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By: Rob Walker

Here’s a question to add to your Christmas trivia quiz: What do Buckingham Palace and Bicester Village have in common, beyond the fact both are in the UK?

The clue is that one, in central London, is home to the Queen of England. The other, in leafy Oxfordshire, is home to hundreds of factory outlets selling merchandise at hefty discounts on mainstream retail. Both places have their fair smattering of luxury. Buckingham Palace has its throne room and fine art. Bicester Village has its Ralph Lauren polo shirts and Michael Kors handbags.

The answer is that these are the two most popular destinations for hundreds of thousands of Chinese tourists visiting the UK every year.

Surprised? Buckingham Palace is a given as a tourist attraction. But when you think about it, so too is Bicester Village. After all, this is where aspirational and brand hungry consumers can scoop up bargains from many of the world’s most famous fashion houses.

In fact, out-of-town outlet centers like Bicester Village are increasingly big business. In North America, where they are most visible, 41 have opened in the last four years comprising a total selling space of around 15 million square feet. There are roughly 60 more in the planning phase, overseen by more than 30 different development groups.

Across Western markets, outlet centers have proved strong performers during periods of weak economic growth. Now, yield-hungry developers are sizing up untapped opportunities in the emerging markets. Latin America, in particular, is generating a great deal of interest.

A Latin American conundrum

In Western markets, most leading fashion houses have shaken off their initial reticence and embraced outlet centers. So much so that big names such as Gucci, Armani and Prada now openly push their factory stores as shopping destinations in their own right. It makes sense. There is probably no better channel to offload surplus stock and last year’s lines, and without necessarily diluting the cachet of full price stores.

There is no shortage of appetite for global fashion brands in Latin America, but retailers have so far shown little interest in factory outlets. They do have a small footprint, notably in Mexico, Brazil and Chile, but there have been few success stories. Overall, the concept pales into insignificance compared with the boom in mainstream shopping malls.

“The problem is that there’s no expertise yet in designing outlet centers in Latin America. This is something that won’t change in the short term. The industry still needs another five years or so before it can be developing at the same pace as Europe and the US”, says Jorge Lizan, managing director of Lizan Retail Advisers and an expert in Latin America retail real estate.

Mr. Lizan points out that leading retailers in Latin America lack the merchandise and operational capacity for factory outlets. As a result, he predicts failure for some of the firms currently investing in the sector.

“Most likely they will make a lot of mistakes and I predict some of those in Latin America are going to be in trouble in a few years. Some will turn into traditional shopping centers because they won’t have enough factory stores to sustain an outlet center in the long run”, he says.

To be clear, an outlet center is defined as having at least 50% of its space taken up by factory stores. The rest of the space might be for food, entertainment or even for stores that are not factory outlets per se. The fast fashion retailer H&M, for example, is visible in some outlet centers in the US in its normal full price format. It fits in because its price points are comparatively low.

How do shopping malls and outlet centers differ?

The distinction between shopping malls and outlet centers is not simply about pricing. Outlet centers are typically in the open air and have fewer luxury trappings than mainstream shopping malls. Their leases also tend to be shorter than full price malls (at around 10 years) and are normally tied to sales performance. Investors argue that the flexibility of the leasing is what makes outlet centers so financially resilient.

Mr. Lizan’s point, though, is that the majority of influential retailers in Latin America are not properly geared up for outlet centers. Hence, it will be difficult to meet the criteria, and some developments will necessarily convert into traditional shopping malls. One of the problems, if that happens, is that these discount/full price hybrids will end up competing directly with a plethora of well-established glitzy shopping malls.

It is important to keep in mind that in the past decade shopping malls have boomed in Latin America. Middle class families, especially, have embraced them because of what they perceive as unrivalled shopping security, as well as access to plenty of weekend entertainment (food courts and cinemas, for example).

The no-frills aspect of most outlet centers might be a difficult sell in Latin America, especially if they deviate too much from the US and European models. In short, developers need to get the mix right from the outset and not allow outlet centers to morph into half-baked shopping malls. Their competitive differentiation from shopping malls is key to their future success.

Eyeing up the next frontier

Outlet centers are probably more a long-term than a medium-term opportunity for Latin America. But that will not stop a wave of new developments coming to market over the next few years. The reality is that some of them will do well while others will fail.

There is widespread industry consensus, however, that outlet centers will grow in size and penetration over the next two decades, not only in Latin America but globally. Arguably, their low price structure makes them more future proof to the rise of Internet retailing than traditional shopping malls, which are already feeling the competitive pinch.

The huge volume of Chinese (not to mention Brazilian, Russian and Middle Eastern) tourists trawling the factory stores of Bicester Village in the UK, many pulling suitcases packed full of purchases, is testimony to the lure of outlet centers among the emerging middle class. Retailers, for different reasons, will love them or loathe them. But, as a bricks-&-mortar shopping concept, it looks like they will only get stronger.

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