NEW YORK, United States — The Fashion Outlets of Chicago mall offers a glimpse into the anything-goes future of the retail industry.
The center is brimming with discounted fare from J. Crew Group Inc., Coach Inc. and other brands, much like the dozens of outlet malls that have sprung up in distant suburbs across the country over the past 40 years. Here’s the difference: It’s just a short 16-mile jaunt from the city and located right by the bustling O’Hare International Airport.
After years of outperforming regular malls, outlets are increasingly encroaching on downtown shopping districts. The shift is part of a painful dislocation for brick-and-mortar retailers, which are abandoning decades of etiquette as they chase a dwindling number of shoppers.
“We’re becoming more outlet-focused for sure in the United States,” said Laurent Vasilescu, an analyst at Macquarie Capital in New York. Department stores and other full-price retailers -- once the preferred place for clothing brands to showcase their wares — don’t offer the same kind of growth as outlets.
Brands and retailers used to have an understanding about outlets. Neither one wanted the discount malls too close to full-price stores because they might hurt total sales. If shoppers can just drive a short distance and get a cheaper handbag from the same brand, why buy a full-price one from a local department store?
As a result, brands like Nike Inc. and Gap Inc.’s Banana Republic typically put their outlets and factory stores far from town. Woodbury Common Premium Outlets, a popular center in Central Valley, New York, is at least an hour’s drive from midtown Manhattan. In the San Francisco Bay area, the premium outlets are in the distant burbs of Petaluma and Gilroy.
“They really wanted to keep away and not cannibalize their own business,” said Chen Grazutis, an analyst at Bloomberg Intelligence.
Over the years, the outlet industry has evolved. As shoppers flocked to the stores in search of deals, companies began producing cheaper clothing exclusively for outlets. That let them maintain their profit margins and distinguish their full-price fare from their discounted products.
Foot traffic at regular shopping centers, meanwhile, has been shrinking — a trend that continued during the latest holiday season. Store visits declined 3 percent in December from a year earlier, according to ShopperTrak. The rise of Amazon.com Inc. and other e-commerce sellers have given shoppers less reason to go to malls or shopping districts.
The slump has put pressure on brands to rely more on one area of brick-and-mortar retail that’s largely still growing: outlets. Teen-apparel companies have been especially aggressive, even as they close regular stores. American Eagle Outfitters Inc., Abercrombie & Fitch Co. and Express Inc. are all adding outlet stores.
As they pursue discount shoppers, the brands risk hurting sales of full-price merchandise, said DJ Busch, a mall analyst for Green Street Advisors.
“You had to separate it from your full line because there’s a different value proposition being offered there,” Busch said. “If they blur that line too much, it goes from an incremental part of the business to more of a cannibalization of your full line.”
In the Boston area, an outlet center called Assembly Row opened last year just 8 miles from downtown. New Orleans, meanwhile, has a new outlet mall called Riverwalk that’s within city limits.
The balance of power between traditional retailers and brands showed signs of tilting in 2002, when Nike had a rift with Foot Locker Inc. In December of that year, the sneaker maker said it would sell fewer of its shoes through Foot Locker, which was its biggest customer. At the time, more than 40 percent of the chain’s revenue came from Nike. Foot Locker’s stock dove 12 percent on the news.
“It was clear that Nike was more important to Foot Locker,” said Michael Binetti, an analyst for UBS AG in New York. “Nike stock got hurt a little bit. Foot Locker stock got hurt a lot.”
In Nike’s case, the issue wasn’t outlets. The company was concerned that Foot Locker wasn’t promoting its higher-end sneakers enough. But the standoff showed that brands had an increasing array of options for marketing their wares. Nike relies both on its own full-price stores and outlet locations to reach customers.
When a consumer goes to the brand directly — whether it’s a Niketown store or a Gap Outlet location — the brand gets more of the profit, Grazutis said.
The shift has added to the headaches of department stores, which are struggling to get enough customers in the door. Macy’s Inc., the largest department-store company, posted same-store sales growth of just 2 percent last quarter — missing estimates.
Some chains are taking a can’t-beat-’em-join-’em approach. Bloomingdale’s, the high-end line of department stores owned by Macy’s, is opening its own outlet center this fall on Manhattan’s Upper West Side. While the company already has several outlet locations, this is the first in an urban center — and it’s just across Central Park from its flagship store.
Even with the upheaval, department stores serve a purpose for brands and the old relationships still matter, said Rick Snyder, an analyst at Maxim Group in New York. They save apparel companies from having to pump money and effort into their own stores, something many can’t afford to do.
“It would be very difficult for, say, a Ralph Lauren to duplicate the distribution that 850 Macy’s stores gives them,” he said.
By Allison Prang, with assistance from Lindsey Rupp. Editors: Nick Turner and Kevin Orland.