Jim Bieri adds insight in this April 2015 article in Shopping Centers Today
Can full-price stores and outlets co-exist in the same mall?
By Joel Groover
When retailers such as Abercrombie & Fitch, American Eagle Outfitters, Express, Gap, J.Crew or New York & Company convert full-price stores into factory outlet concepts, is that a desperation move, a savvy strategy or something in between? Among retail experts, perspectives on the question vary. Nonetheless, they say, certain chains clearly are more interested in “going outlet” with some of their full-price stores these days, particularly at ‘B’ and ‘C’ malls in secondary and tertiary markets.
“We had Abercrombie do that in one of our malls, a tier-two mall, a few years ago, and sales have improved,” said Stephen D. Lebovitz, president and chief executive officer of CBL & Associates Properties, on a fourth-quarter earnings call. J.Crew, too, is converting some of its mall stores into outlets, he noted. Chains are testing such conversions in markets where they believe their prices are too high compared to those of their competitors, Lebovitz said. “The J.Crew store at CBL’s Hamilton Place Mall in Chattanooga is a factory store, and it’s doing really well,” he said.
In a call to analysts last December, Michael Weiss, then CEO of Express (he retired this past January), said Express is mulling the benefits of transforming more of its mainline stores into outlets. The chain launched its Express Factory Outlet division last April with a store at Tanger Outlets National Harbor, in Washington, D.C. The chain has focused hard on outlet growth, and the division was reportedly on track to post $60 million in sales its first year of operation, or more than double the company’s projections. (Express declined an interview request for this article.)
A couple of years ago, Simon’s Towne West Square mall, in Wichita, Kan., lost its full-price Sears store. This month, however, Sears Hometown and Outlet Stores is set to open a 10,000-square-foot store at the mall. The concept gives consumers access to Sears Hometown and hardware merchandise as well as outlet goods the retailer bills as “new, one-of-a-kind, out-of-carton, discontinued, reconditioned, overstocked, and scratched-and-dented products.”
At Mills malls American Eagle Outfitters and Express have already converted all their full-price stores into outlets — 14 stores for American Eagle, and 15 for Express. “Sales in most cases have gone up dramatically,” said Gregg M. Goodman, president of The Mills: A Simon Company. “The customer has responded to the thought that there is a value proposition there for them.”
Gap has been quietly converting some of its full-price stores into outlets at both regional malls and strip centers, according to retail consultant Jeff Green, who heads an eponymous firm in Phoenix. Last year, in fact, Gap relocated an outlet store from the Traverse City (Mich.) Outlet Center to Grand Traverse Mall, a four-anchor regional mall built in 1992. Some developers are courting this phenomenon, Green says. Other developers say they do not want to encourage the trend. New York & Company, the wear-to-work retailer for women, is among the chains experimenting with outlet conversions of its full-price stores, according to consultant Josh Podell, who heads Podell Real Estate Advisors.
David Ober, president of Global Outlet Management, a consultant firm, is skeptical of the trend’s prospects for improving the lot of underperforming malls. “Retailers are trying to make the best of a difficult situation, which is that ‘B’ and ‘C’ malls are struggling to survive,” he said. “To date, this whole idea of opening up a few outlet stores in a failing regional mall has not been well received by the American female consumer.” Of course, many outlet chains, including Bass Shoe, Chico’s, Dress Barn, Nine West and Patagonia, have been opening new outlet stores in non-outlet locations for years. If a few retail chains start converting full-price stores into outlets managed by their off-price divisions, Ober asks, how will that improve the long-term prognosis for malls? “Just because this is occurring, it does not mean that, all of a sudden, that center is an outlet center or has the possibility of becoming one,” he said.
On the other hand, if the only other option is to take a huge write-off by closing that underperforming store, then turning it into an outlet is certainly preferable for both the chain and its landlord, says James McCandless, managing director of Streetsense, a Washington, D.C.–based multidisciplinary design and strategy firm. “Vacancy is the enemy of vibrancy,” he said. “It feeds more vacancy. Foot traffic is good for everyone.” Moreover, today’s highly efficient, omni-channel-focused retail chains have other compelling reasons to consider converting some of their stores to outlets, says McCandless. “They’re looking at the situation and seeing that they expanded and now probably have too many full-line stores,” he said. “Are they going to shutter them, or is there a way to create a new opportunity? This is a natural next step.”
In January ICSC’s Value Retail News published the results of a national consumer study in which research firm August Partners surveyed nearly 1,800 respondents about their shopping habits. Among the findings was that 91 percent of the respondents said they were always “looking for a deal” when shopping. Indeed, 27 percent said emphatically they “almost never shop full price,” and 23 percent said they “seldom” do so.
Nearly 40 percent of respondents, however, said they shopped less frequently at outlet malls, because they were too far away, and 55 percent said they would do more outlet shopping if the outlets were closer. As McCandless sees it, lagging malls are often in prime locations near densely populated areas. Thus if the market has shifted around a property, ramping up the number of outlet stores can expand its trade area as bargain hunters start heading to the mall rather than to far-flung rural locales. “There is an opportunity here to locate your factory store closer to that population,” McCandless said. “The mall will have fewer full-line stores, but people who want full-price shopping can make destination trips to the ‘A’ malls or urban downtown streets.”
And yet in the same survey, slightly more than 50 percent of the respondents cited the “number and variety of stores” at outlet malls as the top reason they patronized these centers. Can ‘B’ and ‘C’ malls with just a few factory outlet stores truly compete with sprawling, outlet-only properties? Again, Ober is skeptical. “Consumers know what an outlet center is,” he said, “and they know what a regional mall is.” Goodman, whose Mills properties blend full-price, outlet and other retail formats, takes a neutral position. “Customers are smart,” he said. “Yes, they are value-driven, but they are also constantly re-evaluating where they are shopping, and they are potentially becoming more and more fickle. I don’t know that wholesale conversion [of full-price stores to outlets] is an all-encompassing panacea for all product types in the industry.” Some chains are already so value-focused, Goodman says, that they would gain little by slapping “factory outlet” onto their stores.
Still, a clear evolution in retail is the desire among many chains to be able to operate in widely divergent types of properties, according to Goodman. And so, in a sense, outlet capability could almost be viewed as an extension of the omni-channel imperative. “Retailers are trying to give the customer what they want, when they want it, and how they want it,” he said. “Having another channel that is specifically value-priced in that way — and defined as an outlet — is something that could be viewed as another leg of the stool.”
Having outlet capability can boost retailers’ flexibility in part because off-price retail is no longer the preserve of mid-tier properties, says David D. Lobaugh, president of August Partners. “The industry erroneously believes that lower-income shoppers patronize outlet stores, which couldn’t be further from the truth,” he said. “Thus some want to relegate outlet stores to ‘B’ and ‘C’ centers. But we have great stats based on our consumer research, both nationally and on a market-by-market basis, demonstrating that among venue types, outlets attract a higher-average-household-income shopper, and a higher-fashion-goods-spend shopper, than malls.” Indeed, according to the VRN–August Partners survey, the average household income of outlet mall shoppers was $84,500, with an average apparel spend of $1,045; those figures were $82,518 and $1,008, respectively, for regional mall shoppers.
Regardless whether converting stores is a winning long-term strategy, it is certainly easier for chains to pull off today, now that so many of them operate their own outlet divisions. But one possible brake on the trend may be the potential for objections from other tenants, particularly department stores. “Among some full-priced anchor stores, there can be a concern that if the mall becomes a discount destination, consumers will be preprogramed to expect those discounts,” McCandless said. Nor would department stores necessarily want to compete directly with other chains’ outlet concepts, Podell says. “The good news is, a lot of the brands that are doing this or that would be good candidates for doing it — Express, Children’s Place, New York & Company, J.Crew, PacSun — are not sold in department stores,” he said.
There is even the possibility that Macy’s, which analysts say is on the cusp of moving forward with a T.J.Maxx-like off-price concept, could jump into this game. When and if Macy’s does launch its outlet brand, the potential for conversion of full-price mall locations in mid-tier malls is intriguing, says Jim Bieri, principal of Michigan brokerage firm Stokas Bieri Real Estate/X Team International. “Macy’s has been noodling around with the factory store concept for a long time,” he said. “If you are in a ‘B’ center doing $300 or $400 a foot, and your store is not breaking even,” Bieri said, “what have you got to lose?”