So what if the country is over-stored and over-malled. Outlet centers are a different animal, and Steven B. Tanger sees a big future for the format.
This story first appeared in the December 19, 2012 issue of WWD. Subscribe Today.
“There could be as many as 100 new centers in the U.S. in the next 10 years,” Tanger, the president and chief executive officer of Tanger Factory Outlet Centers Inc., told WWD. That’s on top of the 150 outlet centers currently operating in the U.S., totaling about 55 million to 60 million square feet, which, as Tanger suggested, is a mere speck on the overall 7.3 billion square feet of shopping center space in the U.S.
As far as Tanger’s piece of the pie, the goal is to open one to two centers annually for the next three to five years, and maintain its 20 percent market share.
The pipeline is robust, the most it’s ever been, Tanger said, with five new developments in the U.S. and Canada presently under way — at Foxwoods Resort Casino in Connecticut; National Harbor in Washington D.C.; Charlotte, N.C.; Columbus, Ohio, and Ottawa, Ontario, Canada. There are also six expansion projects going on.
The latest ground-breaking was last month at National Harbor, which is expected to open for holiday 2013. It’s a Tanger and Peterson Cos. joint venture, with each having a 50 percent interest and each providing site development and construction supervision services, while Tanger will provide management services, leasing and marketing.
Tanger is also partnering with Simon Property Group Inc., the nation’s biggest shopping center developer, on the Charlotte and Columbus outlet centers, both scheduled to open in 2014. Foxwoods and Ottawa openings are expected to occur later. Tanger said it’s generally a two- to three-year process, from start to finish, on his outlet projects. They’re about half the size of regional malls, which can take up to a decade from site location to the actual opening.
Two months ago, Tanger, together with Simon, opened an outlet center in Texas City, Tex., near Galveston. In October, Tanger partnered with RioCan Real Estate Investment Trust in Canada to buy two outlet centers in the Montreal area and rebrand them under the Tanger Outlets flag.
While partnerships are fueling Tanger’s growth, it doesn’t hurt that retailers and brands, such as Neiman Marcus, Saks Fifth Avenue, Nordstrom and Bloomingdale’s are accelerating outlet openings to bolster profits. It’s a cheaper business model, with lower construction costs and rents compared to mall or street locations, and one that many retailers believe doesn’t cannibalize regular-priced stores, attracts a different customer base and doesn’t necessarily hurt the brand image.
“There’s a long runway to grow in the U.S. and Canada,” Tanger said, and therefore no need to take the format beyond North America. “We don’t need to distract our folks and divert human resources. It’s a different skill set overseas.”
Today, Tanger is at a discreet office he keeps for himself inside a law office on 59th Street in Manhattan. It’s to stay close to the various constituencies he deals with — brands, retailers, Wall Street and the media — and to be within driving distance of two key centers in the Tanger portfolio of 43 properties in 26 states and Canada. There’s the center in Riverhead on Long Island, Tanger’s largest and biggest volume center, and The Arches at Deer Park, also on Long Island, among Tanger’s newest and most upscale centers. Tanger considers it “a regional town center” rather than simply an outlet center, since it includes a movie theater, the Christmas Tree Shop, a fitness center and is more architecturally advanced than Tanger’s other outlets, having a Mediterranean-flavored and energy-efficient design. The Tanger headquarters are in Greensboro, N.C., but Tanger himself isn’t there very often.
“I’m in shopping centers and regional malls all the time — 75 percent of my time, I’m traveling. Our job is to stay abreast of names and companies that are hot. You learn by asking questions to find out what brands are popular and which are dying. Part of our skill set is to identify emerging brands and work with them to open their first outlets. Most brands that have opened outlets identify them as the most profitable or one of the most profitable channels.”
For a reserved guy, the 63-year-old Tanger does a lot of bouncing around, keeping on top of what’s going on in his centers and the competition’s; staying close to fashion brands, either emerging or waning.
And then there’s the media. The lean, 6-foot, 4-inch Tanger is always camera-ready and polished, and prone to wearing Tom Ford, even though it’s one label that can’t be found in any outlet center. He’s frequently in the media, reporting on his business, and for the past five years, he’s been doing his own television and radio ads, which run all around the country taking a homespun approach to brand-building, the way local car dealers might, or Tom Carvel did decades ago for his ice cream stores. Tanger, looking relaxed, is typically seen with fashion models. “People like the fact that there is a real person behind the name and the brand,” Tanger said. And that it’s not just a big public company.
He’s got other things going for him, notably a degree of flexibility and creativity in dealing with brands and retailers that other major developers don’t demonstrate as much. He’s laid back, doesn’t show his cards, yet isn’t one for surprises. He’s conservative and consistent, rather than inventive, with the strategy kept tightly focused on conventional outlet centers, and he’s careful to maintain a debt-to-equity ratio under 25 percent — which lenders like to see. Tanger cites studies indicating that a balance sheet with little debt generates higher shareholder returns.
When asked if being tagged as conservative in business was fair, Tanger replied: “That’s an oxymoron in the development world,” but given the current economic climate, he added, “It’s an appropriate characterization.”
“He’s easier to deal with than other developers,” said one retail source who knows Tanger and described him as an astute businessman, a quintessential Southern gentleman and very respectful of others.
“If you are not doing well, he will work with you on the rent,” the source said. “The rents are fairer and he’s willing to take a chance on new brands.”
He’s also said to be more flexible on radius clauses, which Tanger and other developers write into lease agreements to restrict tenants from opening stores within a certain distance of their centers to maintain some exclusivity.
“Steve and his family have been visionaries in the outlet world. He’s one of the premier players in the space and is very creative in the nature of the deals he’s done with us,” said Stephen I. Sadove, chairman and ceo of Saks Inc., which operates Saks Off 5th outlets in a few Tanger locations. “He’s good at attracting top retailers.”
“Steve knows all the principles of the retailers and the brands he carries, what the companies stand for and what the economics of these companies are. He gets his hands dirty,” said Laurence Leeds, chairman of Buckingham Capital Management, who, when he was running Manhattan Industries decades ago, hired Tanger to work at the Henry Grethel division.
Tanger’s approach to business, said Leeds, is “very consistent and quite predictable — the antithesis of contemporary politicians. His centers become destination locations, and contain so many desirable brands and so many fashion names that people go there for the variety. There’s nothing schlocky in there. There’s a lot of pretty upscale brands, but not too many.”
“He has a passionate view of the business,” said Gilbert Harrison, chairman of Financo Inc. “He grew up in the business and has really taken what was his father’s business to the next level.”
“He’s focused and consistent and specializes only in the factory outlet business and he does it well,” said Millard “Mickey” Drexler, chairman and ceo of J. Crew Group Inc. “When you go into an outlet center, on any day you’re there, you know you are getting a deal. The deals are clean and direct,” compared to more confusing pricing at department stores, Drexler said. “By the way, all the brands that department stores carry are in the outlets. Every single one of them.”
Steve Greenberg, president of the Greenberg Group, retail real estate consultants, characterized Tanger centers as clean, comfortable and appealing, but not fancy. “The Tanger family has been the king of the middle-class outlets,” with names like Carter’s, Osh Kosh and Jones permeating the premises. “If you want to have the impression that you are there for a bargain, you don’t need to build a Taj Mahal.”
Greenberg added, however, that, “As they have continued to open centers, they are looking to secure more upscale and luxury brands,” including Saks Off 5th, Façonnable and Last Call by Neiman Marcus.
“There is no need to reinvent something that is working well,” Tanger said.
The results do support his premise. Funds from operations, a widely accepted measure of a real estate investment trust, or REIT, increased 10.6 percent for the three months ended Sept. 30 to $41.9 million, and 19.6 percent to $116.1 million for the first nine months of the year. Comparable tenant sales increased 7 percent for the third quarter and 5.4 percent for the 12 months ended Sept. 30. “As long as we maintain new brands that are popular and keep the product mix fresh, we are not going to re-create anything,” Tanger added. “We are very happy with the format we have — 300,000- to 400,000-square-foot centers with 75 to 100 outlets each.”
In 1919, Tanger’s grandfather, Moe, started Creighton Shirtmakers in Wallingford, Conn., which manufactured uniform shirts and trousers for police and fire departments and the military. Early on, he realized that not every product was perfectly made and ended up with excess fabric, which had little value unless it was cut and sewn into shirts. So in 1920, part of the factory became an outlet on Saturdays for employees and their friends to buy shirts and trousers at a discount. It was believed to be the country’s first outlet.
“He called it ‘Saturday Sales.’ It was a very small part of the warehouse,” Tanger said. “Many times the Saturday sales met the previous week’s payroll. My grandfather was an entrepreneur.”
Tanger’s father, Stanley, joined the business after World War II and eventually relocated it to New Haven, where the company developed a reputation for madras shirts in the Fifties, the kind that were guaranteed to bleed, though at the time, bleeding was the look a lot of people considered fashionable. For economic reasons, the factory was relocated to Greensboro in 1959, and grew as a manufacturer for several brands.
In the Sixties, the company opened an outlet center in Greensboro and, by 1970, Tanger was operating five outlets in warehouses in small towns such as Greensboro and Burlington, N.C.
In 1981, Stanley opened up what’s considered to be the first ground-up, new construction factory outlet center, in Burlington. It had 35,000 square feet and an aggregation of about a half dozen brands such as Ship ’n’ Shore, Hanes and Bass. There was an outlet center in Reading, Pa., selling Vanity Fair brands, already operating though it was born out of a warehouse. By 1985, Stanley Tanger had developed seven small outlet centers, totaling 344,000 square feet in six states.
“My father’s innovation was clustering. He basically studied the cluster concept of retailing,” prevalent in such sectors as fast food and car dealers, where competing companies situated adjacent to each other, to draw greater traffic. “That seems obvious now but back then, it was revolutionary. It became a destination. Many more people came. That was his innovation, to convince manufacturers to cluster together in a strip shopping center — and consumers loved it.
The business model was simple and elegant. Selling direct to consumer meant cutting out the middle man. Consumers could save money every day. It was a win-win for manufacturers and consumers.”
Steven Tanger, who was raised in the South and graduated from the University of North Carolina at Chapel Hill in 1970 with a degree in business administration, worked in his father’s business from 1970 to 1979 until joining Leeds at Manhattan Industries. Despite already having a family background in the industry, “He was eager to learn, pleasant and talented — an all-around good guy,” Leeds said.
In September 1980, Tanger moved into the investor world, working with clients on structuring real estate investments for tax advantages. After the tax code changed and tax advantages were no longer as great, he rejoined his father in business in 1985, seeking something more lucrative. He became Tanger’s fourth employee, and held the post of executive vice president. He ran the civilian division for men’s dress shirts and sports shirts sold to department stores, ran the outlets, and became a member of the board.
“We believed in what we were doing,” Tanger said. “In the next eight years, we built up the business to 1.5 million square feet. My father was a driven, successful entrepreneur willing to take educated risks.”
Asked what was the biggest lesson from his father, who died in 2010, Tanger replied, “He taught me to be respectful to our colleagues and family and to give back to the community in which you live and work.”
In 1993, the Tanger family led the way again by becoming the first outlet center developer to be listed on the New York Stock Exchange as a REIT. “We raised $100 million and paid off 21 different banks that were holding mortgages,” Tanger said. “It was a terrific feeling, a proud feeling. You were watching your dream come true. As entrepreneurs, we always strove for reaching the size and quality to qualify for a listing on the New York Stock Exchange.”
Tanger said going public was probably the most exciting day of his life, next to the birth of his children, Schuster, who is 27, and Andrew, 22. Neither of his sons is involved in the business, though the break from family tradition doesn’t seem to disturb Tanger. “I am not pressuring them to do anything. I want them to lead their own lives.”
Although Tanger’s business remains strong, it’s not without its challenges. At an outlet center, the vast array of brands can be daunting to navigate through, though Tanger said that with the merchandising of all his centers, “There is a science to it. We try to put together different product categories, and to be sure not to have too much of one category. We merchandise outlet centers like a department store merchandises,” so the outlet center becomes like “a horizontal department store. We don’t have any anchors. We have ‘magnet’ tenants, those that draw from five to 30 miles away.”
Magnets, he explained, could be anywhere from 4,000 to 25,000 square feet in size, and include Saks Off 5th, Nike and Last Call by Neiman Marcus. Ninety percent of the centers are occupied by outlets selling apparel and footwear, while the remainder of the space is occupied by jewelry, gifts, home and a bit of electronics.
Perhaps a more pressing concern is the intensifying competition from department stores and chains. They’re slashing prices religiously and trying to project as much value as the outlet centers.
“Consumers are very smart. They know what the real values are,” Tanger said with an assured smile. “Outlet stores offer every day of the week an average of 25 to 50 percent off, in a full range of colors and sizes,” though discounts can often be found at up to 70 percent off at Tanger. “There could be a day or two out of the week that department stores are priced equal to or less [than outlets], but they are not normally offering the full range of sizes or colors. It’s only a good bargain if you can find the color you want, in your size. Chances are much more unlikely in a department store.
“The biggest risk is if our tenant partners decide not to give great values everyday on their products,” Tanger said. “But it’s not a likely scenario.”
Steve Tanger’s Philosophy
• On bargains: “In good times, people like a bargain. In tough times, they need a bargain.”
• On development: “Attack when everyone else is crawling into a shell.”
• On how to develop centers: “Better is better. Bigger is not always better.”
• On anchor tenants. “We don’t have anchors. We have magnets — highly productive outlets that can draw from five to 30 miles.”
• On the balance sheet: “It’s a fortress,” with a debt-to-equity ratio at 25 percent or less.
• On consumers: “They’re smart. They know what the real price is.”
• On the outlet center format: “We are not going to reinvent anything.”
The Tanger Strategy
• Open one to two new outlet centers annually for the next three to five years.
• Consistent format: 300,000- to 400,000-square-foot centers with 75 to 100 outlets each.
• Maintain the 20 percent market share.
• Low debt-to-equity ratio, clean balance sheet.