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OUTLET CENTER CHALLENGE

Hurdles for European developers vary from country to country

By Barbara Hogan Galvin

London-based Value Retail operates outlet centers in four European countries, including La Roca Company Stores in Barcelona, Spain, shown above.

An attempt to sum up the state of the factory outlet industry in Europe presents the very same challenge faced by developers and manufacturers wishing to expand there: Each country is vastly different in terms of the industry’s maturity, political landscape, retailer acceptance and customer awareness of the outlet concept.

And while these general challenges are common for much of the industry, specific barriers and experiences vary from country to country, project to project. What’s more, experts say, the young industry is still a very competitive, closemouthed one, where details about how particular issues have been surmounted, or success achieved, are rarely divulged.

After almost 10 years of outlets slowly being developed around Europe, one of the biggest hurdles for success still is acceptance from governments, retailers and customers. Strict zoning that eliminates competition with full-priced High Street retailers and few out-of-town greenfields on which to develop adequate parcels of land are obstacles to development on much of the Continent. Many times central, regional and local government approval becomes a years-long labyrinth that requires forging local partnerships. Even after receiving development approval, securing tenants for the project is typically the next significant hurdle.

The challenges are principally because there is still so much misunderstanding about the factory outlet industry in Europe, according to Hans Dobke, director of developer Outlet Centres International (OCI) London. "It’s very much treated like a bad aftertaste in the retail manufacturing industry rather than a sensible necessity," he said. "We are still attempting to indicate to the outside world that we are a properly organized industry with a genuine function to fulfill."

Outlet Centres International's Designer Outlet Zweibrucken in Zweibrucken, Germany, is the largest outlet center in the country.

OCI unveiled its flagship center, Designer Outlet Zweibrucken, in Zweibrucken, Germany, this March. The center, the largest in the country, is about 160,000 square feet with 45 retailers, a food court and cafe. By next summer, an additional 25 retailers and 85,000 square feet will be added. Professionals at OCI find that often they have to work hard to dispel some of the myths that abound about the outlet industry — many of which are still based on past experiences with "grey market" traders and discounters, Dobke said.

"We’re basically trying to bring the message of outlets to a wider audience in the retail industry, the manufacturing industry and also to political bodies." Dobke is the chairman of ICSC’s 2001 European Outlet Conference and Exhibition, its first meeting for the European outlet industry, which will be held in Barcelona, Spain, June 12-14.

Politics plays a significant role in many European factory outlet proposals. Such issues as commercial zoning, greenfield proponents, proximity to towns and cities and feuding local governments are all par for the course throughout Europe, experts lament, and can lead to planning stages that last for years before one brick is laid.

"In any property business the basic mantra is ’location location location.’ In Europe it’s ’zoning zoning zoning’ or ’politics politics politics,’" Dobke said. "Get that right and you’ve tackled the most difficult part."

When BAA MacArthur Glen London first sent Luca deAmbrosis out to Serravalle, Italy, just south of Milan, to lay the groundwork for Designer Outlet Serravalle, he was a one-man political, promotional and education department. deAmbrosis, general manager of the 175,000-square-foot center, which opened last September, had to convince local authorities that the project — Italy’s first outlet center — was beneficial in terms of employment, income and tourism for the region, he said. "I told them that it would bring life to this part of Italy — an area that was underdeveloped, underemployed and depressed," he said. So he set out to convince the politicians — "a group of old Italian men who didn’t speak English and who did not get out of the region very often" — of the company’s vision. Two-and-a-half years later, after many, many meetings with these local politicians, the project opened as a major success.

High Street and town center merchants often wield a good deal of local political power and can be a huge source of resistance to Europe’s outlet centers, experts said.

Many manufacturers are still sensitive about the projects, since they fear that committing to an outlet center or developing an off-price division will jeopardize the relationships they have with High Street retailers and large department stores.

Some outlet tenants have to practically sneak into centers in order to avoid some of the controversy from their full-priced counterparts, said Zara Corbett, marketing manager with OCI. "Sometimes things can get pretty nasty, so we have to respect the fact that some tenants are coming in under duress."

In each new country, challenges distinct to the region and cultural landscape arise. Many developers team up with local joint-venture partners, as OCI did in Germany, in order to better understand the customers and market. "It’s invaluable to know what’s going on in that country from local professionals and to be aware of the culture," Corbett said. The concept for a center can be the same, but as soon as you hit a new country, it’s completely different."

London-based Value Retail, which currently operates factory outlet centers in four European countries, typically establishes a local office in the region in which it is developing. The staff makeup usually consists of about 65% local real estate and retail professionals and about 35% international Value Retail professionals who are familiar with the company’s strategies, history and manner of operating centers, said company Chairman Scott Malkin. "The trick becomes finding the balance between a local presence and the consistency across the portfolio in terms of product quality and operations of the centers."

This balance is extended to the tenant mix. Preferences vary widely between neighboring countries such as France and Germany, and then even so within the same country, so an ear to cultural tastes is vital. Value Retail centers typically run about 150,000 square feet and focus on designer and fashion brands like Polo and Donna Karan, plus small regional brands popular with local shoppers.

When it comes to shoppers, acceptance and understanding of the outlet concept also varies widely, even within the same country. Many times, one country’s familiarity with outlets has to do with how many of its residents typically travel to the United States, Malkin said. "The English, the French, they are familiar with the principle, and they know how the concept works. But Spain — many people there do not have firsthand familiarity with the idea. Not that they are uninterested; it just takes more time to communicate what it is and how it adds value."

Before Designer Outlet Zweibrucken was built, OCI conducted customer surveys to gauge the knowledge of the concept. Shoppers in major cities such as Frankfurt were familiar with designer outlets and had a good idea of what to expect, said Corbett. But people in the countryside in which the outlet center was to be located thought the project would be nothing more than "a warehouse with a bunch of boxes."

Promotion for the center included a public relations campaign that generated media attention about factory outlets in general, and an ad program which asked and answered basic questions about shopping in an outlet.

It is unlikely that Europe’s outlet business will ever become as prominent as the $14 billion U.S. industry, experts say, but there are some concepts that are borrowed from American outlet developers that can be transferred to the Continent. Elements such as food courts and childcare facilities are being introduced, and entertainment attractions will likely be added to centers faster than they were in the United States, Corbett said. "We can learn a lot from the U.S. They have a mature industry and constantly rework it to make it interesting. We can look to that and learn."

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