C-Suite: Steve Tanger on the outlook for outlet centers
Tanger Factory Outlet Centers operates, owns or has an ownership interest in 42 shopping centers nationwide that encompass 14.3 million square feet. The company’s centers are home to more than 3,000 stores operated by 470 different retailers, which affords Tanger President and CEO Steve Tanger a unique vantage point on the retail industry. He spoke recently with Chain Store Age about the outlet shopping industry his father pioneered 35 years ago.
CSA: Congratulations on the 35th anniversary. The outlet shopping center industry looks a lot different than it did in 1981 when your father opened the first outlet center in North Carolina. What stands out for you?
ST: When we first started, the outlet stores were clearance stores. If there was excess or imperfect inventory, it went to the outlets. Over time, the excess inventory was sold and no one intended to produce excess inventory. Our tenants reached a punctuation point in time where they had to decide if they would establish outlet stores as a distribution channel and operating division or maintain as a clearance unit. Almost without exception our tenants decided that this was a real and huge business opportunity that they wanted to grow. When the outlets became a distribution channel, the manufacturers created retail stores that reflected the image of the brand. That’s the biggest difference [between then and now].
CSA: Talk a little about the concept of an outlet center and how you think the word “outlet” has evolved in the minds of the consumers over the past three decades, especially as the number of outlet centers has grown. When consumers hear the word “outlet,” what do you think they think?
ST: We were the pioneer in using the outlet term and I believe we were the first shopping center developer to brand its shopping centers as outlet centers. The business model that we helped create is that of an outlet center for outlet stores in which brand names sell direct to the consumer. You cut out the middleman and consumers understand that. The consumer buys direct from Polo as opposed to Polo selling to a department store and then the consumer buys from the department store; there is a profit in between, so inherently the consumer would pay more. The business model is simple and elegant and has had a long life cycle.
CSA: How do the off-price concepts developed by department stores factor into your tenant mix?
ST: We have mixed in with the branded outlets a few of the department store off-price stores. We have a couple of Saks Off 5th stores and one Neiman’s Last Call but we have no Bloomingdales, Lord & Taylor and no Nordstrom Rack stores. Somewhere between 90 and 95% of our stores are brands selling direct.
CSA: Should we expect to see more of the department store off-price concepts in Tanger centers going forward?
ST: Tanger will continue to adjust our tenant mix to meet customer demand and deliver on our commitment to creating an exceptional shopping experience when they shop Tanger.
CSA: What does your research tell you that shoppers like most about the outlet center concept versus other shopping venues?
ST: The ability to buy brand names direct from the manufacturer. It is a business model that has not been repeated and it is hard to repeat. We have survived and grown along with TJ Maxx, Walmart and Target and all the other hot retail success stories. We each have a particular role and people cross shop. Ours is a unique business model, not really a head-to-head competitor with mass merchants.
CSA: Does the concept of an outlet store run the risk of being diluted as more brands enter the space and retailers source goods specifically for outlet formats?
ST: I don’t think so. We do business with more than 400 of the finest brand and designer manufacturers in the world and any one of our centers has between 95 and 120 stores averaging about 3,500 square feet. We mix and match tenants depending on location and which retailers are growing their store counts and which ones are not. The fashion industry is constantly changing so some of the major tenants that we dealt with 10 years are no longer in existence. Liz Claiborne used to be in every one of our centers and now it’s a brand sold in one of the mass merchants. I could go down the list, but the point is that our top 10 tenants 10 years ago are dramatically different than our top 10 tenants today. More brands and retailers coming into the outlet centers does not dilute the concept, it keeps the concept fresh.
CSA: Tanger’s occupancy rates are at near record levels and that’s after adding four centers totaling 1.4 million square feet last year. On top of that, retailers are paying higher rents. This strong demand for physical space runs counter to the notion that physical retail is losing out to e-commerce. What’s causing this disconnect?
ST: There is a place for e-commerce with certain types of products such as commodities. E-commerce is more difficult in fashion and shoes where you are dealing with sizes and colors and different fits. The dirty little secret with apparel sold online is anywhere from 30% to 50% of it is returned. A lot of our tenants have an online presence for informational purposes because the first portal to a brand today is through a web site, but the outlet product is only sold on about 6% or 7% of our tenants’ sites, which is very low.
We are extremely profitable. The reason we can raise our rents and still have the lowest cost of occupancy for our tenants of anyone in our peer group is that the sales in Tanger centers go up. As sales go up, we work with our tenants to charge a fair rent and our tenants are also very profitable. It is a business model that should last for a long time.
CSA: And you’ve got two more centers coming online this year, Columbus, Ohio, in June and Daytona Beach, Florida, just ahead of the holidays. What makes these projects special as far as new features, amenities or service elements that facilitate retailers’ omnichannel efforts?
ST: With all of our projects we try to be unique in the marketplace. In Columbus and Daytona Beach there really are no outlet centers in those markets. We are a regional shopping destination, not a local shopping center. We bring people from 30 to 50 miles around.
CSA: What kind of interest are you seeing from online retailers who want to establish a physical presence?
ST: We are talking to several of them but most of them have no credit. Most who are trying to open brick and mortar are doing so because it allows them to know their customers better and it extends their brand. We will see how it evolves. We dealt with the catalog companies 30 years ago and omnichannel is a digital catalog. We worked with catalog companies 30 years ago to open their first outlet stores and now most have outlets stores and their catalogs have gone away.
CSA: Longer term, what’s the latest on the new outlet center that is part of the Champions Circle mixed-use development adjacent to Texas Motor Speedway?
ST: We are moving forward and have received terrific tenant response. We are not quite at our threshold of pre-leasing 60% of the space, but once we get to that level we will buy the property and start construction. We do not build anything on speculation.
CSA: Is there a projected opening date?
ST: Not yet. Once we close on the land and start construction we are happy to provide a projected date, but right now it would be just a guess.
CSA: Lastly, looking back over the past 35 years an