“There is no retail apocalypse. Retail is not dead,” stated Steven B. Tanger, the 68-year-old chief executive officer of Tanger Factory Outlet Centers, a real estate investment trust based in Greensboro, N.C., and the nation’s only publicly held pure-play outlet center company.
In his measured and assured manner, Tanger made a case for why brick-and-mortar retailing, and certainly outlet retailing, won’t get swallowed up by e-commerce. He immediately pointed to some of digital shopping’s shortcomings, like high return rates in apparel, and his convictions on brick-and-mortar are bolstered by his company’s balance sheet. “It’s a fortress,” he said.
One of his favorite sayings is, “In good times people love a bargain, and in tough times, people need a bargain.”
But Tanger outlet centers are not simply about price. The company’s “best price promise” does help shield against the Internet and the price transparency it provides. But as Tanger said, “We guarantee every stockkeeping unit in every store in every center has the lowest available price so the consumer does not have to think about if he is getting a value. We take price off the table so the consumer can focus on the experience and the quality of the product. As in almost any industry, if the sole criteria is price and the vendors only try to compete on price…you will be out of business. We are not competing on price. We are not selling cheap stuff at a cheap price. We are selling brand names direct to the consumer. The winners today, and this is something I keep repeating, are the ones that can provide convenience, value, experience and trust.”
Tanger Outlets was founded in 1981 by Steven’s father, the late Stanley Tanger, by opening a cluster of factory outlets in a strip shopping center in Burlington, N.C. Steven assumed the ceo reins in 2009. Unlike many retailers and mall companies, Tanger hasn’t overexpanded, having a portfolio of 44 outlet shopping centers in 22 states and Canada, totaling 15.3 million square feet.
According to the ceo, many of the 500-plus brands that populate Tanger centers are reinvesting as well, by updating stores and products. He said many ceo’s from these brands tell him that outlets are their most profitable divisions; e-commerce is the least profitable.
With an occupancy rate year after year of around 95 percent, Tanger doesn’t need to scurry to fill space, even in the wake of all the retail bankruptcies and store closings in 2016 and 2017. Re-merchandising space sometimes involves holding back on leasing available space to accommodate some Johnny-come-latelies to Tanger settings, such as H&M, T.J. Maxx and Restoration Hardware, which require larger footprints than Tanger’s long-standing tenants with smaller footprints such as Gap and Polo Ralph Lauren Factory Outlets.
Tanger’s newest outlet center opened in Fort Worth by the Texas Speedway on Oct. 27. By the time of the ribbon cutting, it was 93 percent leased. No additional outlet centers are planned for 2018, though Tanger is working on redevelopment and pre-leasing for potential developments and has a “shadow pipeline” of sites being eyed. Some could get developed, depending on market conditions and sufficient tenant acceptance. Tanger is investing in existing properties, including spending over $40 million over the last five years renovating and re-merchandising Tanger Outlets in Riverhead, N.Y., on Long Island, which is the company’s second-largest center at 729,706 square feet; Deer Park, also on Long Island, has 749,074 square feet. Re-merchandisings at five other centers will be complete by the end of this year.
For the following Q&A, Tanger sat down over coffee at the Harvard Club in Manhattan, to discuss the state of his company, the allure of outlets and why he believes brick-and-mortar retail is here to stay. “If retail was dead, a new outlet center would never open 93 percent leased,” Tanger said.
WWD: Talk about Tanger Outlets Fort Worth and how it advances the outlet experience.
Steven B. Tanger: We are opening with virtually every top apparel brand, every top designer and brand name apparel company and a large Restoration Hardware outlet store. We are creating experiential shopping to introduce Fort Worth to Tanger Outlets. This is the first outlet center in the Fort Worth market, believe it or not, considering Dallas/Fort Worth combined is the fourth largest city in the country. Dallas has outlets but Fort Worth has none. The architecture is more upscale. We have seating, WiFi, charging stations — all the amenities today’s consumers want to make it easy to shop. We have restaurants, entertainment, the best shopping, the best brand names. That’s it — that’s what we do.
WWD: Interesting that you brought in Restoration Hardware, which usually isn’t associated with operating outlets. Are you bringing new dimensions to the tenant mix?
S.B.T.: We are delighted in Fort Worth to welcome Restoration Hardware. We have one in Riverhead [Tanger’s largest center on Long Island] but it will be first Restoration Hardware outlet in the Fort Worth market. Most outlet [centers] today have apparel and shoes, but we are broadening now to furniture, home goods, those type of products. We are able to curate the selection for consumers. A regional mall by definition has three times the square footage of an outlet center with large anchor tenants. Because of our smaller size, we have been able to select the very best and not have to choose retailers just to fill space. We combined a lot of storefronts and had to hold product off the market to be able to attract retailers like T.J. Maxx and Marshalls.
We tested a T.J. Maxx in our center in Foley, Ala., five years ago, very successfully and we are opening additional T.J. Maxx stores. It’s hard to buy anything on the T.J. Maxx e-commerce site. I don’t think Ross Stores even has a web site. [It doesn’t] Look, they are the most successful retailers today and [almost devoid] of e-commerce. We opened a Home Goods and we have now 14 H&M stores. They are regular H&M stores. [Not outlets.] They offer value and people trust the brand. In order to accommodate those 20,000- to 25,000-square-foot stores, when your average store size is 4,000 square feet, we had to move people and hold stuff off the market. That’s a true re-merchandising.
WWD: What are some of the best-performing brands in your outlet centers?
S.B.T.: I am going to get into trouble if I mention them. I’ll make three friends and 2,000 enemies. You know which ones they are. I would tell you that some of the best manufacturers and some of the best brand names that people trust are reinvesting in their store formats, updating their stores and updating their product. A couple of the best are Coach, Polo/Ralph Lauren, Michael Kors. Then you’ve got to say Kate Spade. I could go on and on. In the men’s area, we think that Vineyard Vines has hit the market with well-merchandised, well-displayed stores with quality products at a great value. I have a list of all the ones doing well, and lists of ones not doing so well and I don’t really want to get into that.
WWD: Does it bother you to see headlines that traditional retail is dying as Amazon and e-commerce grow fast?
S.B.T.: There is no retail apocalypse. Retail is not dead.…Most if not all of our tenant partners’ ceos tell us the most profitable division is the outlets and the least profitable is e-commerce. Look, the first announcement that brick-and-mortar retail was dead was when catalogues became prominent. I’m sure you remember getting 20 or 30 catalogues a week. The question became, “What do you do with the returns?” So virtually every catalogue company opened outlet stores.
Then it became home shopping. You could simply call the number on your TV screen and have products delivered to your house. Once again, 30 to 50 percent of the orders were returned and we have had both QVC and the Home Shopping Network as tenants.
So now there is e-commerce. It’s not a new phenomenon. We have been monitoring e-commerce sales for 20 years. E-commerce transactions for apparel and shoes result in anywhere from 30 to 50 percent of the products being returned. The same as catalogues. So there has been a shift in the past 40 years from a paper catalogue to a digital catalogue. We still estimate that 85 to 90 percent of apparel and shoes purchases are made in brick-and-mortar stores. Just for definitional purposes, we are not talking about books, wine, computer hardware, software. We are talking about fashion items. We do focus groups. We do all kinds of research and we target five generations at the same time. Our research shows that if you buy one product and you keep it, it’s convenient. If you buy three because you don’t know if you want color blue or white and you really don’t know if you’re a size 6 or 8, and you decided to return three, then it’s inconvenient because you have to repackage and go back to FedEx or UPS to have it sent.
At brick-and-mortar, returns are substantially less because you are there, you try it on, see how the color looks, you know what the fabric feels like. With e-commerce, you can’t touch it. You can’t determine the quality, if it fits the way you like, if the color is right for your skin tone. All these variables go away in a brick and mortar store, and by the way, there is free shipping because you bring it home with you.
WWD: How is your company doing?
S.T.B.: We are a stronger company than we were a year ago. Our balance sheet is a fortress. We issued $300 million of 3.88 percent senior notes due 2027 and bought back the debt at 6 1/8 due 2020. All of our long-term debt is in the 3 percent [range]. The next maturity we have on any financing is April 2021 for the term loan.
WWD: How is business and what trends are you seeing?
S.T.B.: We have been in a hard goods, durable goods cycle — products that last more than three years. You buy a home. You fix up your house. You buy a refrigerator, but you don’t buy those every year. Durable goods have been booming for three to five years. Nondurables like sweaters and dresses have not. My guess is there is going to be a shift. I think we are starting to see it.
The NRF as you know is predicting 3.5 to 4 percent growth and there is an extra day and an extra weekend between Thanksgiving and Christmas this year that hopefully will help. So everything seems to be lined up. We are very optimistic about Christmas and the holiday season. Our centers are well-occupied, the stores are well-merchandised, the products are well-priced and we guarantee the price of everything. So if it’s a normal weather pattern and normal geopolitical pattern, I think we will have a really good holiday, and I define that as basically November to Jan. 10. We are comfortable with the NRF forecast and would be very pleased to meet that forecast.
WWD: How has the spate of retail closings and bankruptcies impacted Tanger Outlets?
S.B.T.: We got 157,000 square feet of space back in 2015 and 105,000 square feet back in 2016, and this year we will probably get back 200,000 square feet. Keep in mind that’s out of 15 million square feet. It’s a very small percentage. It’s part of the process of retail where new tenants come in and replace weaker tenants that have failed. The real [issue] to focus on is can we refill the space. At year-end, we have guided the Street that we will be more than 96 percent occupied. If retail is dead, there would be no one behind those brands that go out of business to take their space. That’s not happening.
Retailers go bankrupt because their stuff doesn’t sell or they are overleveraged. I read the numbers and it’s just staggering the amount of write-offs. Rue 21 wrote off like $800 million in debt and now they have re-emerged and we lost a couple of Rue 21 stores but most of them stayed opened. Vitamin World went into bankruptcy. We may lose three or four of those, but most of those will stay open.
WWD: Are brands opening fewer outlets?
S.B.T.: It’s very brand-specific. The ones that are successful continue to open outlet stores. That’s how we are able to open Fort Worth at 93 percent leased. We opened a major expansion in Lancaster, Pa. We increased the size of the center by 50 percent and opened at 95 percent occupied, with a brand new Polo Ralph Lauren Factory Store.
WWD: What’s on tap for the future?
S.B.T.: We have no openings planned for next year. We have a “shadow pipeline” of several sites though we don’t buy land on speculation. For competitive reasons, we don’t announce these sites in advance. That’s why it’s called a shadow pipeline. I will just remind you that from 2008 to 2010, we did not deliver a single center. Then from 2010 to 2016 we had the largest growth spurt in our company’s history. When the market is right and we can get 60 percent of our tenants committed, we move forward. We never build on speculation, which is why we have been successful in maintaining at least 95 percent occupancy since the day we opened in 1981. In 36 consecutive years we have never ended the year less than 95 percent occupied. You can check the public records, but I think we are unmatched. Just think about how many different economic cycles we have been through – recessions, terrorist events, economic cycles and we have maintained that type of occupancy.
There are very few enclosed shopping malls being built and delivered today, the net mall shopping square footage is probably sinking and it was oversupplied, there is close to one billion square feet of regional mall space — 1,100 regional malls times 900,000 square feet on average. Those are big numbers. Today there may be 175 outlets totaling 80 million square feet. So when a new outlet center opens, it’s exciting, because it’s new, fun, unique and we open with the top brands in the world.