09:42 pm
12 February 2016

The Convergence Era

The Convergence Era

Retail historians often refer to milestones or eras in the evolution of the shopping center industry. From Downtowns to the Regional Mall, Power Center and Lifestyle Center Eras, each has represented advancement in the theory and practice of how consumers shop.  If we are to define the industry in eras, then we are perhaps about to enter the “Convergence Era.”

Outlet stores are not new. But these days they are increasingly “news.”  B-i-g news.  And the big news is that off-price outlet stores and traditional retail stores are in the process of converging in shopping centers nationwide.

The collapse of class B and C malls is well underway.  While about 60 percent complete, it won’t be long until an estimated 500-plus additional malls close taking with them much of the apparel and housewares business of retail giants like Macy’s, Sears, Dillard’s and JCPenney.  When these malls disappear, small store retailers operating in them must plan for the replacement of hundreds of lost stores and billions of sales dollars.

As this trend continues, savvy consumers have figured out that brands – whether last year’s fashion trends featured at T.J.Maxx and Ross Stores or made-for-outlet (MFO) jeans offered at Banana Republic Factory Stores – represent the value proposition they want as they increasingly embrace the blurred lines between premium brands and their MFO cousins.

Retailers and developers have begun to exploit these conditions by challenging convention, placing outlet format centers in previously forbidden territory while even more audaciously blurring the lines by introducing outlet stores in full-price centers.  Is the introduction of a J.Crew Factory store into Cincinnati’s Rookwood Commons Shopping Center the beginning of the end of the center – or more likely, an example of the new Convergence Era in premium brand retailing?

From the early days of factory outlet shopping in Reading, Pa., to the introduction of “Mills-style” shopping in Woodbridge, Va., consumers have come to appreciate having the choice to buy trusted brands at full price and at off-price factory prices even if it requires shopping trips lasting all day to far-flung locations to find the bargains.

These all-day trips to find the deals are, however, quickly becoming a thing of the past as developments like the Tanger Outlets at National Harbor just outside of Washington, D.C., and New England Development’s Palm Beach Outlets in Florida hit the scene. Moreover, mounting evidence seems to suggest the emergence of a new retail paradigm in which outlet stores are increasingly being blended with traditional retail, along with other new drivers like restaurants and theaters, to create new shopping options.

Three key trends seem to explain this growing evolution: the decline of the department store, the transfer of many class B and C malls into the hands of newly formed caretaker owners from stronger premium mall owners, and the increasing willingness of consumers to more broadly embrace outlet stores.

The Decline of the Department Store

Department stores continue to experience negative growth while discount apparel represents the fastest growing segment in both commodity and specialty brick-and-mortar retail.

Department stores –not just Sears, JCPenney and Macy’s, but even Nordstrom full-line stores – are increasingly under assault. This year, commodity retailers Ross, Marshalls, T.J.Maxx and Nordstrom Rack will together add over 250 stores.  ULTA Beauty will add another 100 stores, and Sephora maintains a large open to buy.  Home Goods and Bed Bath & Beyond also continue to seize the opportunity to gain market share and are opening stores at a brisk pace.  And this year, Swedish retailer H&M will add the bulk of its 400-plus new stores in the United States and China.

As a result, the department store industry, which has been in a slow and steady decline for decades, is reeling.  Department store giant Macy’s recently lowered sales guidance for the year, while regional favorite Belk announced that it has hired Goldman Sachs to assess “strategic alternatives.”  All this is happening while Sears slowly carves itself into REIT obscurity and JCPenney struggles to regain sales from its disastrous courtship with Ron Johnson.  The result: Each month, more and more B and C malls quietly slip into receivership or a date with the “special servicer” while powerless to stop the megatrends behind their slide into retail obscurity.

Caretakers vs. Mall Owners

Today’s B and C malls – which are mostly disassociated with their now vastly consolidated A mall owners like Westfield, Macerich, GGP, Taubman and industry giant Simon Property Group – are no longer being supported by their stronger former owners, leaving hundreds of weaker malls primarily in the hands of caretakers like Washington Prime, Rouse and fledgling Starwood Capital.

As a result of the weakened department store industry and the loss of ownership leverage created by decoupling B and C properties from stronger A mall REIT owners, retailers and manufacturers who control coveted upscale brands are less likely to keep unprofitable stores open and are more likely to place competing outlet versions nearby.  The result? Retailers and competing developers are now aggressively placing off-price outlet stores in locations previously considered off limits, and retailers like Banana Republic, J.Crew and Brooks Brothers are leading the charge.

Consumers Embrace Outlet Stores

Consumers now not only accept outlet stores as readily as their full-price siblings, but they may well prefer them.  Consumer research firm August Partners has been tracking this trend for years.  In a recent national study of the top 50 U.S. markets conducted in partnership with ICSC/Value Retail News, August Partners’ president, David Lobaugh, concluded, “The results confirmed … that outlet center shoppers out-earn and out-spend mall shoppers on fashion goods; further, that they dine out more often and spend more on dining out … and that they are more brand-aware and brand influenced.”

Lobaugh also points out that outlets generate nearly 10 percent of U.S. shoppers’ visit share, yet according to ICSC/CoStar figures, the segment represents less than 1 percent of shopping center industry GLA.  And while malls generate nearly 14 percent of tested venue traffic, they represent 18 percent of industry GLA. This would seem to indicate that the outlet segment, contrary to the viewpoint of many veteran industry analysts, is far from being overbuilt and may even be vastly underbuilt.

With these trends firmly in place, blending of full-price and off-price apparel has become not only accepted, but has become a strategy of preference for so many retailers that it may well be leading the industry to its next big evolution, the “Great Convergence” of full-price and outlet stores.

Traditional small store mall retailers, faced with the eventual loss of thousands of stores as B and C malls fade into obscurity, are increasingly turning to outlet stores to fill the gap.  Even “disposable” clothing retailer Forever 21 has developed an off-price version of itself labeled “F21 Red.” Moreover, developers are facilitating retailer expectations by rapidly adding outlet centers and removing any pretense that any functional distinction still exists.  This led ICSC’s SCT Week to pose this question in a recent article headline: “Can full-price stores and outlets coexist in the same mall?”

One drive down Florida’s Interstates 4 and 75 illustrates the transitional state of affairs in the specialty retail portion of the shopping center industry.  Premium Outlet centers in Orlando and Ellenton pump out record sales, while in nearby Sarasota, the development team of Taubman and Benderson reverted to a traditional mall format with relocated Macy’s, Dillard’s and a small Saks Fifth Avenue store anchoring its gleaming new Mall at University Town Center (UTC) project.  Restaurants are relegated to the perimeter of the mall, while right across the street, Nordstrom Rack, which substitutes for the cancelled full-line Nordstrom store once planned for the site, sits alongside Ross, T.J.Maxx, Steinmart, Bed Bath &Beyond, HomeGoods and ULTA Beauty.

While the jury may be out on Sarasota’s UTC center, it is not out on the rapidly emerging Convergence Era. Following its successful introduction of The Fashion Outlets next to O’Hare airport in Chicago, Macerich is teaming up with Philadelphia-based PREIT to reintroduce a 1.4 million square foot Gallery mall in downtown Philadelphia as a premium brand outlet offering.  Macerich is also leading the development of another outlet center at the former location of San Francisco’s Candlestick Park.

And could anyone have imagined, even a few short years ago, an urban-style mixed-use center positioned squarely in the middle of the outlet retail spectrum featuring additional offerings like LEGOLAND Discovery Center, AMC Theatres and over a dozen restaurants from Legal Sea Foods to Vancouver’s Earls Kitchen + Bar and a PAUL bakery?  Perhaps not, but that is exactly what Federal Realty Investment Trust created in its unprecedented 45-acre Assembly Row project just outside downtown Boston last year.  Assembly Row features those retailers and more in a mixed-use street format along with high-density residential and state-of-the-art office space situated next to an MBTA Orange line transit station, a perfect example of convergence in practice.

Watch for developments like these to not only continue during the Convergence Era, but to accelerate in the coming years.  As retailers find greater sales and profitability in their outlet formats, and as B and C mall sales opportunities continue to contract, the industry may well see Convergence Retail emerge as the dominant middle-market specialty retail format particularly as the final chapter in the end of the Regional Mall Era is written. Savvy consumers who are quite pleased with Convergence Retail will have the final say. Is anyone betting against them?