Renee Underwood recently took a day of her vacation to troll for bargains at two adjacent factory-outlet centers in San Marcos, Tex. But after six hours of wandering among the centers' 150 stores, the 38-year-old advertising executive left almost empty-handed. And one of the deals she thought she had snagged turned out not to be so great after all. Days after buying a $12 pair of Lee jean shorts from the VF shop, Underwood found the same item on sale at her local Mervyn's for $12.99--a better deal, she says, considering the 45-minute drive to the outlet centers. "I find if I shop smart at my local mall," says Underwood, "I can get better values."
Regional mall prices rivaling factory outlets? You bet: Malls are starved for traffic, and they're steadily narrowing the price gap. But that's just one of the challenges facing factory-outlet centers, which boast cut-rate prices on brand-name goods direct from manufacturers. Explosive growth in outlets is raising fears of market saturation. And outlet centers have been forced to get awfully spiffy to draw shoppers: Gone are warehouselike buildings selling factory seconds. But the closer the outlet centers get to regular malls in look and price, the less reason there is to shop there. "Factory outlets continue to bring in traffic, but the popularity they experienced in the 1980s is gone," says Wendy Liebmann, president of WSL Marketing, a New York consulting firm.
Factory-outlet malls have popped up across the country, usually 20 to 60 miles from a big city but often within reach of a vacation spot. Sales have more than doubled, to $13 billion, since 1990 (chart). That kind of growth prompts some observers to wonder if the industry is overbuilt. "There are going to be too damn many of them soon," says Jack Shea, chief executive of Spiegel Inc., a catalog-sales outfit that also operates 17 outlet stores.
There are signs that this day may already have arrived. Although new centers have pushed total industry sales up, the take at stores that have been in place longer than a year is falling. For the first seven months of this year, such comparable-store sales were down 2.8% from the same period a year ago. "I think there will be a shakeout," says Karen Goldberg, vice-president of the outlet-store division of Barneys New York. "Everyone's building them, but not all of them will be able to survive."
Investors have started to worry, too, says Jon Fosheim, a principal at investment adviser Green Street Advisors Inc. Outlet-center developers saw their stocks soar after they began going public in 1993--as real estate investment trusts. But so far this year, those REITs were up just 0.4%.
SWINGS AND SLIDES. Outlet-center operators are fighting back with new brand-name tenants and different product categories, as well as such conveniences as food courts and playgrounds. Manufacturers make up the bulk of the more than 500 companies operating stores in outlet malls. But lately, such retailers as Ann Taylor, Barneys, Gap, and Saks Fifth Avenue have opened up alongside the manufacturers. Meanwhile, mall developers are bringing in new tenants from outside the traditional apparel base, such as IBM and Sony Corp. Baltimore developer Prime Retail Inc. is betting on athletics, with the introduction of Sports Court at some of its 14 outlet malls, featuring clustered stores selling sports apparel, equipment, and footwear.
Analysts say new product categories should help. After all, apparel now accounts for 70% of outlet-mall shops, and clothing sales have been doggy industrywide. But outlets also are being squeezed by other retailers, particularly department stores, that have learned to compete by offering frequent, deep discounts of their own. They typically slice off as much as 30% to start with--and then drop prices even further. While most outlet centers promise savings of up to 70% off supposed retail prices, consultant Alan G. Millstein says that average discounts run about 25% to 30%. "The average shopper could probably do better if she waited for a department-store sale--and save a lot of shoe leather and gas," he says.
Outlet-center executives argue they still have a major advantage. "You have to wait for a sale at department stores for them to equal our prices," says William H. Carpenter Jr., president of Prime Retail. Still, outlet prices are higher than shoppers expect these days--mainly because more manufacturers are selling first-quality merchandise in their stores. The early days of the concept featured concrete, bare-bones caverns with imperfect or excess merchandise, factory overruns, and last season's styles. Now, most outlet stores are well-designed boutiques arranged in fashionable shopping centers barely distinguishable from regional malls. Irregular and damaged goods account for less than 15% of outlet merchandise, according to Value Retail News.
WARY SHOPPERS. So just what is an outlet store? That's a good question these days. Some, such as Toy Liquidators and Publishers Warehouse, are
really just independent off-price retailers selling merchandise from many suppliers. Others are manufacturer-owned but sell goods designed exclusively for their outlets. Almost all of apparel maker Phillips-Van Heusen Corp.'s outlet goods are made specifically for those stores. Ann Taylor operates some of its 31 outlet stores under the name Ann Taylor Loft. Those stores feature a "bridge line" manufactured specifically for them. "Ann Taylor created this line for people who like the Ann Taylor look but can't afford it," says J.P. Morgan Securities Inc. analyst Lee Schalop. But some wonder if such shoppers will be satisfied with a cheaper line. "The jury's still out on whether this will work," says Schalop.
New formats and shrinking discounts have left customers suspicious of factory outlets and their supposed bargains. "There is some confusion as to what we really are and what we represent," concedes Jeffrey Kerr, president of Developers of Outlet Centers (DOC), a trade group. DOC plans to roll out a nationwide public-relations campaign this winter to help educate shoppers.
Of course, lots of outlet shoppers leave happy. Take Dorothy Lofton, a marketing executive at a San Antonio software maker. She plunked down nearly $500 during a recent spree at the San Marcos outlet centers, loading up on shirts, sweaters, and slacks. Lofton figures such a haul at a department store would have cost twice that. "I do a lot of shopping. I know a good bargain when I see it," she says. Maybe. But plenty of bargain hunters find they no longer have to trek to a distant outlet mall to bag the big savings.