ONCE A POOR RELATION, OUTLETS GO LEGIT -- AND TROUBLE LOOMS

Byline: Sharon Edelson

NEW YORK--Retailing's Cinderella story,the outlet center, may end up a victim of its own success.
After 10 years of explosive growth, outlets are trading up and opening up: Centers are creeping nearer to traditional malls and expanding at 10 times the rate of department stores.
Amid all the expansion, outlets appear to have lost sight of their role in the market: Discounts, the reason shoppers came running in the first place, are getting smaller.
Yet outlet stores continue to dress up their environments while carrying costlier first-quality goods and less closeout and irregular merchandise.
Bargains are fewer and farther between, observers note, and outlets may have begun to alienate some customers.
At the same time, department stores have stepped up already aggressive promotional schedules.
Observers predict a weeding out of the outlet market in the next three to five years. There are some signs consolidation has begun, as two of the largest outlet developers--Horizon Outlet Centers and McArthur/Glen Realty Corp.--announced they would merge several weeks ago.
The good times continued last year, however, as sales at outlet centers increased 15 percent, compared with 5 percent for department stores.
Riding the 10-year growth wave, manufacturers have gradually begun placing more emphasis on in-season merchandise, creating products specifically for their outlet stores. In some cases, discounts have dwindled from more than 70 percent below retail to 10 to 15 percent below, although 20 to 25 percent appears to be the norm.
While the impact of smaller discounts hasn't seemed to hurt the industry yet, retail analysts worry that as department stores continue their increasingly promotional posture, consumers will find the price differential between department stores and outlets insignificant.
"Department stores have gotten better at offering value pricing," said Dana Telsey, a managing director of Bear Stearns. "That is placing great pressure on outlets to maintain their price advantage. Right now, it's very much a catch-as-catch-can atmosphere with regard to what kind of discount you can find.
"Some developers are now putting clauses in their leases of minimum discounts that must be offered in the stores," Telsey added. "Supposedly a 20 percent-plus discount is considered the minimum."
Despite the concerns, some outlet developers say things couldn't be better.
"All of a sudden everyone's worried about the discounts at outlets," said William H. Carpenter Jr., president and chief executive officer of Prime Retail, a developer based in Baltimore. "Sales continue to go up. Our traffic is up over 16 percent from last year. The consumer that understands the branded merchandise is satisfied with the values."
But Barry Ginsburg, vice chairman Chelsea GCA Realty Inc, a real estate investment trust, cautions, "If price deflation continues, the outlet retailers are going to have to sharpen their pencils. They're going to have to take lower margins to stay competitive."
As outlet malls evolve into upscale environments with more consistent merchandise offerings, some outlet shoppers are becoming disillusioned with the prices.
A recent spot check at Woodbury Common Factory Outlets, in Harriman, N.Y., found shoppers relatively pleased, although most said they recalled larger discounts in past years.
"I come here once a week," said April Adams of White Plains, N.Y., who had purchased a Guess jacket. "The discounts have gotten smaller, but it's still cheaper than the department stores."
"There are less bargains," said Anne Sabo of Fairfield, Conn. "In some stores you'll find very good bargains, but in others they're just mediocre."
With more upscale consumers cross-shopping, outlet developers are courting a more affluent clientele. Today's typical outlet shopper is slightly older and wealthier than 10 years ago, according to Carpenter, who said Prime Retail's typical customer is around 40-years-old with an income in excess of $40,000.
"Our properties have a more upscale, designer orientation," said Michelle Rothstein, vice president of marketing of Chelsea GCA, which developed Woodbury Common. "The shopper is representative of the brands we carry. Our best shoppers are people that like to shop around. They shop department store sales, full-price and off-price. In the best case, we're making some of the designer brands very accessible."
In the Eighties, during the format's early years, outlet mall tenants tended to be middle-of-the-road manufacturers that appealed to the broadest audience, such as Aileen and Mikasa. While these firms are still major players, outlet centers have been attracting upscale retailers and fashion forward designers such as Barneys New York, Tse Cashmere, Kenar, Laundry and Leon Max.
At Woodbury Common, Steilmann European Selection carries KL by Karl Lagerfeld. At the Moda Fashion Apparel store, Armani jackets were selling for $540, reduced from $820, and Emanuel jackets were $187, down from $375. An employee of the store said most of the merchandise was in-season.
As is befitting such labels, outlet developers have been gussying up shopping environments with high-quality fixtures and amenities such as food courts. A 10,000-square-foot Polo Ralph Lauren Factory Store, which opened at Woodbury Common in November, looks exactly like the Polo department of a specialty store, with mahogany paneling and display cases.
In the last decade, outlets have experienced rapid growth. In 1990, there were 197 outlet centers in the country, generating $5 billion in sales. Today, about 300 centers generate $10 billion annually.
Nancy Lee, vice president of Management Horizons, a consulting division of Price Waterhouse, said outlet sales will continue to grow for three years, then begin to slow through the remainder of the decade.
Some of the most successful outlet stores generate up to $600 in sales per square foot, with significantly lower operating expenses than a store in a mall or a freestanding city store. Ginsburg said average sales per square foot for Chelsea GCA's properties grew to $309 in 1994 from $278 in 1992.
He said the average sales per square foot in regional malls was $190 to $206, last year.
While retail experts believe the outlet industry, like the department store sector, is becoming overstored, it is showing no signs of slowing down.
In 1995, five new outlet malls are planned for Branson, Mo., alone.
Horizon Outlet Centers, plans to build outlet malls in Laughlin, Nev., Tulare, Calif. and Honolulu. It also plans to expand four existing properties, in Gilroy, Calif., Vero Beach, Fla., Birch Run, Mich. and Michigan City, Ind.
The developer of Belz Factory Outlet World in Orlando, Fla., is currently building an International Designer Outlet Mall adjacent to Belz Factory Outlet World.
Until recently, outlets kept their distance from regional shopping malls to avoid direct competition. But now, in their quest to build a more consistent base of repeat customers, developers are locating outlet centers closer to traditional malls.
"Three years ago, outlet centers were 45-plus miles away from traditional malls," Carpenter said. "Today, the average is 28 miles. Outlets are getting a little bit closer.
"We have one as close as 12 miles from a major department store," Carpenter added, referring to a center in Chattanooga, Tenn., which is close to a Parisian department store. "In that particular market we have substantially upscale tenants in our center, and we were there first."
A study conducted by Prime Retail found that consumers spend 31 percent more time at outlet centers than at conventional shopping malls.
"The outlet centers have gone from cement floors, pipe racks and strictly overruns--like 500 green sweaters in large--to what I call specialty store-looking environments," said Gary Geisler, vice president of Horizon Outlet Centers. "They have track lighting, carpeting, nice fixtures and nice presentation.
"The new centers we are building will be the next generation of outlet malls," Geisler continued. "In Hawaii, we're taking over the Dole cannery and converting it to outlet stores. It will be very unique. We'll have some of the architectural details and old machinery from the cannery."
According to Andy Groveman, vice president of marketing of Belz Enterprises, "Outlet operators learned how to listen to their customers and fulfill their needs. They are using more sophisticated merchandising techniques, brighter, better-looking interiors and managing the stores in a more professional way. They're hiring people that have retail experience to run their operations, which is key." "People spend twice the amount of time at outlet centers as in a traditional mall," Geisler said. "When they come to one of these outlet malls, they come to buy. They've invested time in getting there--it's a planned event."
But Lynda Cangemi, a mortgage banker from Lincroft, N.J,, thinks outlets no longer warrant the trip.
"When I first started going to the factory outlets five years ago, it was always possible to get something at a really good price," Cangemi said. "You always walked away feeling that you had gotten a bargain.
"I got a gorgeous London Fog raincoat for $39," she added. "That was a couple of years ago. It's not going to happen again. Today, while the prices are good, you don't get any better prices than you would at a good sale at a department store.
"I won't go out of my way for one anymore," Cangemi said. "If I'm passing by, I'll stop. There was a time when I would get into a car and drive to an outlet center."
How many more customers like Cangemi can factory outlets afford to lose?
Some retailers, including Ann Taylor and The Gap, have decided that customers are more interested in consistency than "the deal." Both companies have redefined their outlet concepts. Ann Taylor established a separate sourcing base and merchandise team for Loft, its new outlet concept.
Since March, Ann Taylor has opened Loft units in Riverhead, N.Y., and Branson, Mo.
At Woodbury Common, the Ann Taylor Factory Store was selling white cropped cotton jackets with the Loft label for $48. Other Loft styles included drawstring pants for $44, cigarette pants for $38, gingham tops for $39 and denim vests for $28.
The Gap, which manufactures merchandise for its Old Navy Clothing Co. outlets, plans to open 75 new Old Navy stores this year. Prices at Old Navy are 30 percent lower than at The Gap.
The Gap will open a flagship for its Old Navy Clothing Co. on Ladies Mile in Manhattan and is said to be looking for other locations in the city. Ann Taylor is reportedly shopping for sites in Manhattan for its new Loft concept.
Now that retailers have realized how profitable outlet stores can be, they're adding a new wrinkle to the business.
To the chagrin of some vendors, retailers such as Saks Fifth Avenue, are opening outlet stores near their flagship units.
Saks Fifth Avenue, which recently changed the name of its Clearinghouse outlets to Off 5th--Saks Fifth Avenue Outlet, is close to signing a lease for a Clearinghouse unit in Manhattan, which is believed to be on Sixth Avenue near 20th Street.
"In a lot of ways it may be a good thing if [department and specialty stores] maintain first-run goods in their flagship store," said Allen Schwartz, ceo of ABS. "At the end of the season, if you always keep your merchandise fresh and new, you could condition the customer to buy at full price. It makes sense to put the sale merchandise into Clearinghouse stores and give the specialty store a chance to keep the new and forward merchandise alive."
Saks Fifth Avenue, which operates eight Off 5th units, plans to open eight to 10 new stores this year.
Philip Miller, chairman and chief executive officer of Saks Fifth Avenue, estimated the firm's outlet business could quickly reach $200 million. It's expected to do about $120 million this year.
The Off 5th stores, which range in size from 25,000 to 40,000 square feet, do about $500 a square foot, according to Miller.
Carpenter believes apparel manufacturers will remain entrenched in the outlet industry.
"The outlet business is like having a fax in your office--it's a necessity," he said. "You never know if yellow is going to be next season's color. But somebody will buy yellow for a price. As long as there are manufacturers, there will be outlets."

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