How to evaluate the performance of an outlet center

Ken Gunn discusses how to evaluate the performance of an outlet center, investments, and outlet center management

KPIs AND OUTLETS ASSETS

The first outlet centers arrived in Europe in the early 1980s and were originally intended as a “no-frills” tool for the clearance of unsold stock. They have since evolved into vibrant regional destinations which enable brands to drive sales volume and achieve high profit margins through enhanced environments. In this blog, we discuss how to evaluate the performance of an outlet center, outlet investments, and outlet center management in today’s challenging retail environment.

Outlet centres are sophisticated operational assets where performance is 'curated' by operators

In just over 40 years, the outlet community in Europe has reached 200 major sites, totalling 4.1 million sq m of gross leasable area.  A clear hierarchy of sites generated turnover of €19 billion euros in 2023, which is estimated to grow by 1.5 billion euros by 2024.

Fundamental to this success is a lease which empowers management, rewards higher turnover, facilitates change, encourages growth and supports true partnership between brands and investors.  As a result, outlet outlet centre management is typically more agile, adaptable, commercially driven, and knowledgeable about brand performance than shopping center counterparts.  Bicester Village boasts the highest average sales density of any shopping destination in the world, but there is an entire community of inspired operators and investors working tirelessly to emulate this accomplishment.

The road to success is not without its potholes but today’s outlet professionals boast the collective experience of four decades of successful growth.  Design for example, has transitioned from converted factories, purpose-built shopping centers, and retail parks to the popular ‘village’ format.   In floorspace terms, village-style outlet centers account for 57% of all European outlet centers, but 73% of the top performing sites, a clear demonstration of how performance insight and trading success have driven the evolution of the sector.

THE KEY METRIC OF SUCCESS

So, how do we evaluate the performance of an outlet center? Speak to any outlet professional and it will not be long before sales densities are mentioned. Sales density, or sales per square meter, is arguably the key metric of success in most retail businesses, as it is more indicative of store profitability than measures such as footfall or turnover. While it is true that outlet incomes are derived from turnover volumes, the majority of better-performing brands actively seek sites that generate higher sales densities. Between 2013 and 2019, outlet centers with above-average sales densities attracted three times as many high-quality brands as sites with below average sales densities, and they achieved 20% more growth in turnover.

With typical realism, outlet operators typically remove VAT and include ancillary space in their calculations of sales density.  This produces a lower measure than cited by full-price operators (who typically include VAT and exclude ancillary space).  However, the outlet metric is more consistent, comparable, and crucially, less subject to “definitional differences” when it comes to reporting.  As a result, the hierarchy of European outlet centers is clearly defined by average sales density performance and is characterized by obvious differences in brand line up, operator strategy, retail mix, design, and the composition of guests.

If the average full-price European non-food retail sales density is approximately €5,000/sq m, the equivalent average sales density at European outlet centers is nearly 50% greater.

Of course, performance can cover a variety of additional aspects, depending on the purpose of a business and the role individuals play within it.  Nonetheless, all are linked to sales density and profit. For example:

• For an investor, performance relates to profitable and relatively low-risk growth of income and asset values, over the lifetime of the investment

• For a brand, performance relates to the profitable disposal of unsold inventory, without damaging brand equity at full-price channels.  For some, this can mean simply removing low margin stock from operationally expensive flagship stores (thus maintaining range freshness and profitability). For others, this means a whole new business channel and profit center where performance is measured in terms of profit contribution

• For guests, performance is about experiencing memorable, carefree days out, in the company of friends and family. Guests often cite outlets as unique destinations that offer inspirational brands, a good selection of stock, exceptional customer service, remarkable prices, and unique architecture. Assets which provide an ideal combination of these see amplified Spend per Visit, Average Transaction Values, and Dwell Times

• Finally, for operators, performance relates to delivery of the growth strategy and the many services required to achieve agreed milestones and meet the objectives of the three parties listed above. Crucially, within the outlet industry, operators are remunerated on the basis of asset performance, making their role more proactive and akin to 'performance engineer' than the more passive custodial role of shopping center management

While sales density is the headline-grabbing “magic metric” which allows outlet brands and professionals to instantly position an outlet center’s status, it only provides a limited explanation of performance. Most importantly, it cannot answer the critical question regarding how well an operator or asset is performing in relation to the potential demand in the catchment area when it is fully activated. For example, while a sales density of €6,000/sqm may seem strong compared to the European average, it might be considered suboptimal in a dense urban conurbation, such as London or Paris.  Conversely, a sales density of €3,000/sqm at a remote location, where the purchasing power of the catchment area and tourist spending are limited, might be considered to be strong performance. So it very important to evaluate the performance of outlet centres from first principles

HOW TO PRIORITIZE GROWTH OPPORTUNITIES

To fully evaluate an outlet center’s performance and growth potential, fundamental questions need to be asked about its business drivers, using relevant industry metrics to understand the current position and appropriate best practice benchmarks to prioritize growth opportunities.  Key aspects to consider include:

• Site characteristics - Is the design and environment conducive for high quality brands? Is the access and egress suitable? Is the site easy to reach, particularly for guests travelling from remote parts of the catchment? Is there adequate provision of ideal size units and anchor stores? What opportunities exist for asset management intervention? Do opportunities exist to extend the site or add complimentary activities eg leisure or cultural attractions? Is there sufficient car parking? Can the site be reached easily by public transport? Are neighbouring activities appropriate for a high quality destination?

• Market Size – eg. scale, composition, accessibility, catchment penetration etc.  Is the strategy being pursued by the operator right for this market? Does tourism or leisure amplify resident spend? Are certain critical parts of the catchment underperforming? What opportunities exist to strengthen destination appeal and achieve best-in-class catchment penetration?

• Competition – eg. Tier positioning, scale, design and operational quality, retail mix positioning, brand lineup, drive time distance, presence of visit multipliers, catchment overlap, potential for future extensions and growth.  Is brand mass and quality waxing or waning? How does local and regional competition create and divert guests from the subject site? What opportunities exist to achieve competitive advantage?

• Market Share – How much guest expenditure is converted to turnover at merchandise category level? Does the scale and allocation of floorspace adequately match demand? Is the provision of F&B appropriate for guests? How might changes in brand mix, critical mass, or even the operator, affect future performance?

• Sales Density – How do merchandise-level sales densities compare with industry benchmarks?  What improvement is possible if the brand mix, floorspace provision and market shares are optimized or if the asset is expanded?

• Guests – What are they potentially worth? Does the asset appeal to domestic or international tourists? Are particular groups missing or underspending? Who are the promoters, who are detractors, and how does that relate to their optimum guest value?

• Brands – How does the performance of a particular brand compare with other sites? What alternative brands might pay more rent? Are stores operated by company brands or distributors? What popular, but absent, brands would be a good fit with guests? Are stores adequately staffed? Are brands providing their best or inferior stock packages? Do established brands need to upsize, downsize or exit the asset?

• Operations - Is the operational plan adequately funded? Has there been adequate maintenance of guest spaces and landscaping? Is the management team fully staffed? Is the marketing plan delivering sufficient footfall and the right guests? Are there issues with site positioning, branding, security or guest perceptions? And how do these compare with competitor sites? Is the communication and relationship with brands strong enough? Is the operator fully exploiting the market opportunity?

• Rental Income – What share of turnover is converted to rent?  Does the asset generate adequate top up rent?  What is the impact of optimizing the retail mix, attracting more guests, increasing turnover or expanding the site?

UNCOVER UNTAPPED POTENTIAL

Today’s outlet centers are sophisticated businesses which embody advanced management techniques and require shrewd investment.   A comprehensive set of appropriate benchmark metrics is essential for understanding true potential but these must be harnessed with relevant experience to identify the best opportunities.  It is not uncommon for detailed reviews to uncover untapped potential for between 30% and 50% greater income, even at long-established, 'mature' assets.  And as the outlet sector continues to evolve with changing consumer demand, the opportunity to augment physical visits with digital sales will stimulate even greater future uplift.

The experience of the last 40 years has taught the outlet community many lessons. Crucially, no two assets are the same, not every operator is suited to every site, maintaining key points of difference is essential for footfall and not every investor is suited to every outlet opportunity.  Perhaps the most important lesson however, is that change is profoundly important to the health of outlet center assets.  While guests continue to evolve, competition intensifies, and brand strategies can only ever be transient, the unique nature of the outlet lease continues to drive substantial, rapid and profitable transformation.

It is no surprise that outlet centers emerged from the pandemic in far better shape than when they entered.  It is also no surprise that growth at outlet centers has been 2.6 times the rate of non-food retail sales (including digital) across Europe since 2022. This performance highlights both defensive robustness and scope for income growth, and is a clear reason why investors should consider the outlet sector to be distinctly separate to any other type of retail assets.