ESTON-analysis – The rise and fall of factory outlets

In the past 5 years more and more retail developments flooded the surroundings of Budapest. During these years it turned out that not all of the many similar projects can be successful.

Eston International consultants examined 3 outlets in Budapest, from which the first two opened in 2004. The projects started at the M0 motorway, not far from each other, by having almost the same name: Budapest Outlet Centre, and Budapest Outlet Center. Developers claimed at that time that their choice of the place and name were completely accidental. They believed that the proximity of the two developments will only boost their sales, since, at the beginning, different brands settled in each establishment. Later correcting the identical names, the two projects became known as GL Outlet and Premier Outlets Center.

The main characteristic of the factory outlet is that the products of each brand are offered much cheaper, at a price at least 30% lower than downtown retail prices; in addition, former collections, unsold stocks are also distributed by these shops. This concept attracted plenty of brands which had not been present in Hungary previously. For them it was easier to enter the market by paying a lower rent at a busy place on the edge of the city to explore further possibilities for trade expansion.
Based on the experience of Eston experts, the key factors to ensure success in the inceptive period of a retail project would be the following:

1. good location
2. easy and obvious accessibility
3. visibility
4. well chosen marketing strategy
5. attractive tenant-mix
6. good concept
7. critical consumer mass

In the case of GL Outlet, probably no prudent location survey was prepared before the building commenced. From the seven success factors indicated above, especially the absence of the “good locationâ€? was conspicuous. Premier, on the contrary, before and after its opening launched an aggressive campaign in all means of the media. Therefore in the shoppers’ minds, the words ‘outlet’ and ‘premier’ involuntarily linked up together.

Regarding its location, it is situated by a slip road, and is clearly visible from the main road; whereas, the competition settled by a less busy part of the M0 motorway, in the neighbourhood of a hypermarket on the decline.

As for the tenant-mix, the filling of empty retail spaces requires great foresight in the beginning of the investment. Some of the big brands do not tolerate well if shoppers buy overdue collections from the outlets only, instead of the full-price products downtown. Therefore it is quite difficult to persuade them to represent themselves outside the city. In order to create the perfect tenant mix, owners leave some retail units empty even for months rather than letting it to a tenant that does not fit into the atmosphere.

Besides the elaborated tenant-mix, Premier used turnover-based rents, which means that tenants pay the rent as a defined proportion of their gross income on top of a fixed rent.

In spite of the bad “kick-offâ€?, GL still had a positive attitude towards the market and tried everything that is possible and written in handbooks for managing a situation of this kind. They tried to boost trade turnover in two steps: firstly they changed the management company, secondly, their profile. Since then it turned out that these changes resulted in no success, which was also illustrated by appearing on the “black listâ€? of APEH (Hungarian Tax and Financial Control Administration) in time, as a debtor.

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In the meantime, the third competitor (being a competitor almost only in its name) M1 Outlet opened next to Premier, however, few months after the opening it already closed. Premier emerged as a winner again and continued the previously started fierce competition. They even changed the access to their premises by transforming the entry road in order to attract the other outlet’s customers.

Besides the partisan attack of Premier, it is important to see that the failure of M1 mainly rooted in its mistaken concept. The underground parking lot, built to compensate the scarcity of outdoor parking spaces, made the shopping more time consuming; furthermore, the multi-storey layout was less transparent than the traditional shopping-street style. Regarding its tenant-mix, M1 showed a rather mixed image: from food stores through drugstores to crèches, the services included almost everything. Although not all the fashion stores offered their products on outlet prices. As it seems mixing the ‘outlet’ and the ‘shopping mall’ concepts could not please the customers neither with the architecture, nor with the product line.

According to the experts of Eston International’s retail division, the following ingredients are elementary for the ideal functioning of an outlet:

– Be the first on a given market – even if this means only one month ahead of the competition’s appearance
– Carry out continuous market research (beforehand, and regularly after the opening): focus groups to explore the customer needs
– Most effective layout: ~20 000 sqm “shopping villageâ€?, sufficient free parking spaces inside
– At least 2 million people should live in the outlet’s surroundings within 1-hour drive
– The shops shall be open till late night, for the comfort of customers coming from work
– Differentiate brands, refresh the tenant-mix – otherwise the customers will get bored easily with the steady supply

Success is not guaranteed even if all these rules are observed. It is sure though that in crisis, high-quality, durable products –especially at a lower price – are the shoo-ins.

By examining the outlet concept, it seems that we are facing a build-up which is fundamentally crisis-resistant. Here customers can select from discounted products all year long. There is still development potential east from Hungary as well; new projects have started with success. In Central and Central-Eastern-Europe – excluding Poland – outlets appeared lagging behind the western market: the first outlet opened in Prague in 2007, in Romania in 2008, while the first one in Slovenia will only open in 2010. Hungarian outlet market is still unlikely to be overloaded; just the rightly professed triple rule of “location, location, locationâ€? has to be implemented well.

For further information please contact our experts or visit our site at www.eston.hu and read the full issue of Property Watch under „Our publicationsâ€?.