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With luxury brands, outlet centers give malls a run for their money

Outlet malls are on the rise, opening nearer to regular stores and attracting high-end labels that in turn bring in big spenders.

April 26, 2014|By Tiffany Hsu

Alexander McQueen, the late British designer and high fashion's enfant terrible, wasn't the type to hang around a discount mall alongside a Riverside County freeway.

But that's where his eponymous label opened its first U.S. outlet store a few days ago.

In addition to McQueen — the label responsible for Kate Middleton's royal wedding dress — powerhouse brands Helmut Lang and Belstaff also launched their first North American outlets in the same mall, Desert Hills Premium Outlets. CH Carolina Herrera, Dolce & Gabbana and a host of other red-carpet regulars opened stores there as well.

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.

The outlet debut of McQueen, celebrated with a splash of champagne amid wafting aromas from Wetzel's Pretzels, was part of a $100-million, 50-store expansion at Desert Hills.

Since 2006, 40 outlet centers have opened in the United States while only one new regional mall has emerged, according to Value Retail News, a publication of the International Council of Shopping Centers. In the last year, the number of retail chains with discount outlets rose to 368 from 322, and some are close enough to their regular stores to almost be neighbors.

"The outlet centers are getting a lot closer to full-price retail malls," said Robert Cohen, a real estate broker with RKF. "It used to be that they wanted to stay as far away as possible so they didn't compete."

The rise of the discounter coincided with the decline of the economy. Hard times helped erase the stigma that once caused high rollers and fashion snobs to recoil at the thought of outlets.

Additionally, many upscale brands see value in moving their sale-priced merchandise out of their full-priced showcase stores, where old, discounted stock ruins the ambience. Hiding such inventory in an outlet may be a safer strategy that, as a bonus, helps connect the brand to a new consumer base of bargainistas.

As accessible luxury brands such as Michael Kors use relatively affordable prices to challenge higher-end rivals, more of those elite labels are dropping to the outlet tier to battle for customers' loyalty.

"High-fashion brands sense it's profitable, but they like to know their peers are here," said John Klein, president of Premium Outlets, the outlets division at Desert Hills owner Simon Property Group. "They talk, and that feeds on itself."

The center, which sits next to Interstate 10 near Cabazon and draws 10 million visitors a year, has seen record sales since the recession. Tenants bring in an average of $1,300 in sales per square foot — making it the best-performing outlet in the state and among the top five nationally.

In recent years, Desert Hills has seen an influx of customers driving BMWs and Mercedes-Benzes. To attract even more, Simon gave the entire property a face lift, widening and paving walkways and adding lampposts and fountains.

The formula is working for Diana Marin, 27, who regularly drops thousands of dollars buying full-priced products from the Beverly Center and other ritzy retail meccas 100 miles away.

In a father-financed spree at Desert Hills on Thursday, the Long Beach student spent $3,000 on scarves, belts and purses from Prada, Fendi and Gucci.

"They're bringing in better designers, which means I'm getting more to choose from," Marin said. "If they have more good deals, I'll definitely make a trip once a month instead of paying full price."

Outlet malls are in a prime position to cut in on full-priced shopping centers, many of which are troubled. Rick Caruso, the mogul behind the Grove and Americana at Brand properties, said recently that the traditional enclosed mall is destined to become a "historical anachronism."

About 1,500 of these old-style malls operate nationwide, compared with nearly 400 of the open-air "lifestyle centers" like those that Caruso builds and nearly 200 outlet malls, according to the shopping center group.

The so-called off-price sector was the only mall segment to grow steadily in the last four years, said Paul Morgan, a managing director at investment bank MLV & Co. High unemployment and minimal wage growth have conditioned shoppers to hunt for deals.

"The industry is consolidating," Morgan said. "You may have several hundred fewer malls in the U.S., but the top properties are only getting stronger and more productive."

Twelve new outlet malls totaling 4.2 million square feet are set to open this year in the U.S. and Canada, including the Outlets at Tejon Ranch in Bakersfield in August and the Outlets at Border in San Diego in October. ICSC said 55 such centers are planned through 2016. And 18 existing properties have expansions on the drawing board.

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