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Evolution and Stabilization of the Japanese Outlet Market

Outlet malls first started to sprout in Japan in the early 1990s. On the back of sluggish economic performance, rising inventory of retailers and brand conscious Japanese consumers looking for high quality products at more affordable prices, a market opportunity was born. When the first outlet store was opened in 1993 it was extensively covered by local media and gained immediate traction with customers. But it was not until 1999 that the market started to take off. This coincided with the entry of leading US outlet operator Chelsea Property Group (CPG). In a joint-venture with Mitsubishi, Chelsea introduced American style outlet formats to Japan which rapidly gained in popularity leading earlier formats to lose their appeal.

1999 to 2008 saw a period of rapid expansion - Mitsui developed a total of 8 outlet malls while the Chelsea's Japan portfolio continued to grow after Simon took over the shares from CPG in 2004. The market in Japan saw early concentration around the leading players. By 2008, 33 outlet malls were in operation nationwide with Mitsui and Mitsubishi- Simon JV controlling 45% of market share by number of outlets.

Following the financial crisis, the market slowed - the retail industry had become more competitive with many traditional formats introducing discounted products and in-store promotions. Simon had refocused its operations on its core market, i.e. the US, liquidating equity stakes in several China malls and scaling back expansion of its outlet portfolio in Japan. Outlet players responded to a more challenging operating environment by diversifying their formats and adding facilities such as restaurants and entertainment to their product offering. The launch of new projects remained slow - access to sites with large proprietary catchment areas especially around major metropolitan hubs was becoming more difficult to secure. As a result, most operators focused on expanding and upgrading their existing floor area to accommodate more diversified retail experience. Mitsui has been the only active player in terms of new developments, opening five outlet centers since 2008 and establishing itself as the clear market leader by number of outlets operated. As new entrants have been few, the market remains highly concentrated. Amongst the 20 top performing outlet centers by retail sales in 2014, only three were not operated by either one of the leading players.

Looking forward, Japan's outlet market growth is expected to remain subdued- a rapidly aging and declining population have led to contracting retail sales which will continue to challenge the operating environment for retailers. Competition from existing large scale shopping centers remains fierce and the rise of e-commerce is a growing challenge in terms of matching price discounts. For outlets in Japan to remain competitive, adopting O2O strategies, expanding service offering and adapting their positioning to the changing demographic trends will be critical. Increasing traction from in-bound tourism from China and other Asia countries can also help to off-set some of the challenges and present a viable strategy especially for locations that are popular tourist destinations.

The History of the US Outlet Market

The history of US outlets can be dated back to nearly a century ago when apparel and shoe manufacturers first started selling damaged goods at discounted prices to their employees. Popularity of the schemes quickly led to an expansion of the customer base to non-employees. Originally, stores were located within the premises of the factories themselves from where the term "factory outlet" originates. The first independent outlet store was opened by men's clothing manufacturer Anderson-Little in 1936 and marked the first evolution in the industry. Until the mid-1970s, however, outlet retailing largely served as a channel for manufacturers to dispose of excess production and irregular stock in single-brand stores. The next big evolution came when Vanity Fair opened a multi-brand outlet store in Reading Pennsylvania. But it was not until 10 years later that the first enclosed outlet malls started to appear and the industry as we know it today began to emerge. The 1980s were an important period in re-shaping the industry's image from single manufacturer-branded stores to multi-branded outlets centers offering a wide range of designer label offerings at discounted prices. The outlet malls of the 1980s and 1990s were mostly built in more remote locations around major metropolitan areas and featured tenants not found in traditional malls, thus maintaining a clear distinction from shopping centers in their value proposition. The lines between traditional and outlet retail were clearly defined, as they provided consumers with two distinct shopping experiences.

From the late 1980s and throughout the 1990s, a period of rapid expansion was witnessed - the number of outlet stores increased significantly from 113 in 1988 to 327 by the end of 1997 - meanwhile, retail sales of outlet malls grew at a CAGR of 11% from USD 6.3bn to USD 12bn in the period from 1991 to 1997 (Source: Good marketing to "bad consumers", Outlet Malls, Grey Markets, and Warehouse Sales. Anne T Coughlan and David A Soberman. Instead, July 1999). The formats during this expansion phase were mainly dominated by outlet centers of 50,000 to 200,000 sf which grouped several outlet stores built next to each other. Most of the malls defined at outlets in the 1990s would no longer qualify for that definition today (Now VRN defines outlet malls as having at least 50% of GLA as outlet retailers). Throughout the 1990s the market remained fairly fragmented with several regional players dominating different segments of the outlet industry. Among the big names in the outlet industry in 1990s, only Tanger has remained a leading player today.

After 2000, the market began to mature rapidly. Players started developing bigger formats and diversifying their product offering, increasingly blurring the lines between regional malls and outlet centers. This period was also marked by clear consolidation and market leaders crystalized. It is during this period that Simon Property Group, already an established shopping mall operator, entered the outlet market. Facilitated by buoyant capital markets and easy access to capital, Simon pursued an aggressive expansion program through a series of strategic acquisitions, focusing on portfolios of leading regional players. In 2004, Simon took over Chelsea Property Group's "Premium Outlet" portfolio comprised of 36 malls including 4 in Japan. This was to become the first cornerstone acquisition for Simon in the outlet market and was followed suite by a series of additional acquisitions. In 2009, Simon completed the purchase of 22 outlet malls from New Jersey-based Prime Outlets. This acquisition was to cement Simon's dominant position in the outlet market, increasing its total outlet portfolio to 63 malls by the end of 2009.

The Global Financial Crisis slowed growth in the outlet market during 2009-2011 mainly due to tight liquidity and low investor and consumer confidence. But the recession has also heightened consumer sensitivity to "value for money". As a result, the outlet industry has witnessed a second spring recording strong annual performance since 2011. Developers have been racing to bring more outlet malls to the market and leading to an influx of new developments and re-developments. A total of 41 new outlet centers were opened in North America between 2012 and year-end 2015 with an estimated pipeline of close to 60 projects currently under planning according to VRN (Source: Value Retail news, August 2015). Leading players including Simon and Tanger are continuing to expand their footprint and more joint-ventures are also seen between major players that are joining hands to develop bigger and better centers. This is a significant expansion for an industry that only comprises of 215 outlet malls today, when applying VRN's strict definition of outlet malls.

Over the years, outlet malls have become progressively more sophisticated and also larger in size while luxury brands and department stores have increased their activity in the outlet space, adding more quality tenants and brands to the industry. As developers are seeking to tap into new market segments including international tourists and everyday shoppers, outlet malls are increasingly locating themselves closer to traditional retail catchments, which has further blurred the lines between outlet malls and traditional retail formats. This geographic shift is seen as a major success factor and a key reason behind why the industry is thriving today.

Looking forward, it will be the ability of outlet operators to continue providing customers with a superior shopping experiences, by selecting more convenient and accessible locations, introducing higher value services, while also maintaining value margins over traditional retail pricing, that ensures the competitive advantage of outlet malls and cement their positioning in the retail industry going forward. While outlet malls have succeeded to build loyal customer networks on the back of price-value, the rise of e-commerce presents a threat that cannot be ignored. Outlet operators will need to apply innovative strategies to increase their appeal beyond the discount proposition that they have relied on thus far.

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