Prime Retail has begun development of a $156 million, 120 store-outlet mall in Livermore California. About 30 minutes from San Francisco, this outlet mall will be called "Prime Outlets Livermore Valley".
Undaunted by the slowing retail environment President of Prime Retail Dale Kaye says “People are looking for bargains... They want to buy brand names at a lower price.”
This type of thinking is silly as in a recessionary environment people will shop at outlet malls less. Just as real estate does not "always appreciate" and buyign does not mean you "build equity" over renting, this mentality is what is going to make the commercial real estate crash long and deep.
In an economic-boom environment it is completely logical for a retailer to setup an outlet, as an outlet allows the retailer to move excess inventory without diminishing the brand value as there is a great price differentiation between "boutique" and "outlet" stores allowing the retailer to price discriminate.
However, in a recessionary environment when consumer spending slows, the retailers are forced to both reduce "boutique" retail prices as well as reduce order commitments. This creates two problems. First in a recessionary environment many retailers are simply struggling to survive. This usually means monetizing brand equity, aka "whoring out the brand." Many retailers are already engaged in this, for example Movado, Coach, and Burberry heavily discounting their products in their boutique stores while rapidly eroding perception of brand-value. As sales price nears product cost, this necessarily reduces the spread between "boutique" and "outlet" price thus reducing the attractiveness of an outlet. Second as order volume decreases and product lines are eliminated, excess retail square footage is created in their boutique stores. In order to maintain profiability retailers must fill this excess square footage with products normally destined for the outlet further impairing the attractiveness of an outlet.
While consumers are still flocking to outlets with the belief of a rapid price spread between "boutiques" and "outlets" it is becoming more evident that this spread is rapidly eroding. As consumers catch on outlets will become less and less attractive.
Hopefully Prime Retail and Dale Kaye catch on before the consumers do...
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