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Luxury Outlet Stores on the Rise, Malls Take a Backseat

Luxury retailers are tapping into the outlet market, encroaching on traditional stores and drawing deal-hungry consumers.

And some say malls could suffer as a result.

According to a Value Retail News (VRN) report titled, “2014 State of the Outlet Industry,” published last month, forty outlet centers have opened in the U.S. since 2006 while just one regional mall opened in the same time period. In the last year, the number of outlet chains grew from 322 to 368 and many of these off-price stores are located considerably close to regular stores.

“The outlet centers are getting a lot closer to full-price retail malls,” Robert Cohen, a broker with retail real estate firm RKF told the Los Angeles Times. “It used to be that they wanted to stay as far away as possible so they didn’t compete.”

But as discount shopping has become more prevalent with constant markdowns, and high unemployment conditioning consumers to bargain hunt, opening outlets has become necessary to brands’ global strategies.

Arthur Weiner, chairman of AWE Talisman, said, “The brands need outlets for disposal, made-for-outlet, piece goods, no matter what, they need outlets. And outlet centers have flourished because of that. There is just a small handful of brands that still don’t have outlets,” according to the VRN report.

A sizeable group of new brands are moving into outlet space for the first time, and many of those newbies hail from the upscale market.

Jimmy Choo, Anne Fontaine and Roberto Cavalli have joined the off-price retail ranks, and Alexander McQueen opened its first U.S. outlet store at Desert Hills Premium Outlets in Cabazon, California last week.

The McQueen store opening was part of a $100 million fifty-store expansion at Desert Hills–owned by Simon Property Group (SPG)–that also included the addition of CH Carolina Herrera, Fendi, John Varvatos, Rag and Bone and Valentino stores.

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“The discounts may be relative; McQueen was featuring an orange snakeskin clutch with ornate skull detailing – marked down 20%, to $1,839. But the outlet malls that retailers have long used to unload excess or out-of-season merchandise are going way upscale, welcoming haute couture brands and challenging full-price shopping centers in the process,” according to the Los Angeles Times.

Expanding into the outlet format has given retailers an opportunity to target a new market of bargain buyers and has put them in a position to pull market share from full-priced malls.

According to a Cowen and Company research report titled, “There Are Always Winners and Losers in US Retailing,” the department store segment has been steadily losing market share for over twenty years, which has ultimately affected sales performance and growth at malls. Sears’ struggles and slowing sales at stores like J.C. Penney are evidence of the department store’s decline. So far, the biggest beneficiary of the shift has been the off-price sector.

The market has shifted in favor of discounters, according to Cowen, because the consumer loves value and traditional retailers can’t beat off-price stores in terms of value for money, and because massive unit expansion in home and apparel specialty stores has created competition for traffic. “As the world becomes awash with brands and apparel manufacturers — Off- Price has become a valuable door of distribution,” the report noted.

Eleven outlet centers opened last year and eleven more are planned for 2014, VPN noted, and experts predict robust growth for the industry. In North America, plans in the pipeline through 2016 include fifty-five projects totaling 21 million square feet, plus eighteen expansions that will add another nearly 2 million square feet.

SPG chairman and CEO David Simon told VPN, “When we bought the outlet business [in 2004], the [net operating income] was roughly $400 million,” he said. “Today, it’s $1.3 billion.”