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The Outlet Industry Turns 20

Two decades after the first enclosed outlet mall opened in 1980, the industry has matured without wavering from its original mission: providing manufacturers a venue for surplus stock and offering consumers a good deal.

One of the outlet industry's pioneers was Stanley K. Tanger, who, after 30 years of operating a shirt manufacturing business, discovered a way to dispose of overstocks, overruns and irregulars. Despite skepticism from lenders, in 1981 he opened five small outlet stores to sell excess inventory directly to consumers.

He soon found that Stanley K. Tanger & Co. could make a profit on unprofitable merchandise and give consumers a savings of 30% to 70% off retail prices. When he needed capital to respond to increasing demands by tenants for new centers, Tanger in 1993 became the first outlet mall developer to be sold on Wall Street. With the infusion of capital brought by the formation of increasing numbers of REITs in the mid-1990s, the industry grew to more than 320 centers nationwide by decade's end.

"The basic concept of the outlet center remains consistent with what it was 20 years ago," says Steven B. Tanger, president and COO of Greensboro, N.C.-based Tanger Factory Outlet Centers, which now boasts 31 outlet centers totaling 5 million sq. ft. in 23 states. "People still like to buy direct from the manufacturer and cut out the middle man."

Still, outlet centers have evolved over the years. They've moved closer to major metropolitan areas and have become more sophisticated in terms of design, marketing and entertainment options. And like other sectors of the shopping center industry, outlets have had to confront the Internet.

Internet: friend or foe? Some outlet center developers have adopted the attitude, If you can't beat 'em, join 'em. Baltimore-based Prime Retail recently announced it will invest $15 million on The developer plans to charge manufacturers for space on the website, which will allow manufacturers to conduct Internet sales and will offer fulfillment infrastructure. Prime hopes the virtual outlet mall venture will increase traffic and sales at its 51 locations.

Memphis-based Belz Enterprises, a mainstay of the outlet industry since its inception, is developing "E-commerce has added another distribution channel, and retailers will have to be represented in that space," says Andrew J. Groveman, president of Belz's factory outlet division.

For its part, Tanger remains off the Internet bandwagon. In 1995, the company began guaranteeing consumers that the price they paid for name-brand products would be the best price available on those products from any channel of distribution, including catalog or Internet.

While admitting the Internet will change consumer habits, Steven Tanger expresses confidence in the staying power of outlets based on past history. "We were told we would be out of business with the advent of catalogs because people would stay home and shop; that obviously was not true," he says. "We ended up with virtually every catalog company as a tenant in our outlet store.

"Then we were told we'd be out of business because of home shopping channels, and now there are QVC and Home Shopping outlet stores," he continues. "Then we were told we'd be out of business because of the Internet, and now we're in negotiation with several e-tailers looking to rent outlet space."

The Internet, Tanger notes, has encountered the same problem as home shopping and catalogs: the large number of returns. The return rate can be as high as 25% to 30%, he says, and the items are difficult to resell if not returned in the original packaging, which cuts into revenues.

Tanger's company is monitoring the Internet as a potential sales medium, but so far results are inconclusive.

"We have not seen any negative impact on outlet sales," he reports, "and traffic was up significantly during the holidays."

Embracing the Internet more aggressively is The Mills Corp. Last fall, the Arlington, Va.-based firm struck a deal with eBay, the Internet auction website. In December, Mills conducted live auctions at its centers, which were promoted on eBay and broadcast on Mills TV.

The two companies have much in common, according to Mark Rivers, executive vice president of The Mills Corp. "It captured the imagination of consumers," he says. "I think we'll start to see more of that."

Mills auctioned shopping sprees and gifts from Mills' retailers on their own eBay web pages in addition to the live auctions. Rivers says Mills will be investigating other combinations of bricks and clicks, especially as a way to add entertainment to the shopping experience.

"It doesn't have to be us vs. them," he adds. "I think the Internet is our friend, not our foe. It can be a tool for us to drive traffic to our centers and raise our profile."

But Tanger doesn't expect to see many Internet retailers setting up shop soon in outlet centers. "We're negotiating," he says, "but most don't have good credit."

More than movies Entertainment has become an increasingly important part of the tenant mix at outlet malls over the past decade, but in recent years the variety of options has become even more diverse. Outlet centers no longer boast just multiplex cinemas and video arcades, but also family-oriented venues and activities such as skateboarding parks, fly-fishing, recording studios, miniature golf and rock climbing, all intended to make shoppers linger longer and return more often.

"We look at the total out-of-home experience," Rivers says. "We want (shoppers) to come farther, spend more time. The uniqueness of the Mills concept lies in the sum of the parts, the total experience."

Entertainment has been an important part of the Mills mix since Ontario Mills opened in Los Angeles in 1996. "We've made it a part of every development project since then," he says. "It's the future of both retailing and entertainment."

Belz, which incorporated a carousel into one of its early centers, is using a rainforest theme complete with waterfalls for the food court and entertainment components of its new Belz Factory Outlet World Canovanas. The center will be Puerto Rico's first enclosed factory outlet mall when it opens later this year.

More new outlets Since the first outlet centers opened in 1980 in non-metropolitan areas to avoid direct competition with traditional retailers, they have moved closer to major cities and tourist destinations. In the decade from 1987 to 1996, the number of centers grew from 108 to 329, according to Value Retail News. Several more new outlet developments are currently in the works.

Universal Properties Group Inc., a developer/builder based in North Brunswick, N.J., is in the process of building The Centre of New England in Coventry, R.I., to serve the 11 million consumers who live in a 100-mile radius - in the Providence, Boston and Hartford areas - as well as the millions of tourists who visit Cape Cod, Martha's Vineyard and other New England tourist sites.

The enclosed outlet mall is the first such venture for Universal Properties, which typically has developed strip and power centers, and the first major outlet mall for Rhode Island, according to Lori Marchetti, leasing manager for the privately owned developer, which had been buying up prime parcels along I-95 for the past 10 years.

A few years ago, the company earmarked the land for a mixed-use development featuring an outlet mall with retail outparcels, a hotel and industrial complex, says Marchetti.

The mall has been approved for a variety of tax exemptions or reductions for tenants, including retail inventory tax, wholesale inventory tax, personal property tax and real estate taxes.

Cracker Barrel, BJ's Wholesale Club, Applebee's and Starbucks Coffee will begin opening this year in freestanding structures on the outparcel lots. The first phase of the enclosed 1.4 million sq. ft. outlet mall, which will feature a racetrack design and a historical New England motif, will open next year.

The Mills Corp. has an ambitious development plan of two new centers per year. "We're working our way through major metropolitan markets," says Rivers.

The self-managed REIT opened an expansion of Sawgrass Mills last spring in the Fort Lauderdale-Miami area. It opened Katy Mills in Katy, Texas, in fall 1999, and plans to open Opry Mills in Nashville, Tenn., and Arundel Mills in Anne Arundel County, Md., this coming fall.

Sugarloaf Mills, located 30 minutes north of downtown Atlanta, is due to open in 2001. The $170 million, 1.5 million sq. ft. center will feature approximately 200 stores. While Rivers declines to name specific tenants, he says the center will include a typical Mills mix.

A Mills center usually features a mixture of retail outlets, manufacturers' factory outlets, catalog outlets, department store outlets as well as category-dominant stores, super savings stores, food service and entertainment. Tenants frequently include Off 5th-Saks Fifth Avenue Outlet, JCPenney Catalog Outlet, Eddie Bauer Outlet, Off Rodeo, Last Call! Clearance Center from Neiman Marcus, TJ Maxx/Marshalls, Cache Outlet, Donna Karan Co. Store, bebe Outlet and Burlington Coat Factory.

A Mills center typically has 15 to 18 anchors, rather than the average three to five, according to Rivers.

Other Mills projects on the drawing board for 2001 and beyond include: Vaughan Mills in Ontario, Canada; Boston Mills in Massachusetts; Candlestick Mills in San Francisco; and Meadowlands Mills in Carlstadt, N.J.

Belz, a privately owned company, opened Belz Factory Outlet World-St. Augustine in Florida this summer. The enclosed mall, with 252,000 sq. ft. of GLA, opened 70% leased. Belz wanted to expand its presence in one of the country's premier vacation spots, Groveman says.

The center is positioned within 30 miles of downtown Jacksonville along I-95, which attracts 10 million tourists each year. Belz Factory Outlet World and Belz Designer Outlet Centre in Orlando are also located along popular I-95.

Belz will again take advantage of tourist traffic when it opens Canovanas on a 122-acre tract 15 miles east of San Juan this fall. The tenant mix will be similar to Belz centers in Orlando and Las Vegas, according to Groveman, who says the center is 60% leased with commitments for 85% of the space.

Canovanas will be an enclosed mall comprising five connected buildings, each with a different streetscape depicting Old San Juan. Phase I will comprise 350,000 sq. ft. and have about 80 tenants, Groveman says.

The outlet industry has continued to see the entrance of more designers and manufacturers, which still need a controlled means of distribution for their products, according to Groveman.

The industry veteran reflects on the time span since Belz constructed its first outlet mall 20 years ago near Memphis. "Looking back over the past two decades," he says, "it is fascinating to see that the basics and underlying rationale for the whole factory outlet industry remain amazingly similar."

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