Outlet centers are hungry for more locations and are no longer content to be in the hinterlands. They are increasingly invading full-price stores’ traditional territory and retailers seduced by new profits are willing to take the risk of cannibalizing sales.
Kurt Salmon’s research determined that the close geographic proximity didn’t hurt the sales of full-priced stores and in some cases they grew as the closeness created sales opportunities. The research cited Nordstrom as an example, with instances of a Nordstrom Rack store next to a full-price Nordstrom. Another example of close quarters is Saks Fifth Avenue and an off-price Saks Off 5th both opening in lower Manhattan.
These examples may show full-price and outlet living in harmony, but that isn’t always the case. Look at Coach’s outlet center history. In 2004, Coach’s outlet stores were usually 50 to 100 miles from major cities and by 2012 that distance had shrunk to 30 miles according to Kurt Salmon research. However, Coach said in its last annual report that it was only going to see modest to no growth in its outlet stores and it was trying to recapture its luxury brand appeal after diluting its brand with too much promotional outlet product.
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“It’s absolutely a fact that outlets are getting closer to full-price,” said Steve Ferris of JLL. “The sensitivity barriers have broken down over the past five years.” He pointed out that the Twin Cities Premium Outlets in Eagan, Minn., opened within five miles of the Mall of America, the country’s largest shopping mall. The argument for proximity is that these are two different customers and therefore there shouldn’t be any risk to sales, but stores with locations at both Mall of America and the Eagan outlet mall reported a loss of business at the full-price store. Jill Renslow, senior vice president of business development at Mall of America said, “The brands that have a presence at both locations were the ones that may have been impacted.”
An outlet mall that springs up in an area where there is a limited amount of shopping dollars is another problem. “It really is location-driven,” said Ferris. If an outlet mall is built within 10 miles of a “B”-rated mall, it is affected. For example, the B-mall generally won’t have a brand name store like Tommy Hilfiger, whereas the outlet mall probably would. “I think by an large it’s a very competitive environment between outlets and full-priced big-box stores,” said Ferris.
While it feels like outlet centers are being built right and left, it’s actually slowed from the crazy years between 1986 and 1995 when Value Retail News said that 29 centers opened every year. That number has slowed to 18 outlet centers opening between 2014-2015 or roughly nine per year. Salmon research also noted that with the channel reaching a greater state of maturity it was inevitable they would encroach on full-price stores.
It is widely accepted that America had overbuilt malls. The addition of new full-price retail slowed dramatically in 2013 according to the International Council of Shopping Centers and that’s before the avalanche of retail bankruptcies at the end of 2014 and beginning of 2015. Instead of building, full-price malls are closing. Green Street Advisors analyst DJ Busch said, “Since 2010, more than two dozen enclosed shopping malls have been closed, and an additional 75 are on the brink.” Ferris also commented on the trend saying for the 41 outlet malls he knew opened over the past four years, only one or two full-price malls were created. Ferris said, “There’s only a finite number of dollars.”
So if the outlet malls are capitalizing on the death of full-price malls, it was only a matter of time before they would begin invading each other’s territory. In Connecticut two outlet malls are vying to build within 15 miles of each other. Simon Property Group has plans for Windsor Locks to begin construction in 2016, while Horizon Group Properties has a similar construction schedule for East Hartford’s Rentschler Field. Simon seems to have the governor’s backing, but Horizon says it has also talked to state officials. It is expected that the area can only support one outlet mall, but neither seems to be backing down. Back at the Twin Cities, Mall of America isn’t competing with one outlet center, there are two — Twin Cities Premium Outlets in Eagen and Albertville Premium Outlets. The two centers say that they haven’t had any problems with losing customers, but then they are both near an international airport drawing tourist dollars.
With retailers looking to outlet malls for their new profits and survival, the battle for geographic territory is heating up. Salmon research wrote that the encroachment “is making it challenging to maintain the historic level of separation and forcing many retailers to rethink their off-price channel strategy.”