JC Penney leaves the Outlets

September 14, 2011

DISCUSSION TOPIC

A Contrarian Penney to Sell Outlet Stores 09-02-2011

While many other retailers are increasing the number of outlet stores they operate, J.C. Penney is getting out of the business altogether.

According to a Bloomberg News report, Penney has reached a deal to sell its outlet stores to SB Capital. The department store chain made the decision to get out of operating the 19 stores at the same time it is closing its print catalog business.

SB Capital will continue to operate the outlet stores under the J.C. Penney banner for 21 months before a name change is made. The company is also bringing on Penney’s outlet store management team to run the business.

Penney’s decision to close its outlet stores runs contrary to the current trend in retailing that sees many chains and designers expanding. Sales in outlet stores are capturing a greater percentage of overall sales, particularly in select categories such as apparel. According to The NPD Group, total year-over-year apparel sales increased 1.4 percent for the 52-weeks ending April 2011. By comparison, apparel sales in outlet stores grew 17.9 percent during the same period.

Marshall Cohen, chief industry analyst at NPD, said the success of outlet stores is due to value conscious consumers “looking for brands they either already have, or that they trust. They want products that are tried and trusted and they don’t mind spending money on them.”

Discussion questions:  What do you make of J.C. Penney’s reported decision to sell its outlet store business? Do you expect other retailers to follow Penney’s lead?

My post:

This is a very interesting move on the part of J.C. Penney’s leadership.  It may seem counterintuitive to move away from a currently trending business model.  However, I applaud any business that chooses to focus on its core business vs. dabbling in other areas.  Despite the continuing challenges, Penney has made several good moves to strengthen its core:  closing unprofitable stores and formats, adding key customer-desired elements such as Sephora cosmetics, and strengthening its web offering.  A focused mid-tier department store world dominated by Kohl’s and Penney at the bottom/middle and Macy’s at the top sounds about right.

What I find really interesting is the decision of SB Capital to choose to make this purchase without the ability to keep the name.  In so doing, I assume this a pure real estate play and I doubt a new name for an outlet center anchor will emerge but rather Saks Off Fifth or similar will eventually occupy the sites.

The evolution of American retail continues…

Mike Osorio, your Dare to be Contagious! ™ strategist

www.OsorioGroup.com

What do you think?  Please add your comments and add to the discussion!

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Go to the full discussion at Retailwire.com:  A Contrarian Penney to Sell Outlet Stores

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The Lure and Growth of Outlet Malls

August 27, 2011

DISCUSSION TOPIC

Outlet Malls Adding Square Footage 08-26-2011

At least in terms of real estate, outlet malls are the stars of retail. The channel appears to be the only one witnessing noticeable square footage growth.

A series of articles recently detailed the appeal of factory outlet malls while pointing to expansion efforts in markets around the country. The first ever outlet opened in Oklahoma City in August. A new outlet shopping center is being built in San Clemente, CA.

The expansion comes as apparel sales at factory outlets rose 17.8 percent for the 12 months that ended in April, NPD Group told The Weekly Herald in Washington.

“Americans are so focused on price,” Lee Peterson, executive vice president of creative services at WD Partners, told the Chicago Tribune.

But a number of factors besides budget-shopping are driving outlet center’s growth:

  • Overcoming stigma: Outlet centers over the years have lessened the perception of a bargain-bin atmosphere. Steve Craig, chief executive of Craig Realty Group, which owns Citadel Outlets in Los Angeles, told the Los Angeles Times, “Ten years ago, if I said, ‘Come shop at an outlet,’ they’d say, ‘Oh, no, I shop at Neiman Marcus.’ I don’t get any nose cringes anymore.”
  • Luxury appeal: Nordstrom, Neiman Marcus, Barneys and Saks are also all opening up more outlet locations. Bloomingdale’s and Lord & Taylor are opening outlets for the first time.
  • Vendor expansion: Newer vendor brands such as Not Your Daughter’s Jeans, Vince Camuto shoes and Under Armour are aggressively expanding outlet locations.
  • Marketing ramps up: Bus tours and hotel shuttle packages are often now offered to attract tourists to the mall. Coupons and radio ads are being used to drive nearby traffic.
  • Hybrids: Hybrid malls combining full-price and outlet stores are opening. Macy’s recently announced plans to open its first traditional department store in an outlet center.
  • Location! Location!: With limits, many outlet centers appear to be opening closer and closer to towns and cities.
  • Economics: It’s not only lower rents, but common area assessments (no elevators/escalators, no collective heat/air conditioning) and staffing costs are lower than traditional malls. At the same time, Chicago Premium Outlets in Aurora generates $700 a square foot while Simon Property’s top-performing outlet mall, Orlando Premium Outlets in Florida, generates $1,300 a square foot, according to the Chicago Tribune.

While the heap of recent articles exploring outlet centers growth were overwhelmingly positive on the channel’s prospects, it was stated that location remains a drawback for consumers not fond of driving far distances. Although many appear to be opening closer to traditional mall towns and cities, brands are still said to worry about opening outlets too close to their full-price department store or mall customers.

Another issue is merchandise quality, although it appears to be a minor complaint. While outlets in the early days did sell a large quantity of the prior-season liquidation goods formerly found at full-price locations, an estimated 85 percent of apparel — even at luxury stores — is made specifically for outlets at inferior quality to offer the needed lower prices. Outlet shoppers either don’t know or don’t care. But Boston University professor Ellen Ruppel Shell, author of Cheap: The High Cost of Discount Culture, warned in The Oklahoman, “It’s really a case of buyer beware to know what you are getting. And the sales clerks don’t always know.”

Discussion questions:  What’s your assessment on how the factory outlet channel has evolved and its future prospects? What limits do you see for factory outlet center growth? What warnings, if any, would you offer brands?

My post:

Retailers must tread carefully here.  On the one hand, centers in places like Oklahoma City are a phenomenal way for retailers such as Polo Ralph Lauren, Saks Off 5th, and others to penetrate a fast growing and underserved demographic at a relatively low cost of capital and ongoing labor/overhead.  In addition, given that the current economic malaise is likely to continue in much of the US for the next several years, Outlet locations allow a retailer a much needed growth opportunity particularly for publicly traded companies whose stock price is largely driven by growth (or lack thereof).

On the other hand, luxury and upmarket brands must carefully consider the risks to brand equity.  The more this channel grows, particularly in close proximity to urban centers, the higher the chance of degradation of brand perception.  Long term, this could hurt brand equity and growth.  However, as most upmarket brands operate on a global platform, there can be two strategies:  One which capitalizes on what appears to be a long term trend toward price driven retail in the US and potentially some markets in Europe, and another which focuses on the high growth Asian and emerging market economies which allow for high margin, regular price selling.

A great example of this is the Timberland brand.  In the US, I can buy a Timberland knit polo shirt for $60, ~$48 on sale at Macy’s.  Pricier than similar product from moderate brands, but I’m willing to pay the price for the quality, fit and the prestige of the brand.  Recently in Singapore, I needed a casual shirt quickly while attending a conference.  With only 15 minutes to shop, I went into the Timberland store in the Shops at Marina Bay Sands and spent the equivalent of $104 for a similar knit polo shirt.  Clearly this brand is taking advantage of this two-pronged strategy as are many others.  Currently the only “outlet product” they sell is online and only footwear, but you see my point.  Sad to be a brand only operating in the US these days…

Mike Osorio, your Dare to be Contagious! ™ strategist

www.OsorioGroup.com

What do you think?  Please add your comments and add to the discussion!

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Go to the full discussion at Retailwire.com:  Outlet Malls Adding Square Footage

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Thank you for visiting my blog!  Please subscribe using the RSS button and comment on my postings.