The future of the outlet mall industry
The outlet mall industry has undergone a major transition during the past decade and has never been better positioned for future success. This is a significant change from 10 years ago when a stale product mix targeted to a transient shopper base had raised serious questions about the viability of the outlet mall.
However, just as outlet malls were seeing early signs of maturity, the credit crisis and recession hit and with those economic developments were born a new breed of price-sensitive shoppers who sought to eliminate the middle man and buy direct. Outlet malls were the beneficiaries of this new shopper dynamic and by redefining their product mix and building properties in more strategic locations, we have seen outlet malls leap to the next level. This renewed success is no short-term blip.
It is important to understand the evolution of the outlet mall as a prelude to where the industry is headed. Outlet malls originated in 1980 as a way for manufacturers to sell surplus or irregular stock while offering consumers a truly great deal. They were built outside major metropolitan areas, relied on tourists as a large customer base, featured tenants not found in traditional malls, and maintained a markedly different feel from the regional shopping center. Consumers had a clear choice between two totally different shopping experiences. Today there are approximately 51 outlet mall landlords operating properties where outlet stores account for at least 50% of the tenants and 11 of these landlords own more than one property. Major players include such familiar names as Simon Property Group, Tanger Factory Outlet Centers, McArthurGlen, and Craig Realty Group, who combined own 154 of the industry’s 200 properties.
As the industry has matured, the lines between the outlet and traditional channels have become increasingly blurred in terms of tenant mix and physical location. Although malls have usually only been labeled an outlet if 50% or more of the tenants are manufacturers selling directly to consumers, more and more traditional mall retailers are opening outlet stores. They are also building in more well-populated areas and carrying goods with less dramatic mark downs. While these changes have pushed outlets closer to how we typically define traditional malls, outlets will always distinguish themselves by selling somewhat older products at a lower price point. Despite featuring more mall retailers and some higher-priced goods, shoppers are unlikely to find all fashions for the current season at an outlet, nor will they see the entertainment options available at traditional malls like movie theatres and a diverse restaurant selection.
Outlet mall strategies have changed for several reasons. The increase in gas prices form a decade or two ago affected shoppers willingness to drive one or two hours to a distant outlet mall. The crash of the capital markets also brought significant job loss and a more cautious approach to spending, which changed consumers’ shopping patterns. They’re now looking for ways to extend their dollar on all goods.
Developers also recognized the need to appeal to new customer segments in order to thrive. While international tourists have traditionally flocked to outlet malls, their travel decisions are heavily dependent on the value of the dollar and tourism dollars are already limited. By building more properties close to major hubs, outlet mall developers diversified their customer base to attract more everyday repeat shoppers looking for bargains.
This geographic shift is the most important reason the industry is thriving today and will continue to do so in the future. For example, Houston is currently receiving significant attention from outlet developers. Tanger is looking in southern Houston, in and around League City, and is considering land at the intersection of Interstate 45 and FM 646. Simon Properties has expressed interest in Texas City and Taubman has expressed interest in the Houston market but has not confirmed specifics about the locations.
The recession also created a more equal playing field between outlets and traditional malls. Full-price retailers have struggled during the economic downturn and outlets have captured a portion of their lost sales. This has prompted some retailers to open stores in outlet malls as a way to reach different consumers, which has strengthened these properties by attracting additional shoppers. Difficult times have created a new type of outlet consumer—those who never shopped at outlet malls in the past but are now drawn to discounted prices on higher-end items. Retailers like Saks Off 5th cater to this new consumer base, which hasn’t always been on the hunt for a good deal.
All of these changes have led to today’s outlet malls, which to some consumers may seem like a false promise. Traditional retailers’ move into outlet properties has confused the consumer, obscuring the “good deal” outlets have always offered. With outlets now carrying more necessity items and high-end goods, the truly great deal is sometimes harder to see – but they definitely still exist.
It is this ability to give consumers better overall value than traditional malls that ensures outlet malls are well-positioned for the future. Certainly, as the economy improves and consumer confidence rises, some shoppers will revert to conventional malls, but outlets have a loyal historical customer base that will continue to shop there thanks to consistent value and a wider range of products. Some traditional retail tenants will also likely return to conventional malls, but most major landlords recognize this and have ensured the majority of centers are not designed around large retailers like Nordstrom Rack. Longstanding outlet tenants have consistently found success with these properties and will remain in this space thanks to the industry’s move into highly populated and well-trafficked geographic areas.
Another key factor is the experience versus value proposition that serves as the fundamental defining difference between traditional malls and outlets. Traditional malls are always trying to improve customers shopping experience by adding new entertainment options like bowling alleys, mini golf courses, dining options and amusement rides. Outlet malls are purely focused on value, nothing extravagant or entertaining about the experience, aside from finding a good deal. Outlets that follow this strategy will be consistently successful in the future.
Richard S. Hauer is a managing director in the New York office of BDO Consulting where he leads the real estate practice area for the Business Restructuring Services Group. He has more than 25 years experience in the commercial real estate industry advising a client base of REITs, retailers, financial institutions, creditors’ committees and developers. If you have any questions, email Richard at firstname.lastname@example.org.