The outlet centre in the UK and Europe is facing a number of challenges, and that is creating major opportunity. Dom Brady asks and answers the key questions facing the sector.
How big is the market? How many outlets are there in Europe? What is the combined value of the outlet market from an investment and also retail perspective?
Since the outlet model was introduced from the USA to Europe in the 1980s the market has grown each year with a functional outlet now operational in most major European countries. According to Ken Gunn Consulting in October 2023, the European outlet industry comprises over 210 major outlet centres, with a total gross lettable area of just over 4 million square metres. Turnover in 2023 has been estimated to total circa €21 billion, being 10% above the cumulative turnover for the sector in 2019.
Typically, the outlets themselves target differing levels of retailer ranging from the numerous value-orientated centres at the bottom, right up to the few centres at the top who are defined by the world’s finest luxury brands, with everything in between.
What differentiates outlet from full price?
Outlets tend to be located in more remote places where the competition is low and are viewed by shoppers as a genuine retail/leisure pursuit.
The visitor frequency is typically less than full price with outlet schemes being visited four to five times a year although the amount of money spent during those visits is typically much higher than full price. This encourages very high conversion rates and spending levels with shoppers arriving expecting a unique retail adventure, hoping to find items from amazing brands at unbeatable, one-off prices in an appealing and stimulating setting. Very different to browsing brands online.
Full-price centres are often perceived as being less dynamic, and because they are more accessible and see higher frequency of visit, there is less pressure to spend.
The power of the brands is significant and the shopper tends to pick their outlet trip based on the prevalence of key anchor brands. Each territory differs but in the UK the brands with the biggest pull are Nike, Adidas, Polo, Levi’s, Tommy Hilfiger, Calvin Klein and M&S.
Who are the main operators and where are the best schemes?
The key pan-European outlet operators include Value Retail, McArthur Glen, Via Outlets and Neinver.
Each one of these operators specialises in a slightly different sector of the market. For example, Value Retail is positioned firmly at the luxury end of the market whilst Neinver focuses more on the mass-market/premium end of the scale. Each of these operators will strive to deliver defined values, from brand mix through to centre look and feel, so the shopper will know what to expect from their visit.
There are many other smaller operators at various points of the value proposition. Examples include Le Compagnie de Phalsbourg who operate a fantastic scheme in Lyon, and Holy & Co who operate the landmark Metzingen outlet centre in Germany where Hugo Boss used to be based.
There are also several schemes that are in the process of reinvention with a great example being The Outlet at The O2 which has seen significant growth over the past 18 months by tailoring the offer and attracting key brands that resonate with their unique catchment.
There are several incredible outlets at the top of the outlet hierarchy scheme such as Roermond which is on the border of the Netherlands and Germany, Bicester Village in the UK, La Vallee on the outskirts of Paris and The Mall, Firenze near Florence. These schemes offer an incredible shopping experience, therefore generating huge sales and are major tourist attractions in their own right.
How has the model evolved and matured in the 10-15 years?
The understanding of how outlets provide an opportunity to connect with new customers has improved hugely over that time. Gone are the days of incomplete sets, missing sizes and damaged items!
Rather than being seen as the poor relation, outlets are now considered to be incubators for new shoppers and ideas. Investment in the quality and design of shop fit has improved significantly and we expect this creativity to continue as new schemes are launched.
Outlet owners have responded by improving public realm and the overall trading environment. The transparency of the model means that the impact of any landlord investment can be quickly quantified through sales data and this can often encourage further spend.
The resilience of the outlet model during economic downturns and also periods of high inflation (due to the turnover model) has also meant that most of the recent landlord innovations in the retail property industry have been seen in new outlet developments both in the UK and abroad. Notable examples include the design language at The Village in Lyon, and the “green” elements incorporated in the new McArthur Glen outlet scheme in Giverney which opened in 2023.
What are the ingredients that make for a good outlet?
A dominant outlet will have a gross lettable space of over 200,000 square feet to ensure penetration from a two-hour catchment. Any smaller than this and the breadth of offer is likely to be insufficient to appeal to a large enough area.
The tenant mix should offer a breadth of retail and leisure elements but the balance will be determined by location, catchment type and size, value proposition and competition. For example, Gunwharf Quays can sustain a much larger number of restaurant units than other outlets due to its seaside setting, whilst La Vallee in France can attract a higher proportion of luxury brands than other centres owing to its proximity to Paris.
Physically the outlet needs to have an identity and design message that is in line with the target brand mix. Physical store sizes need to be varied enough to provide retailers with the opportunity to present their offer. Stores sizes can often be smaller space than usual however to maximise the sales density (the metric that most schemes are benchmarked by).
Is there enough room for future growth and development?
There is still plenty of opportunity for development across Europe, with Scandinavia particularly in demand due to the lack of premium locations. We are involved with a major outlet development is underway on the north side of Malmo (due in the second quarter 2026) which will showcase the best premium Scandinavian brands. This scheme has been fantastically well received by the brands and will drive significant sales due the lack of competition and the currency tourism that this region benefits from with customers coming over the bridge from Copenhagen.
There are also opportunities in the UK, although locations where a new outlet might work, have been squeezed with the planned openings in Scotch Corner (expected 2024), The Cotswolds Outlet (expected 2025) and Grantham Designer Outlet Village (expected 2026)
Generally, brands will expect their outlet accommodation to match their brand values. At present much of the current stock does struggles to keep up with these demands. There is an opportunity in some locations to modernise established but underinvested schemes to drive the sales density and better resonate with the catchment.
What are the main issues facing the industry?
There is a risk of oversupply of space in some markets and where new developments show the future of physical retail and environmental performance, older schemes risk the departure of key brands for more exciting new centres.
Retailers are getting more adept at stock management, so the amount of surplus stock which needs to be cleared through outlet is reducing. Some outlet brands have responded to this by creating additional stock in order to satisfy outlet demand, whilst taking a hit on the margin. The bargains are still there but they may just sometimes be more difficult to find!
Why do you think the market is increasingly of interest to full-price owners and what learnings can be taken?
The turnover based leasing model means that when the retailer does well, the landlord does well. Leases are outside of the Landlord and Tenant Act, with performance criteria built in which ensures a constantly evolving and relevant tenant mix, and no complacency from the occupiers. Income is also inflation proofed as rent payable will rise during times of inflation, and there are annual increases in base rents without the need for formal rent reviews. This engenders better and more honest relationships between the outlet owners and their brands.
We know all these elements really appeal to full-price owners.
In terms of learnings, data interpretation and application is probably one of the most important. While lots of full-price schemes gather data from some of their tenants, not all understand what it is telling them. Expertise in outlets is built around the interpretation of data, market knowledge and quality relationships so you can leverage what the data is telling you to drive income and improve the asset performance.
The structure is very difficult to replicate in a full-price environment and the change would require some very specialist advice and input. We are not aware of any landlord that has successfully managed to apply this model across a major full price shopping centre, but if implemented properly, we believe that a shift to this leasing model presents a huge opportunity for landlords to regain control over their assets, their tenant mix and income performance.
What are the advantages of owning an outlet over full-price shopping centre?
Transparency of performance and control are key advantages. Income will keep pace with inflation and if run proactively, assets can be at the cutting edge of tenant mix and latest shopfit designs. Tenant incentives are also generally lower than in a full price setting.
Landlords are able to quickly and efficiently asset manage their scheme to keep it fresh and exciting. If run properly, the end result tends to be a successful centre that constantly evolves and one that is loved by its customers and retailers alike.
How do the brands see outlet and what opportunity does it present to them?
Many of the best global retailers see their customer as "one shopper" as they shop across all platforms (full price, online and outlet) at varying times.
The brands see outlet as an important channel and an opportunity to secure a sale where there might not have been one, to a customer who might not have considered them before.
It’s not a universally loved sector however and does not work for everyone. Multibrand operators tend to struggle due to the level of discounting required when they are not in full control of the margins on the product they sell.
Some retailers are also reluctant to sell product at a reduced price point, concerned that it could be brand damaging. This sentiment changed at the top end of market many years ago. Though luxury brands didn’t want to discount, the opportunity to generate huge turnover and access a global audience at a centre like Bicester Village was just too tempting to avoid.
What is the future for the outlet industry?
New outlet developments will be a showcase for exciting new technology and innovation in the retail sector. The best brands will want to be associated with these schemes and their performance teams will be excellent. There will also be many newer brands entering the sector, showcasing their creativity and seeking to align their businesses with the current best in class operators.
The most established outlets will continue to thrive by attracting the best brands but the poorer outlets will gradually unravel as strong retailers relocate and owners fail to respond. Proactivity will be extremely important.
Data will continue to need to be interpreted and acted upon by experts, but it is important for the brands and the operator to continue constantly working on improving the customer experience. After all joy of visiting an outlet revolves around the hope that you will find an item you didn’t even know you were looking for at an unbeatable price.
Dom Brady, partner, KLM Real Estate