What Happened?

Four members of Congress recently asked the Federal Trade Commission (FTC) to launch a federal investigation into the marketing practices conducted by outlet stores. In their letter, US Sens. Sheldon Whitehouse (D-RI), Richard Blumenthal (D-CT), Ed Markey (D-MA), and Rep. Anna G. Eshoo (D-CA) called on the FTC to look into claims that merchants may be selling lower quality items produced specifically for outlet stores without properly informing consumers.

What is the Law?

The FTC’s Guides Against Deceptive Pricing require any price comparisons to be made between merchandise that is of similar quality. This means that a retailer must ensure that when it states that “Brand X Shoes — 50% off retail price!” the Brand X shoes have to be the same quality and grade as those sold at the retail price. The meaning of this claim is clear when dealing with a brand that sells its product in the mall.

But when a consumer sees this claim at a retailer selling shoes in its outlet location, she may believe that the retailer is offering at its outlet location the same shoes that it sells in its mall location for 50 percent less. In many instances, this is simply not the case, since the outlets now are a forum for big brands to distribute a “lower quality” selection of items at less expensive prices.

What are the Legislators Arguing?

“We are concerned that outlet store consumers are being misled into believing they are purchasing products originally intended for sale at the regular retail store,” write the legislators. “We believe this practice may be a violation of the FTC’s Guides Against Deceptive Pricing.”

The members of Congress contend that lower quality items were never intended to be sold at the regular retail store and are instead manufactured for sale in the retailer’s outlet collection. Some consumers may not appreciate this: “Historically, outlets offered excess inventory and slightly damaged goods that retailers were unable to sell at regular stores. Today, however, some analysts estimate that upwards of 85 percent of the merchandise sold in outlet stores was manufactured exclusively for these stores.”

What Happens Next?

If action is taken, the FTC will have to decide if consumers appreciate that they are purchasing lower quality merchandise rather than getting an incredible bargain.

It will be important for retailers involved in outlet malls if the FTC takes the bait on the letter from Congress.