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The World of Outlet Centers

By Barbara Hogan Galvin

Under construction in this photo, BAA McArthurGlen’s Designer Outlet Serravalle has since opened. It is Italy’s first purpose-built outlet center.

BAA McArthurGlen worked to convince customers that Designer Outlet Livingston in Scotland was not like low-end outlet centers.

LONDON -- In centuries-old European markets, where commerce was in full swing before America was even known to exist, a U.S.-born company finds itself in the unlikely position of educating Europeans about retailing.

Some may see a simple parallel between medieval trading centers — where handmade clothing and crafts were purchased directly from the creator — and the modern manufacturer’s outlet center, but for BAA McArthurGlen, unrolling the concept on this side of the Atlantic has been anything but clear-cut.

This fall the firm, based here, opened two designer outlet centers, one in Italy and another in Scotland.

And even though the firm already had developed nine outlet malls in Europe, its team found itself giving tenants and customers a crash course on the U.S. version of the discount retail strategy.

Designer Outlet Serravalle, a 175,000-square-foot center located in Serravalle, Italy, just south of Milan, opened in early September — the country’s first purpose-built factory outlet center. The development team faced huge challenges — the first and possibly the most significant being that the term “outlet center” has no direct translation into Italian. Simply explaining the concept, let alone convincing regulators and tenants of its benefits, was the first step in an arduous two-and-a-half-year effort to open the outlet mall.

Indeed, the translation and education victories there have come with a bonus that can’t be measured in sales revenue: “From now on, when someone in Italy is talking about an outlet center, they’ll mention Serravalle,” said Luca deAmbrosis, general manager of the project.

The development company faced a different educational campaign when it came to Designer Outlet Livingston, a 300,000-square-foot center that opened in late October in Livingston, Scotland.

The area’s customers and retailers were familiar with typical outlet malls, but not with McArthurGlen’s slick brand of designer center, complete with regional mall style and amenities, such as a food court, movie theater and even a health club.

“We seemed to be tarred with the same bargain basement mentality that exists in some parts of the outlet market,” said Iestyn Roberts, European commercial director for McArthurGlen. “Our marketing, advertising and public relations effort have focused on what’s different about [Livingston]. We call ourselves a designer outlet rather than a factory outlet deliberately to create some space between us [and other outlet malls], to convey that we offer aspirational merchandise, not just the bottom-end shopping experience,” said Roberts, who leads both the marketing and operational departments at the Scottish center.
While McArthurGlen was presented at Livingston with the challenge of distinguishing itself in a mature retail niche, the company’s Herculean image challenge actually was tackled six years prior with the opening of its first designer outlet mall, Cheshire Oaks, located near Manchester, England.
At that time, the method of selling overruns, excess goods and end-of-season styles typically took place in dingy rooms adjacent to a manufacturers’ factory or warehouse, according to Joey Kaempfer, chief executive of BAA McArthurGlen.
“There were lots of factory stores throughout Europe — what was unknown was the U.S. concept of putting them all together in a facility that was a pleasant place to go to,” he said.
Kaempfer, an early investor in the U.S.-based McArthurGlen, joined with British airport retailer BAA to form BAA McArthurGlen here in 1994. Kaempfer has since bought out all the U.S. investors in the company.
Even armed with a handful of enthusiastic tenants, the leasing of Cheshire Oaks, which opened in 1995 at 107,000 square feet, was an uphill battle, Kaempfer said. “We used to walk into the [retailer’s] door and get thrown out.” Brand executives typically were concerned that they’d ruin their full-cost business by discounting items, and worried about the less-than-glamorous image that factory outlets connoted.
These days, brands such as Armani, Polo, Arcadia and British retailing giant Marks & Spencer are tenants at many of the company’s European designer centers.
Cheshire Oaks now tops more than 400,000 square feet, and its sales have risen 150% since it opened, to reach a current average of approximately $500 per square foot
Leading manufacturers now see outlets as a way for them to increase sales, get closer to their customers and to deal with some of their excess stock problems,” Kaempfer said.

Italian reluctance

That may be the consensus these days in Great Britain, but Serravalle’s deAmbrosis recently found himself just where Kaempfer had been seven years ago.

Before he could even try to persuade manufacturers to test the country’s new retail format, deAmbrosis had to navigate the labyrinth of local and regional political authorities to get approval to have the project built. “I had to convince them of our vision,” he said. Careful communication with other retail associations in the country, demonstrations about the employment and tourism benefits and the involvement of some powerful local businessmen finally won over the necessary politicians, he said.

Then came the big challenge of wooing prospective tenants — to whom the name McArthurGlen was unfamiliar.

Manufacturers’ main concerns were about whether the concept itself would be successful, deAmbrosis said. His careful education plan began with introducing the company to manufacturers and demonstrating its professionalism; then moving on to the actual designer outlet concept, showing videos and giving presentations about the company’s other successful centers; finally, a tailored, detailed pitch was given to retailers about becoming part of the center and what services they could expect from McArthurGlen.

Still, for some Italian manufacturers who were used to operating in the country’s boutique retailing environment, the idea was a hard one to grasp. Like their English counterparts years before, the only discounting vehicles these retailers experienced was through their own tightly controlled factory stores.

“Until Serravalle, we didn’t have a place of quality where big brands had an opportunity to serve with their colleagues and offer discount prices,” said Carmello Pistone, director of worldwide retail for Trussardi, an Italian manufacturer of men’s and women’s ready-to-wear and accessories.

Pistone was familiar with U.S. factory centers, as he is half American, but convincing the heads of the family-owned company to join the new center was a struggle, he said.

In the end, the time and effort it took for McArthurGlen to educate anxious manufacturers resulted in a lineup of 65 top-brand retailers, including international favorites like Nike and Levi’s as well as Italian leaders such as Dolce & Gabbana and Versace. Shops average 2,000 square feet, with sports manufacturers Nike and Asics taking the largest spots, which run 6,000 square feet. Opening day drew a crowd of 25,000 shoppers, and some retailers hit monthly sales goals in just the first three days of operation, deAmbrosis added. One of those retailers was Trussardi, which occupies a 4,000-square-foot store.

“It’s a new way to sell as opposed to just the same old-fashioned method,” Pistone said. The initial success at Serravalle has “definitely opened the door” to possibly expanding Trussardi’s outlet operations, he said. Even after the initial flurry of curiosity settles down, deAmbrosis said he feels that the sales-per-square-foot goal of approximately $320 is one the tenants can easily achieve.

One of the biggest aces that deAmbrosis held when talking to politicians and tenants about the planning of the outlet center was the quality of BAA McArthurGlen’s other European operations, he said.

What’s more, the high standards used in building the center have lured additional manufacturers interested in taking spots in the project’s second phase. An additional lineup of stores, which will open next summer, will bring the total gross leasable area to 300,000 square feet, comprised of about 180 retailers, a food court, restaurants, a children’s play area and a bicycle museum.
It is that attention to quality and broad range of amenities that also is setting the company’s newest project apart from its competition.

Upscale in Scotland

While there are a handful of smaller factory outlet centers in Scotland, Designer Outlet Livingston has been conceived as an upscale shopping and entertainment hub. The 300,000-square-foot center includes a lineup of 90 retailers; a 22,000-square-foot health club; eight-screen, 35,000-square-foot movie theater; food court; and bars and five restaurants. What’s more, the outlet mall is located adjacent to the 520,000-square-foot Almondvale Shopping Centre, a regional mall owned and managed by Land Securities, the giant U.K. property firm, which also owns half of the Livingston outlet project.

The idea behind the development cluster was to create a town center in the relatively new city of Livingston, located between Glasgow and Edinburgh. In recent years, the area has blossomed into an enclave of high-tech companies, and has welcomed an international residential mix to the previously quiet area.

The outlet center’s designer fashion and entertainment elements were tailored to complement Almondvale’s tenant mix of service and mid-range fashion retailers, and its anchors: specialty store Bhs and national supermarkets Asda and Safeway.

“We think there will be tremendous local benefits with [the location of] the two centers,” Kaempfer said.

When shoppers are finished at [Livingston], they may go into Almondvale to pay bills or go to the bank — they have five — or get something to eat or go grocery shopping,” he said.

A handful of tenants at Almondvale did express concerns about the outlet center initially, but their issues were addressed and resolved by meetings with both BAA McArthurGlen and Land Securities executives.

“We are quite sensitive not to present a situation where we are damaging one center at the expense of the other,” Roberts said.

“Almondvale will only gain critical mass with having us next door. We’re going to bring in a few extra million visitors a year from people who would not normally go into Livingston to go shopping,” he added.

While there will not be any direct cross-marketing efforts between the malls, efforts will be made to coordinate common opening times and transportation access to the center.

McArthurGlen’s track record of six centers in Britain meant that Livingston’s leasing executives could tap into a pool of top manufacturers with which they already had relationships, according to Roberts.

“Because of our European reach, we have brought in very prominent brands that won’t be found at any of our outlet competitors, and that the local customer will really want to visit.” he said.

The cinema and health club act as anchors of the enclosed, two-level center, and “big-niche name” tenants such as Gap, British department store Marks & Spencer, Armani and Jaeger are expected to be major customer draws.

In addition to the smaller shops, a 20,000-square-foot housewares area has been created.

The center’s five food-court tenants are complemented by a scattering of coffee shops and small eateries that can offer shoppers a quick bite on the go. “Customers have moved on a bit from just expecting food courts,” said Roberts. “People like to ‘graze’ as they move around the center.”

As of late September, Livingston was 90% leased and was scheduled to open with more than 50% occupancy.

In addition to securing top name tenants, the center’s leisure component has always been an integral part of the project’s plan, according to Roberts.

“The town doesn’t have a leisure center of this quality or a multiscreen cinema — we are completing the circle for Livingston.”

The full, and costly, slate of leisure elements is not trickling down to tenants, Roberts said. Rents and common-area maintenance fees at Livingston are in line with the company’s other U.K. design centers, he said.

However, the leisure elements are expected to be a big boost to Livingston retailers, and average sales goals of about $420 per square foot have been set.

Initial marketing and advertising are focusing on the quality of the outlet center and its leisure components.

Roberts has been working with local radio stations and newspapers and is planning a campaign with the tourist-heavy airports at Glasgow and Edinburgh to alert visitors to the center.

“Our first aim is to make sure we attract a strong base of local customers, and then reach out to a broader audience,” he said.

With Livingston, the United Kingdom may have reached its outlet saturation point, said Kaempfer. But that doesn’t mean a development slowdown for BAA McArthurGlen. Current plans include three more centers in Italy, two in Germany, one in Holland and two more in France. “That’s about as much as we can see — and afford — at the moment,” he said. Europe’s education continues.