler Alert: I am about to shed some light on these so-called “discount” retailers. In the last few years, the rise of fast-fashion retailers (H&M, Forever 21, Zara) has severely affected pricing across the entire fashion industry. These companies are outperforming American fashion mainstays, like GAP, Banana Republic, and J. Crew, forcing these brands to reevaluate their pricing and production strategies.

Keeping Up with Fast Fashion Giants

Despite common belief, outlet clothing often does not enter a “regular” store and is most likely produced in an entirely different factory than the “regular” clothing. A few months ago I met with some people from Banana Republic Outlet. Banana Republic has a team of people whose sole responsibility is to design and manage production for their outlet stores. Their production team was looking for new ways to diversify their outlet product-line in order to compete with H&M and Zara. It is rumored that these huge retailers have such agile supply-chains that they are able to bring new product to their stores every 2 weeks. While Banana Republic and J.Crew are not trying to compete on price with H&M, their outlet counterparts must. This means that these companies produce lower cost and lower quality clothing specifically for their outlet stores. As Hillary Crosley writes in her article for Jezebel:

“The jig is up: Big brands like J. Crew, Gap and Saks’ Off 5th aren't selling you discounted or out of season merchandise at their outlet locations. You’re just buying lower quality cardigans and patterned pants.”

Licensing to Maxx-imize Profit

TJ Maxx, known for off-price designer labels, finds itself in a similar position. Ever notice that TJs will have a surplus of Calvin Klein, or Rachel Roy, or Elie Tahari clothing? This happens when TJ Maxx brokers a licensing deal with one of these brands. In this situation, the brand (ex: Calvin Klein) works with TJ Maxx to produce clothing with their label on it in return for a percentage, usually between 5-20% of the wholesale price of the garment. To put this in perspective, in 2012 Calvin Klein reported that “licensed products currently represent slightly over 50% of global retail sales.” At that time, licensing alone accounted for more than $3.8 billion in CK sales.

Licensing can be a great situation for the brand because they do not have to manage sourcing, production, or shipping. TJ Maxx, or the licensee, often manages all of the nitty-gritty stuff, and makes the product in factories at prices that they control. Then, they put the reputable brand label on the clothing and write that company a check. These branded garments end up at discount retailers and consumers buy them thinking that they've just scored an awesome Calvin Klein blazer.

These licensing contracts are popular throughout the fashion industry because they are beneficial for both parties. Hung Tran explains the relationship very clearly:

The licensee will produce and distribute the product, then pay royalties to the licensor (said to be between 5%-15% of profits from sales of the licensed product) for permission to use their trademark. However, exact figures are generally kept confidential. If a licensee continues to work with big labels, they can build an impressive portfolio of brands and attract more licensors. This will help emerging designers feel more confident in signing a contract with them.

Now don’t get me wrong. I love a bargain and I love finding a pair of designer boots for half-off at TJ Maxx. Sometimes you just don’t care because the price is right, and there is nothing wrong with that. The problem I see with this growing trend is that it is deceptive. Don’t try to tell me that these J.Crew outlet pants “originally cost $89" and are now “marked down to “$44.50". Those pants were intentionally made to cost $44.50. And that’s fine. Really, it’s great because I didn’t want to spend $89. Just don’t try to pull the wool over my eyes and tell me they are worth double. Because the fabric, the sewing, and the craftsmanship is NOT the same as the $89 pair of pants.

What Happens Now?

Apparently, I’m not the only one with my discount panties in a bunch. A group of Congressmen and women from Connecticut, Rhode Island, Massachusetts and California have submitted a letter to the Federal Trade Commission asking them to look into this misleading practice:

“Historically, outlets offered excess inventory and slightly damaged goods that retailers were unable to sell at regular retail stores. Today, however, some analysts estimate that upwards of 85% of the merchandise sold in outlet stores was manufactured exclusively for these stores. Outlet-specific merchandise is often of lower quality than goods sold at non-outlet retail locations. While some retailers use different brand names and labels to distinguish merchandise produced exclusively for outlets, others do not. This leaves consumers at a loss to determine the quality of outlet-store merchandise carrying brand-name labels.”

In essence, I don’t want to be lied to. Brands should be honest, open and transparent with their customers. If they aren’t, they violate the brand-customer relationship and risk losing customer loyalty. Newer fashion companies (like Everlane and Cuyana) are incorporating these beliefs and practices into their values from the start. We aim to do the same with our company by following the “Brass Rule”: Treat your customer how you want to be treated. And never lie about price.