Why the outlet market is weathering the retail storm

A perfect storm of historic over-renting, low wage growth, oversupply and the growing popularity of internet retail have produced a situation that is being further exacerbated by the offloading of surplus units by some retailers, backed by private equity. During these stormy times, one might wonder where to run for cover in the retail sector.

One potential safe haven is the outlet market, which remains an attractive option to those focused on income growth and wanting to maintain an interest in retail. Outlet retail provides a rare opportunity to find value, with turnover leases encouraging a strong alignment of interest between landlord and tenant.

As a result, the outlet market has avoided the burden of over-renting, while the prospect of a discount on branded goods appeals to the aspirational, bargain-hungry shopper. All of this provides a safe harbour against the internet retail challenge – outlet stock is generally not available online and shoppers must visit outlets to buy the goods.

Despite challenging weather conditions, which reduced anticipated footfall, specialist outlet asset manager Realm reported solid performances across the centres it manages over the four months to the end of April. Realm outlets in Wembley, Livingston, Birmingham and Dalton Park recorded total 2.2% sales growth in this period. In stark contrast to the challenges facing the overall retail sector, total sales have improved by 4.8% across Realm-managed outlets over the past 12 months.

Casualwear and sports lead the way

So how is this sales growth being achieved? Most noticeably through the consistent conversion of would-be browsers into shoppers, as the discount retail offering becomes increasingly attractive to visitors. Add to this the fortuitous double whammy of an early Easter weekend that coincided with March’s pay day and it’s no surprise that footfall increased significantly at Realm’s outlets over the Easter period. Also driven by onsite events, it peaked at 10% footfall growth, while sales rose 13.7%.

The strongest-performing sectors at Realm-managed outlets have been casualwear and sports footwear. Beauty and healthcare outlets have also done very well, with the outdoor operators all capitalising on thelater arrival of better weather.

Fashion has been a more mixed bag – retailers with the ability to be flexible with their stock  have delivered excellent results by reacting to the unexpected weather, while others with more constrained inventories found it more difficult to match shopper demand. Realm has put these countercyclical performances down to the operators’ ability to fine-tune their stock offers to meet the day-to-day demand from visitors.

Both savvy operators and shoppers are looking more and more at outlet shopping centres as destinations. At Seven Dials, we repositioned Princes Quay in Hull to include a mixture of outlet stores, traditional shopping, food and beverage and leisure facilities. The centre is well suited as a leisure destination, with the outlet mall providing an exclusive form of retail therapy that sets it apart from the other shopping centres in the region.

As retail is a cyclical industry, the tide will no doubt turn in a couple of years and new formats  will advance, with occupiers that are specialists in innovation and creativity drawing shoppers back to bricks and mortar. As necessity is the mother of invention, this will have to be matched by landlords, which will need to recreate and reshape their retail property to meet ever-changing demands. We see Princes Quay as a front-runner of this trend.

Mickola Wilson is director at Seven Dials Fund Management