The Outlet Channel: Overheating? Risks and Opportunities for Investors and Operators

Retail has become a tricky business over the last years.

Declining retail footfall is the consequence of multiple factors, amongst them:

  1. changing consumer habits, especially of generation Y, and likely Z to follow on its heels. Other stuff became important. Teenagers don’t want bicycles, they want smart phones, and generally less stuff and more experiences.
  2. We also buy so much more online, either for reasons of convenience (can’t be bothered to get off my couch) or because we are looking for something very specific. It is so much easier to find a highly specific product, read impartial product reviews, find how-to tutorials all online.

Price may well be the last of the frontiers, and per se, does not exist anymore. Full price is discounting, online is discounting, outlets are discounting, with special sales, pre-season sales, in-season sales, private sales, Black Friday, friends and family etc…

We all know this.

But, actually, the simple truth is: Too much stuff, too few buyers.

It is a race to the bottom, first eroding and eliminating those that have the highest fixed costs. That was ironically often the mama and papa shop around the corner, the local outfitter in a smaller town. Furthermore, there are many intermediaries in the physical supply chain, fewer in digital supply chains. Digitalisation removes them one by one. Today we see retailers struggle, tomorrow – unlikely as it may seem right now – we may even see powerhouses such as Amazon struggle as Apps such as Wish connect the manufacturer directly with the end consumer.

As a supplier to this market place, to have a strong brand in this environment helps, if you can control the distribution. It still sells if you have an omnichannel presence. As a pure play brick and mortar retailer its harder, since attracting footfall has never been tougher. Future success in this space will require significant re-invention.

One of the distribution channels that has bucked this trend for a long time (in Europe) is the outlet channel. Generally growth has been positive for many schemes, in terms of footfall growth and spend per visitor / share of wallet.

Many outlet centres were located far away from key cities, with politicians fearful that lower prices would erode the existing retail in the city and town centres in the adjacency. Brands were sensitive to having an outlet store close to their full price flagships. In consequence, outlet schemes often had strict planning restrictions from their local councils regarding what category product they were permitted to sell and sometimes also in what pricing structures. Oftentimes categories such as books, electronics and personal care were excluded from the outlet permissions.

Just today I reviewed an article in the German magazine “Handelsblatt” showing the relative strength of Amazon in categories in Germany such as eletronics & computer, books, toys, sport and leisure, home and garden / DIY. Note that precisely these categories are often restricted in outlet planning permissions, funny, isn’t it. Then there is the rapid growth in recent years of Zalando, focussed on textiles.

It is safe to say that the outlets have played a minor, perhaps even irrelevant role, on inner city retail decay compared to the massive impact of online retailers. In this context, Alibaba just recently sold almost 10 billion dollars in one hour alone, on Singles Day 11.11.2018. Point made.

However, in my own observations, the same factors mentioned above are starting to affect outlet centres too. It is so much harder to attract footfall, and given that the outlets had a price advantage historically, the consumer expectation is that this advantage continues to hold true. Why else would I drive an hour or two for last season’s goods if I am not going to shoot a bargain, risking that my size might not be available? Actually, I could also do it from the comfort of my couch at previous season sites such as VentePrivee. Furthermore, new developments such as Saks Off 5th Avenue, as well as existing inner city discounters such as TK Maxx, bring the off price business into the heart of the city. El Corte Ingles, with its retail dominance in Spain, is opening its own outlets.

It is pretty clear from above where the risks lie for retail, and equally for outlet schemes located far from concentrated catchment areas. For remote outlet schemes, you are competing with other ways the consumer may want to spend his time (for example going fishing instead). But more importantly, the cities providing your catchment are also developing and adjusting to the new retail world. They may become more or less attractive as a result. Another article covers inner city development considerations, see Our inner cities of tomorrow.

So, unless you are in the fortunate position that you are an outlet scheme in which the tenant list reads like the who’s who of luxury fashion, here are the factors that need to be nailed to be successful:

As an outlet, your mantra is likely not going to be location, location, location. It better be experience, experience, experience. Play your advantage, you control the perimeter, and much inside of it:

How to get the guest experience just right:

  1. You need razor sharp focus on what you want to be to whom. Do you want to be a regional provider, then your merchandise and brand mix needs to reflect the needs of the regional catchment, and will likely be a multiple gender / category / price positioning brand mix. Do you want to cater to high net worth individuals, and attract tourists to come to you for destination shopping, then you need to have luxury drivers with a blend of local specialities. Do you want to be known for a particular specialisation, such as sports, outdoor, or do you want to focus on families, or a particular gender. Do you want to position yourself as young and hip or rather more traditional? Similar considerations will apply to aligning your food and beverage offering, as well as to the services, entertainment and promotions you provide.
  2. The same razor focus continues when communicating what you are, identifying when your target audience is receptive, through what media channels, and with what content. In this context: it is challenging to alternate your consumer profile, but it is possible to alternate your catchments and / or your reach for various campaigns or retail moments in a given year.
  3. You got everything right so far – which was under your direct control. You positioned yourself well with the right crowd. They came in droves. Your place is spotless and your front desk staff flashed their best smile. Just too bad the guests walked into one of the boutiques and got lousy service. The highest retail standards require close cooperation with the brands you serve, excellent relationships, and constant motivation of store managers to be engaged in the overall centre strategy. Each store is an ambassador for the scheme, just as the scheme is an ambassador for the brands.
  4. Ensure building permissions allow you to build the customer experience you want: An outlet center of 100 stores will provide somewhere between 1000 and 1500 direct jobs, and this will frequently be in rural or structurally weaker areas that depend greatly on these livelihoods, and the taxes that come with it. Work with your local council to ensure that planning permissions are supportive of future growth drivers, as they need the outlet scheme to be successful, as much as you want it to be. That may include relevant categories to round off a product offering, or to enable razor sharp focus. In this context, service offerings will be particularly relevant (see point 1). Given that the physical retail world has changed so much, planning permissions need to be adjusted, and local authorities will need to become more flexible.
  5. Consider the auxiliary services you offer. A tax free refund booth is obvious, tailors, childcare, entertainment, international shipment, payment methods familiar to your local clientele as well as your tourists.
  6. If your focus is tourism, which has been one of the strongest drivers of retail and outlet shopping, especially at the higher end of the market, you need to start your work in the source markets, and trace your visitors all the way through their journey, work with tour operators and guides, as well as the local tourism industry to ensure your activities have traction at a till near you. Needless to say, if you attract Mandarin speaking tourists, it helps to have Madarin speakers in your teams, as well as the boutiques.
  7. Everybody seems to be hungrier to eat these days than to shop, good F&B increases dwell times, and actually has become a footfall driver in its own right.
  8. The whole shopping experience has to be amazing, simply fabulous, from the moment the customer hears about you, sees your advertising, plans her trip,  parks her car, in the tourist / customer reception, in stores, at breakfast, lunch and dinner, and in the follow up of the customer relation through your CRM channels. One adage of old still holds true, there is nothing like a personal recommendation from a trusted source. Social media has amplified and accelerated this through Instagram and Facebook.

Further considerations for investors:

  1. Outlets are currently proliferating and a lot of investment is flowing into the sector. As mentioned above: Too much stuff, too few buyers. Some schemes will fail if they cannot adequately position themselves in a catchment, differentiating themselves clearly against other shopping centres, or if their catchment is too small in the first place.
  2. Brands, brands, brands: The total product offering, and therefore the positioning, is based on the brand mix of your centre. Brands are fickle, especially when they sign lease contracts. Most other factors can be controlled or purchased, brand decision making only influenced.
  3. There are a number of very capable owner-operated schemes, however fewer highly capable independant operators. That will be an important consideration when choosing to invest in schemes. Interestingly, in counter argument, it is a German stand-alone center that has just taken the lead in the 2018 European rankings as most economically viable center (from a tenant perspective).

The beauty of the outlet sector over full price retail is that there are many more levers to tune the machine, and when the stars align, square meter turnover can reach dizzying heights. But beware, there are winners and loosers and so it will be with new schemes.

As usual, I welcome your thoughts and comments.