April 22, 2010

Talk with Value Retail Chairman Scott Malkin

Scott Malkin, Group Chairman Value Retail (photo: Value Retail)
Outlet centre virtuoso Scott Malkin: "Value is never cheap & nasty"
Mild-mannered Scott D. Malkin, founder and Group Chairman of London-based Value Retail Plc, is not the most probable exponent of something so controversial as the village outlet centre.

However, Harvard-educated Malkin (51) has made his vision come true in old Europe.

After selling his creation, 2 Rodeo Drive in Beverly Hills, California, in 1990 to the Japanese department store operator Sogo, the American from the East Coast packed his bags for London.

Unlike other US tourists, however, Malkin had something unusual in his pockets: the blueprint of a new operating model for the traditional European shopping centre – and one which has proved to be very lucrative.

Visitors increase, sales boom  
Last year, 23.5 million shoppers (+11 per cent) visited Value Retail's nine outlet villages in seven European countries comprising a group unit area of around 162,000 m².

Although they are not as mature as the company's oldest outlet in Bicester, near Oxford, in the UK, the German village outlet centres at Wertheim, near Frankfurt in Franconia, and Ingolstadt, near Munich in Bavaria, are thriving. In fact, they seem to have become increasingly busy since their inauguration in 2003 viz. 2005.

Privately-run Value Retail is not required to disclose earnings, but does state that gross sales grew 21 per cent last year to €1.2bn while comparable store sales gained 10 per cent – not bad on a broadly recessionary European market.

Controversial concept

One wouldn't have thought from his untroubled demeanour, that Scott Malkin's sales channel is the subject of vehement attacks from various interest groups. The main bone of contention is the alleged drain on local spending power away from neighbouring towns to village outlet centres and their cousins, the factory outlet centres (FOC).

Small wonder that Malkin stresses company statistics pointing to an increasing level of tourist shoppers at his village outlet centres.

Malkin has experienced resistance to change in all the western European countries Value Retail has entered to date, but in German retailing particularly bitter ideological feuds inevitably presage all experimentation.

The problem is also one of definition. Government planning authorities, not generally known for their love of shopping centres, can't seem to get their head around a retail concept where brand manufacturers run the shops and which, superficially, resembles a shopping centre, but in reality is more like a quality department store.

Unhappy fashion brand manufacturers
Some German fashion manufacturers such as Gardeur refuse point blank to rent space at any outlet centre because they fear that this will cheapen the brand. But even if fashion brands pay someone like Value Retail around 12.5 per cent of annual turnover for the privilege of selling excess stock in one of its village outlet centres, surely anything is better than selling it with little control on the grey market or even, as some do, burning it on the bonfire?
After all, the merchandise on offer at the outlet centres is at least one year old and therefore not in direct competition with the latest fashion collections sold on the High Street.

A philosophy of quality 

Returning to the bureaucrats, perhaps they should read Marvin Traub's most recent book. In "Like No Other Career" Traub praises Malkin's village outlet centre concept for its reinvention of the stale and predictable experience consumers are obliged to endure at all too many shopping centres.
They might also like to recall a quotation from American retail visionary Harry Gordon Selfridge in 1911 that is still relevant to what Scott Malkin is doing for brands in his European village outlets today: "Remember that the recollection of quality remains long after the price is forgotten."

And didn't the Victorian cultural philosopher John Ruskin write as long ago as 1882: "It is not cheap things we want to possess, but expensive things that cost a lot less."



Mr. Malkin, last year the seven European markets you operate in were hit by the worst economic recession since World War 2. How then did you achieve like-for-like double digit increases in your revenues?

Shopping based on a value proposition has elements to it, which are appealing, but in and of itself that is not enough. The offer has to be correct. We are showing the growth we are achieving largely because we are constantly improving the way we operate the business, ever since we opened our first outlet center, Bicester Village, 15 years ago.

You last talked to Lebensmittel Zeitung six years ago. Has it been found necessary to refine your business model since then?

We have increased our focus on international tourists because it is the Japanese, Chinese, Russians, Emiratis or Brazilians who are traveling and spending more than, for instance, the Italians or the Spanish. Since 2004 there has been a lot of growth, international travel and international recognition.

Chinese women in Hong Kong recognize our Bicester Village in the UK more as a brand than any department store in Europe. Six years ago the person who would have known about us would probably have been a British ex-pat going home on holiday. Now, it is Asians who make Bicester Village one of their points of call when they go to Europe. 

How much of your customer base is now composed of tourists?

This year in our more mature villages, we shall be getting towards 60 percent non-locally sourced visitors and the younger villages will be around 30 to 35 percent. Even three or four years ago, our more mature villages were probably only 30 to 35 percent.

How would you define the tourists who shop with you?

They are aspirational. They are not people who wear the fashion of the moment and who drive the newest sports car, but, equally, they are jet setters in the sense that they arrive by jet and are familiar with international travel. So we are not getting the long-haul cheap flight tourist.

How would you describe the spending behavior of local customers in Europe?

We don’t break down trading data in that way. In a village, where 30 to 60 percent of the customers are not local, we would be guessing.

Having made this caveat, we are seeing consumers being more thoughtful, spending more time comparing products and, in the end, making much more considered purchases. Although more often than not, they will have chosen to buy from those brands whose goods were originally offered to the markets at the higher price points.

Your concept is primarily aimed towards female customers, but have you seen any differences between the way men and women spend at your villages?

There has been less frivolous expenditure by men. Men’s buying sports cars and more luxury watches for themselves in a self-indulgent way has been cut back; the days of “toys for boys” seem to have passed.

Women continue to spend strongly on themselves and their households. We haven’t seen a lot of women who used only to buy at full-priced stores suddenly rushing to our outlet centers. Equally, we haven’t seen a lot of cheap & cheerful people streaming to our villages on the grounds that our price points are lower.

What would you call the big consumer trend?

Guilt-free shopping has become a big theme. The principle of having bought something in a way which is not demonstrably showy or insensitive is very much in keeping with the moment. The value judgment of “money doesn’t matter” is no longer cool.

An extreme point on the spectrum of this logic is where women have actually been heard saying that they have bought brand fashion at outlet centers when, in fact, they have bought it at the department store, simply because this sounds less showy.

In Germany, fashion brands, such as Hugo Boss or René Lezard, operate their own factory outlets, where they don’t have to pay people like you 12.5 percent of turnover for rent etc. Why do you think that fashion brands are better advised to sell last year’s stock at a village outlet center?

If you are a tourist and have come from half-way around the world, you wouldn’t want to go to just one brand and one factory site. Even if you only drive an hour and a half to the factory shop, it is very frustrating to find that they do not stock full ranges or that they have nothing in your size.

At our villages, where we can sell over a hundred different top brands, there is a far higher possibility that one’s trip will be worth-while.

Where in Europe do you intend to expand next?

In the current economic climate, the banks like to see operating businesses like ours focused on the mechanics of their existing business rather than pushing organic expansion.

Only a few years ago, Poland, Ukraine and Hungary were seen as especially ripe for development. Has the recession delayed plans for the region?

The spending power in these markets does not yet support the price points we need in order to serve the brands. So, any activity in the region would be a long time down the road.

If your outlet villages are being increasingly visited by Asian tourists, why don’t you open any in south-east Asia?

In emerging markets, there are a range of challenges which can include everything from cultural to legal issues. Goods distribution is typically controlled through middle-men who, as licensees or distributors, don’t have a reliable supply of stock and who often can’t maintain a predictable relationship with the brand itself.

Our service is to the brand and in support of the brand’s identity, positioning and profile. So, if we can’t present the brand correctly, because the stock isn’t there, or because the local people aren’t treating the brands or the customers with the logical respect they deserve, we can’t execute.

Presumably you are also referring to counterfeit problems?

Yes. In emerging markets, where the rule of law is often of a more flexible construct, there is a presumption that some, if not much, of the branded stock on offer is counterfeit.

When you visit one of our villages in Europe, the presumption is, quite correctly, that all the stock on offer in the company owned shops is completely authentic and it is this confidence which they can take back home along with their purchases.

Europe is slower than even California when it comes to authorizing shopping centers etc. Has the local German authorization situation improved or worsened recently?

I don’t see a fundamental change from what we have experienced throughout our seven years in Germany. Obtaining planning and approval typically takes two to three years, and construction a further two.

McArthurGlen, Mab Development etc. all seem to have ambitious plans for Germany. How many Village Outlet Centers/FOCs can Germany take?

Here, one can take the US as a point of reference because the outlet sector as a channel of distribution has already been active there now for some 35 to 40 years.

Regardless of how many outlet centers have been opened, historically they have never achieved more than 1 percent of the national retail market, i.e., their overall effect on distribution patterns is minimal.

But how relevant is your comparison with the US because there is so much more space there than in crowded Western Europe?

Obviously, it is easier to build outlet centers in the US because planning is more relaxed and the spaces are more wide-open. So there are likely to be fewer in Europe in its entirety and they will remain statistically insignificant in retail terms.

However, outlet centers continue to be very relevant for brands. They allow them some breathing space in which they can clear their surplus stocks, while they concentrate on the process of re-inventing themselves through their new full-price collections elsewhere.

Why should outlet centers remain “statistically irrelevant”?

On whatever market, the actual consumption of goods through this channel is a statistically irrelevant amount. Therefore, by definition, there will be a finite and relatively insignificant number of outlet centers in any given market.

And Germany?

Historically, a simple rule of thumb is that a brand needs to have between five and ten full-priced stores or boutiques in order to justify a single outlet center for that brand.

Brands with very high volumes, i.e., with more than 50 stores, are typically at a price point or on an operating model where outlets don’t necessarily work for them. So Zara in Spain, for example, doesn’t often need to be represented in the outlet business.

So what does this mean in practical terms for German brands?

Most brands in Germany would need four or five outlet centers in the whole country if they have a pretty good distribution of merchandise. Luxury, very high-end category brands might need one or two.

This won’t change over time because there is only a finite supply of stock to fill the brand distribution pattern.

Value Retail is unusual in that it owns, operates and manages all of its outlet centers. Why did you choose to take this route?

We like to preserve our independence of action in order to be able to adapt to evolving consumer expectations and to contribute to invest in the villages. In practice, not owning what are fundamentally operating businesses means that one lacks the independence to re-invent them in the most progressive ways.

Competition online for a share of your consumer base is getting fierce. E-commerce sites (e.g. Bluefly.com, Overstock.com), comparative shopping engines (Google’s Froogle.com), online shops (Yoox.com), and online boutiques have elevated the bargain bonanza to new heights. Do you see the internet as a threat or as an aid to your business?

The world is polarizing between price-led and qualitatively-led offers, between price efficiency and shopping experience, between intellect and enjoyment. These trends are pushing mid-market brands in one of these two directions or forcing them to disappear altogether.

That’s partly the result of the world economic crisis, but the real driver and ultimate catalyst of this change is the internet. When we talk about efficiency, intellect or a price-based distribution channel, all pricing or goods which are competitively positioned today are driven by the internet.

So do you see the internet as a curse or a blessing?

People might pay a premium to buy something immediately in a store rather than wait for it to be delivered, but they won’t pay above a certain premium for the convenience of being able to do so.

Growing broadband capacity and increasingly sophisticated consumer gadgets mean that a primary mechanism for comparing prices, ascertaining availability and making payment will be online via a hand-held device, but there will be no elimination of the store-based environment.

Surely you have to say this as you own your own sites?

Well, going back to the picture I was trying to paint earlier, there are two extremes. There is the internet site and there is the status built on experience.

Everything we do, our entire corporate being, is directed towards creating an experience in a special, hopefully unique environment for tourists and people who are prepared to travel, think and behave like tourists, even if they live down the road.

So, whether one should be worried or not, depends fundamentally on whether one is in the middle of the spectrum or at one of its ends. We are solidly planted at the experiential touristic end.

You have been increasingly extending your marketing palette with perks like valet parking and personal shoppers. Are you not in danger of delighting a few very up-market customers at the expense of a relatively affluent, but far broader consumer base?

Our consumer base is similar to that of the high-end department store. Our aspirational customers regard services such as personal shopping, valet parking, bag-holding, high-quality food etc. as perfectly normal. They belong to our culture and environment.

Moreover, our customers have become more sophisticated as access to the internet and the availability of knowledge have grown.

If consumers are becoming more value-oriented and increasingly guilty about all-too conspicuous consumption, is it not a contradiction to offer particularly affluent, privileged services?

It’s definitely not a contradiction. The aspirational customer has the right to expect the same welcome and service as those customers who are more used to upmarket shopping.

‘Value’ isn’t defined, in any way, by being cheap and nasty. It is very much in line with our concept to offer value as part of this very high quality experience. We not only offer just service, we also offer hospitality.

As more and more millions of customers shop at your nine outlet villages each year, they are becoming increasingly crowded. Are you not becoming a victim of your own success?

Our concept is about quality rather than quantity. Actually, we don’t want more people; we want correctly-targeted visitors. We don’t intend to be unwelcoming, but we want to identify the hard-core consumer, who, of course, is an international tourist, and to make her feel welcome and drawn to us.

So, our main sales growth will come from customers who shop with us once in a lifetime or once a year rather than someone who is looking for something to do when they are bored at the weekend throughout the year.

Could you imagine taking Value Retail public or merging with a competitor such as McArthurGlen in order to accelerate expansion?

We have a three-year program to double our current gross annual sales of €1.2bn. We would not want anything to occur which would distract us from this business plan. We have never sold a project and have no plans to do so. We are long-term investors. After 3 years we may review the situation, but not before then.

How do you intend to double sales in only three years?

Essentially, this will be achieved by increasing sales densities on a maturing store base. As our younger stores grow, they will increase square foot sales and stock more higher-priced point goods.

The sales at our older villages have quintupled since they first opened. Last year, we had double-digit like-for-like sales growth in all of our mature villages.

That is the pattern in their sales density which has been consistent over the 15 years of our trading.

Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 14, 08.04.2010

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