Outlets & pure players. The race for bargains
With the rise of online private sales, traditional outlet centres offering discounts to clear inventory are facing new rivals for command of their domain. Are retailers favouring online or offline channels to sell overstock? What is the most profitable channel? Global Retail News investigates this new shifting territory.
Described as the “poor side of retail” or the “fifth wheel on the coach” for many years, the outlet sector was represented by outlet centres. Retailers considered that their outlet stores had to be hidden away, often synonymous with discomfort or poverty.
Tenants and suppliers of outlets were primarily in the fashion sector, where unsold items accounted for up to 20% of total volumes every season. Retailers selected locations as far as possible from their “full price” stores, in order not to tarnish a brand image and appeal. Luxury brands like Louis Vuitton and Chanel destroyed unsold inventory rather than reduce sales prices. Destruction costs were included in their business planning to protect a maximum margin.
This destocking sector has now changed completely. The majority of retailers appreciate that an overstock represents a huge and valuable business. Beyond the traditional anchor tenants such as Nike and Adidas, outlet centres now house unexpected newcomers, such as Black & Decker (outlet stores in the U.S.A.), Bialetti (an Italian brand of coffee machines with outlet locations in Italy and France), L’Oréal, Lindt and even Haribo. In addition, an array of online newcomers is shaking up traditional outlet operators, with ephemeral online sales which meet demand from customers and brands eager to sell overstock. “The online private sales are a residual valve for our end of season stock”, said Stéphane Coudassot-Berducou, Leftover Director at Fast Retailing. “Such sales help us clear huge volumes of merchandise in a very short period of time, with low capital investment, and this also earns cash during the season. In France for instance, we organise two private sales every season via Vente-Privee.com and Showroomprive.com. One sale is for Comptoir des Cotonniers, the other is for Princesse Tam-Tam”. At the same time, retailers don’t want to be very visible online with highly discounted prices. “On Vente-Privee.com, an item is reduced by 65%. This means that an item sold at €100 at a full price store is sold online for €35, plus the website margin on top of that. In total, we sell at discounts of over 70%”, adds Stéphane Coudassot-Berducou.
Several online private sales operators show insolent growth rates, with turnovers exceeding one billion Euros and reporting double-digit sales growth. This year, Vente-Privée expects a turnover of €3 billion. During the 1st half of 2016, Yoox Net A Porter reported sales of €897 million (up by 13%) and profits of €37 million (up by 15%). This channel is also moving to a new phase of concentration and internationalisation. Since January 2016, Vente-Privée took over three major rivals in Spain (Privalia, a website also active in Italy, Brazil and Mexico), in Switzerland (Eboutic.ch) and in Denmark (website Designers and Friends) and is considering a Portuguese purchase. However, the large majority of this sector remains dominated by local firms such as Zulily in the U.S.A., Brands4friends and Best Secret in Germany, Kupivip in Russia and Fashion Days in Romania. “In the private sales sector, the country leader is always local”, explains Dimitri Dewavrin, C.E.O. of The Agent. “Vente-Privée and Showroomprive.com have not managed to become leaders. In the e-commerce sector, the winner has to master the local culture better than any others, because every country has its preferences in terms of returns management, customer service and communication.”
As a result, global investors have showed a skyrocketing interest for stakes in these private sales operators. In April 2016, Mohamed Alabbar, the owner of Emaar Properties retail estate developer (Dubai) took 4% of Yoox Net-A-Porter for €100 million, aiming to expand the online overstock business into the Middle East. In September 2016, the department stores Galeries Lafayette acquired 100% of Bazar Chic for an undisclosed amount. The Swiss luxury giant Richemont (Cartier, Van Cleef & Arpels, etc.) was a pioneer in the purchase of British website Net-A-Porter in 2010, before rolling out a merger with Italian competitor Yoox in 2015. “I strongly believe in those new models which mix physical retailers and pure-player operators”, said Franck Verschelle, former Director of McArthurGlen, now heading up the Advantail developer. From one side, retailers know how to manage a physical store. From the other side, private sales firms are e-commerce experts, able to manage delivery, returns and online marketing. Each share has complimentary skills to create a win-win relationship.”
Faced with such widespread online rivals, the world’s largest outlet developers such as Simon Property (U.S.A.), McArthurGlen and Neinver (Europe) are trying to erase their previous image of “factory stores”, re-positioning these as “fashion destinations” and “brand hubs”. Meanwhile, the outlet malls sector remains extremely dynamic. “In 2015, the sales of the 228 European outlet centres (excluding Turkey) grew by 10% like-for-like”, said Ken Gunn, C.E.O. of FSP Retail in London. Last year, the average turnover at a typical European outlet centre was €4,100/ sq.m GLA. In 2015, Seb Group’s home appliance stores Home & Cook Outlet (selling Moulinex, Tefal, etc.) posted average sales of €7,000/ sq.m GLA a year, whilst top stores reached €15,000/ sq.m. In Europe’s best performing outlet centres such as Bicester Village (U.K.), La Vallée Village (France), Roermond (Netherlands), Mendrisio (Switzerland) and Serravalle (Italy), sales per sq.m are higher than in the “full price” stores. Franck Verschelle also shares the same vision: “In 25 years of working in outlet centres, I have never seen a negative year.”
As another surprising phenomenon, outlet developers do not yet consider online private sales as proper rivals. According to Dr. Joachim Will, C.E.O. of Ecostra institute in Wiesbaden, Germany, “Visitors in an outlet centre certainly come to find lower prices, but also spend a day out with friends and family. It is a socialised shopping experience that is not available on the web.” It’s also surprising to see that outlet mall developers seem unaffected by the omnichannel changes, and how delivery, click & collect and online services come as a lower priority. “Of course, we are developing online services to give consumers access to our products when they’re not in our centres, but we have to remain focussed on our core mall business”, said Brendon O’Reilly, C.E.O. of Fashion House Group, which runs outlet malls in Romania, Poland and Russia. “We are not Net-A-Porter. Our strategy is not to make the best profitable online business but to maximise and strengthen the turnover of our asset, which is property.” In April 2016, the Moscow-based outlet centre Fashion House launched an online sales service. “Six tenants are already active on our online platform and after just five months, their cumulated sales are equal to the weekly sales of one average outlet store of 160 sq.m GLA”, added Brendon O’Reilly. 80% of online orders are for home delivery with our logistics partner Pony Express, and 20% are click & collect”. Fashion House aims to launch online sales in Romania by the end of 2016 and in Poland before the middle of 2017. For those outlet developers, mall expansion remains the main drive for growth, and Asia, Eastern Europe and the Middle East have a fair potential. Expansion will also restart in Europe in 2017, with 17 new openings of malls planned in 2017 compared with just 5 during 2016. “I would love to have 15 Russian outlet centres”, added O’Reilly. “In Russia, you have 150 million people who are passionate about fashion. A Russian woman will eat only rice for several months to buy a Versace coat”.
What about margin?
As a retailer, which channel should be the priority? For most of the retailers we’ve interviewed, the priority is to consolidate their outlet stores, with online private sales as a complementary channel. According to Stéphane Coudassot from Fast Retailing, “The goal is to sustain our outlets stores. Our physical network for destocking is more qualitative as we control the brand image from A to Z, but it also takes a longer time to sell overstock”. At Fossil the accessory retailer, the strategy is similar. “Our priority remains our outlets shops”, said Wolfgang Thoeren, Vice President Retail for the region Europe Middle East. “As a retailer, when you have an overstock, either you send it to outlets to be sold over 6 weeks, or you offer it online where you sell higher volumes in a shorter time. The Internet is an adjustable variable for us”.
In the home electrical sector, the Seb Group remains focused on its store network of outlets under the Home & Cook banner. “In Western Europe, we have never offered any online private sale,” said Geraud d’Adhemar, Retail Director at Seb Group. “On the Internet, it is difficult to control prices and product movement. You never know who purchased your products and where they will finally end up.” However, in the U.S.A., Seb Group offers private sales for its high-end cookware brand All-Clad Metracrafters, which is bought by star chefs. “We organise these private sales “in house” with our own client database, and they work very well,” adds Geraud d’Adhemar. Only our customers receive an email with a personal code to access a private website with amazing promotions, such as a 50% discount on a stove that would cost €1,000 at a full price store. We ship orders directly from our U.S. factories.”In terms of margins, outlets stores are definitely more profitable than online private sales, where aggressive discounts mean lost margins for retailers. “In Spain, the U.K., Italy and Germany, our best factory stores are often more profitable than online private sales”, adds Stéphane Coudassot from Fast Retailing. Joachim Will, the C.E.O. of Ecostra in Germany confirmed this trend. “Most retail tenants told us that the profit they generate at outlet centres is better than online private sales. Turnover is much higher in an outlet centre, even when you add wages and rent which are inherent to a store. In a good outlet centre ran by McArthurGlen, the fixed annual rent usually starts at €300 /sq.m GLA, plus a variable rent (% of sales)”.
Disruptive new frontiers
The frontier between traditional and new outlet operators is increasingly blurred. In Moscow, an online fashion retailer (suggested as Lamoda or Kupivip) is considering opening an outlet store in the Fashion House centre. In France, Bazar Chic already runs two physical stores (300 sq.m GLA each) in the outlet mall L’Usine Mode et Maison in the suburb of Paris (Velizy). In addition, some online retailers are making inroads in the outlet business. Zalando launched the mobile app “Movmnt” in Germany and in France in 2015. This promotes factory overstock and end-of-lines directly to customers. Movmnt targets the most price-sensitive consumers aged from 15 to 30, with overstock items sold at almost cost price. “It’s a beginning, but the potential of this application is huge,” added Dimitri Dewavrin, C.E.O. of The Agent. In the coming months and years, the battle for the lowest prices is expected to continue to be disrupted by e-commerce.