Money Growing: Global discount

Ask any woman in Moscow if she is waiting for the sales in the fashion boutiques and the answer will be unequivocal. A few years ago chains understood that it is possible to make money from this expectation. Then in Moscow every possible stock and discount center began to appear.

Despite this, according to experts, this niche of the market is still not saturated. Yet the format of outlet centers abroad has been successfully developed. In the Russian mass media forecasts about this format appearing on the market began to appear about 3-4 years ago. But time has passed and forecasts still remain just that.

Reasons and Plans

The outlet center format is similar to Moscow’s discount centers, but nevertheless differ from them. In outlet centers they sell unsold products and seconds, but at prices close to wholesale.

The appearance of outlets is by small private manufacturers of clothes and footwear, and to be exact – the shops themselves. Sold in such shops at factories past season goods that have remained in department stores, or goods with a small defect in production. Old collections and factory seconds are compensated by prices close to cost price. In the 1990s, there were shopping centers specializing in the sale of goods of similar class.

Outlet centers are not widespread not only in Moscow, but also throughout Russia, says Sergey Bogdanchikov, director of the consulting department at the London Consulting Management Company (LCMC). The reason for such difficulties, in his opinion, first of all is in the poorly developed market and the unwillingness of chains to rent additional areas. "Many companies only now face increases in the expenses of unsold production. As soon as the scale of this problem and the number of retailers increases in Russia, as well as in other countries, outlet centers will appear," argues Bogdanchikov.

The main reason is the absence of resources necessary for the realization of such projects: a land plot in a good location and demand which could justify the occurrence of this format, considers Anna Shiryaeva, general director of Magazin Magazinov. In addition developers are more doubtful as such projects have lower parameters than traditional shopping and entertainment centers, and they are also doubtful about the ability of outlet centers to successfully function in the Russian market, she adds. Experts explain that abroad outlet centers are often a kind of "shopping village," outside, with streets and numbered shops.

Currently consumer demand exceeds the supply of goods in the Russian market. For this reason there is no serious competition and necessity to price dump, explains Yulia Dalnova, director of the retail real estate department at Knight Frank. Russian consumers are still insufficiently spoilt and buy practically everything that a shop offers: from last season goods to cheap fakes of eminent brands. The manufacturer simply does not need to reduce the price to a minimum level to get rid of any goods that are left. Everything is bought, the expert sums up.

Another fact is that in Russia developers expect to make super-profit from the realization of a shopping center project and cannot understand why the rental rates of outlet-shops should be lower, because the economic meaning of rent is to pay for the turnover of goods. Goods that have been discounted, for whatever reason, are less liquid and also the turnover of such shops by definition lower, argues Ned Cussen, partner at King Sturge for the UK.

However, as with the creation of a normal shopping center, developers must also attract anchors – the best brands in this case - for outlet-centers. In Russia the majority of the most demanded brands are in the hands of several companies which developers would have to offer special condition to, to attract them: low interest rates of rent, rental vacations.

In the West for a long time there have been professional operators copying the outlet format in the various countries. In Russia, even now such operators are still not carrying out any projects.

In the US, for example, Prime Retail group is the largest in this segment. It has 29 outlets in its empire, which are visited annually by up to 70 million people, says Ilya Shuravin, partner at S.A.Ricci in association with King Sturge. English company Outlet Centres International manages shopping complexes in Scotland, Sweden, Germany, and is also looking for partners to open centers in Italy, Denmark and Spain.

The discount-centers that exist in Moscow, can only be considered as the early stages of the outlet format, as all of them (on Leningradka and Lesnaya ulitsa, Stokmann stores, Podium discount-center on Savvinskaya Naberezhnaya) are multi-brand shops of one operator, explains the expert.

The discount business is new to Russia, considers Anna Lebsak-Kleimans, general director of Fashion Consulting Group. At the moment the discount department stores of large western chains that have entered the Russian market with technologies and large starting investments are the most developed. Outlet centers are not very developed in Russia. In her opinion, this is connected with the fact that in Russia there are only a few large manufacturers and only they are developing this type of business dealing.

There are plans to construct outlet-centers in Moscow and St. Petersburg but nothing has been completed yet. And of those functioning and that position themselves as outlets; practically none of them possess the full list of necessary characteristics. Projects corresponding to the format were only announced in 2007. Intersport will construct the first outlet store in Moscow on Minskoye shosse, shares Bogdanchikov.

Two more projects are planned on Novorizhskoye and Leningradskoye shosse, however Bogdanchikov does not know the details of these yet. This information has been confirmed by Panfilov, Podkova & Partners. Dalnova adds the Krasniy Kit shopping center in Mytishchi to the list, where the opening of a second phase which will be an outlet-center is planned. Near St. Petersburg Italy’s Margery Group is building the Neva Collosseo shopping center, which is positioned as an outlet center.

Concepts and Principles

Outlets allow manufacturers to not only receive additional sales profit, but also avoid additional costs connected, for example, with the storage of old goods in warehouses. They also help psychologically bind buyers to certain brands and choice of place for shopping.

Roza Kameneva, owner of Cara Co concept store, also has a business in Australia. She says that outlets there are divided into two categories: factory outlets and shop outlets. The first are shops that sell surpluses or old goods. The second sell goods that remain in shops after the sales from the previous season. The discount on sale goods in shops is no more than 30 per cent of the retail price, while in outlets it reaches 50 per cent and more.

Defective or damaged goods are marked with a special image and are on sale at lower prices, Kameneva continues. Outlets are usually located in the suburbs. In Sydney there are also so-called stock-take sales. These are two-day sales of goods held by several shops in a stadium, cinema or even a town hall (Paddington Hall), she adds.

Outlet-centers have a wide range and discounts from 30 per cent up to 70 per cent. They exist to help manufacturers market unsold goods. Therefore the developer of an outlet-center should understand the fashion industry. Classic outlet stores, as a rule, are represented by premium and luxury class goods, explains Bogdanchikov.

In European outlet-centers an extensive choice of various brands is on sale, and premises are located in a zone toughly 90-minutes from the centers of large towns or cities. As a rule, in large outlet-centers measuring 25,000-30,000 sq.m there will be 70-80 different collections of famous brands. Among them will be discounted clothes and footwear, electrical appliances, and home ware. The location of such centers is not chosen casually. They are chosen so that they do not compete with the goods of the same brands, but from new collections, explains Andrei Panfilov, general director of Panfilov, Podkova & Partners.

Opening such a center will reduce the losses the retailer bears from incompletely sold collections during a season. By the expert’s estimations, this loss is about 4-6 per cent of the turnover of companies, and in fact existing discount-centers and stock-centers on the market do not effectively sell leftovers, Panfilov is assured.

However he says that outlet-centers have both strengths and weaknesses. First of all the strengths of the format, which in his opinion are: the format hasn’t formed (in the Russian market) a market niche in the given segment, high interest from consumers; it is a convenient arrangement of various brands under one roof. And the weaknesses: there is a shortage of operators in the given format, recovery of outlay takes a long time and there is only a small number of Russian operators which possess exclusive rights to distribute many fashion brands. To attract them as tenants in one place is difficult. Representatives of luxury brands do not like competition.

The cost of construction

Abroad developers willingly invest in the construction of such premises. In the western market the following successfully do business: BAA McArthur Glen (Cheshire Oakes, Swindon and so forth), Freeport PLC (Braintree Outlet Shopping Village, Designer Shopping Village), Value Retail PLC (brands La Roca Village, Bicester Village, La Valle Village), MEPC Plc. (Atlantic Village), Neinver (Nasicca Vila do Conde, Gli Outlet di Vicolungo) and Realm (14 complexes in England). But here their Russian counterparts are not in a hurry to develop this segment.

"A large land plot is necessary for the construction of an outlet. Therefore in Russia outlets will most likely appear within the structure of projects that involve the complex development of territories," says Evgeny Mititel, general director of Grand-city, as the first on the list of problems.

Another deterrent of the development of outlets is good sales of fashion lines. Many retailers still don’t think about where to keep last season’s leftovers as there simply aren’t any. Despite the low cost of construction of such projects (in comparison with the construction of standard shopping and entertainment complexes within the city boundaries), rental rates are also lower than in usual shopping centers, by approximately in 1.5-2 times by some estimations. Accordingly, recoupment takes a long time. According to Panfilov, initial investments in view of purchasing the land, installing all necessary communications and construction of the center will cost a minimum of $35 million and recoupment of the project will take no less than 30 years.

"The cost to construct 1 sq.m of an outlet-center format building on average can be 20-30 per cent lower due to a simpler design of the building and less expensive furnishing of the general zones," explains Polina Zhilkina, director of the analytics department at ADG Group. The low cost of construction is a result of there being no excesses (from an architectural point of view these buildings are extremely simple), rather than the use of cheap building materials.

Also, according to experts, savings are made by efficient internal lay outs with no areas unused, etc. For the construction of an outlet-center in the simplest form a big-box type building would be most simple. Expenditures on furnishings and engineering maintenance can be minimal, adds Konstantin Korolyov, general director of Smart Property. The cost of such a project in his opinion may range from $1,000 - $1,500 per sq.m. "As outlets primarily occupy areas in warehouses or even parts of a factory shop, the characteristic features of such premises are a large volume, high speed of erection and minimal expense on construction," describes Korolyov.

The cost of construction of an outlet center within 35 km from the MKAD will range from $1,500 to $1,700 per sq.m depending on the location of the site, the level of the shopping center and the quality of the materials used, says Omar Gadzhiyev, managing partner at Panorama Estate. To build an outlet within the city boundaries will cost $1,700-$1,900 per sq.m.

Discounts all year round

It is impossible to say that in Moscow there is absolutely no discounter segment. But you can count the “true” discounters on one hand.

Companies representing luxury class brands in Moscow such as Bosco di Ciliegi, DzhamilKo group of companies, Podium and several others, have made the sale of goods at a discount another direction of their business.

For example, six of the Podium chain’s stores are discount-centers. Four of them are in Moscow, one is in Kiev and one is in St. Petersburg. The Moscow shops are located on Leningradskoye shosse, Kutuzovsky prospekt, Varshakskoye shosse and ulitsa Profsoyuznaya. On what conditions the company occupies the retail space, has not been disclosed by its press service. However, it has become known to Vedomosti, that almost 10,000 sq.m in Kvadro shopping center (88 Kutuzovsky prospekt) belongs to the company. The total area of the shopping center is little more than 16,000 sq.m, and the lower floor belongs to the Perekryostok chain. Little more than a year ago, whilst carrying out the transaction, other market players estimated the cost of the obtained space at approximately $35 million. Podium rents its other premises.

The company does not plan to stop growing. In its discount-center on Kutuzovsky it recently opened Podium Vintage. Here it is possible to get 50-90 per cent discounts on leading luxury brands and also display items. However, according to the press centre of the company, "soon" another shop will open of this type. Whether the premises will be rented or bought the company did not specify.

At 10 Savvinskaya Naberezhnaya, there is the "Ostatki Sladki” store in which items from old collections of Bosco di Ciliegi boutiques are on sale. Elena Evteyeva, executive director of Magaziny Bosko, explains: old collection clothes are more convenient to display by size and groups of goods so that customers can find the necessary item independently. The main collections on sale in the boutiques of the company, are displayed by total look (color, fabric, style). "It is impossible to forget that in the fashion industry only the current season can be displayed using the total look format, with past seasons the fashion trend is irrelevant and the shop cannot be displayed in such a way," says Evteyeva. There are other factors: pricing principles, etc.

And at 26 Olympiisky prospect you can find the Modny Podval store belonging to DzhamilKo.

Rent or build

Advisers and experts in the field of the retail real estate and retail trade are optimistic: the format will receive due development in the Russian market, and in the next 3-5 years Moscow can inevitably expect to see high-grade outlet centers.

"With the strengthening in the market of local manufacturers and trademarks this format of retail trade has good prospects to develop in Russia. No more than 3 years is required for it to develop," says Lebsak-Kleimans. Especially in areas with lower rental rates, industrial zones or outside the MKAD.

According to expert estimations, it is more profitable to rent retail space for such shops.

Ilya Kuznetsov, director of the consulting services department at Cushman Wakefield / Stiles Riabokobylko, says that for the majority of retailers it is more favourable to rent retail premises within the city boundaries, than it is to build, especially in conditions of financial instability. Discount shops possess an essential advantage, which is their attractiveness to buyers. Such places that any other retailer would not survive in (Savvinskaya Naberezhnaya, Kvadro shopping center inconveniently located on Kuznetsky prospekt), are almost ideal for discounters, as rental rates are lower.

Evgeniya Smirnova, an analyst at consulting company RRG, estimates rental rates in the above shops at approximately $200-$300 per sq.m a year under the condition that the occupied area is 10,000-15,000 sq.m. To construct such buildings independently, in his opinion, will cost approximately $1,000 per sq.m.

Korolyov agrees: rental rates for premises in which discount stores are placed, for example, should be low - ranging from $180 to $250 per sq.m a year. This is due to the requirement for minimum costs in the discount format and the low quality premises, he says. "The structures are not new, the facades have not been repaired for a long time. It is possible to assume that the internal communications are also low quality," argues Korolyov. However such conditions, in his opinion, do not hinder discounters: this format functions in such buildings with no problems.

The operators renting areas for discount-centers (mainly in the suburbs of the city), as a rule, are large anchors and occupy more than 1,500-2,500 sq.m. For example, for a discount-center near Kuntsevskaya metro station the rental rate per sq.m a year is within the limits of $500-$800, in the Varshavki district (Prazhskaya metro station) is $250-$500, near Kaluzhskaya metro station is $350-$700, and in the Leningradskoye shosse area (Vodny Stadium metro station) is $350-$700. Higher rental rates for such format of tenants are inefficient even within the city boundaries, Gadzhiyev explains.

According to Alexander Osipov, head of the consulting department at Astera, the rental rate on Savvinskaya Naberezhnaya is $1,100-$1,200 per sq.m a year, and on Olympiisky prospect is $1,500-$1,800 per sq.m M a year.