If you're like most Americans, somewhat cash-strapped, you're probably looking for deals. And if you're looking for your favorite brands, outlets may be what you're seeking. The outlet consumer is an aspirational customer, with a customer that is looking for the brands that they love at the best possible value, and that's what draws them into our shopping centers. It's a big industry valued at about $65 billion, spread over 342 centers all over the country in 2023. But record-breaking inflation has affected that consumer's ability to spend, while the industry as a whole is nearing full recovery. Outlets are far behind compared to 2019. Outlet malls are discretionary. A lot of people go there to find value. If you're a bit constrained, if you are finding finances are a bit tight, you don't necessarily make those trips where you don't have a purchase in mind. Outlets are also taking a hit from the rise of e-commerce giants like Shein and Amazon.

So why are outlet malls so behind the rest of the
industry? And can they go back to the allure of what they once
were? When outlets first arrived in the 1930s, out-of-season, overrun, or faulty apparel were sold at a
discount to employees. They expanded to the general public by the 1970s. Once they realized that the general public might be
interested as well, they started opening it up to other customers. So over time, that concept grew a lot. They, you know, instead of them being right next door
to factories, they started being placed in far-flung locations, kind of like miles outside of city centers. Outlets expanded rapidly, much like its indoor mall
counterparts. By 1988, there were an estimated 113 outlet malls,
coinciding with the rise of commercial real estate. Around that time period, there were changes in the tax
laws which created sort of like this very positive period for REITs to go public.

Reits are real estate investment trusts. They are basically real estate companies that own and operate income-producing real estate, like in this case, malls and outlets. In the early 90s, they started launching IPOs to raise capital. Right around that 1993 period, you saw Simon and Tanger go public. There was still also, you know, a significant amount of growth in the overall retail sector and demand for new retail concepts. Major retailers capitalize on the demand, like Gap, who launched its outlet division in 1994. By 1997, more than one third of Americans shopped at outlets. The industry was now worth about $12 billion by the 20 tens. The indoor malls were on a decline that benefited other categories like outlets. The department stores have really seen a marked decline over time. Department stores were once the largest channel of retail in the US, and what that means is people

rather than just going to the big malls for the things
they need to buy, they spread their spend a lot more thinly across other destinations, and that's
been very helpful to the outlet malls. It's easier and less costly to build an outdoor mall or
outlet. Also, if we look at the demand side of the equation,
department stores have been consolidated and shrinking for decades. Now, and that's been very helpful to the outlet malls,
because outlet malls tend to be quite robust in terms of having very strong occupancy
rates, having brands that people want to buy, and they've become a real
destination. The decline of the department store wasn't all good
news for outlets. More than 13,000 retail stores filed for bankruptcy in
2017, nearly four times the year prior. Access to capital became nearly impossible, and
share prices saw big drops as bankruptcies slowed. Yet another catastrophe ensued
the pandemic. And even as the world reemerged, record high inflation
and an onslaught of highly competitive e-commerce sites

have made it hard for retail to get back on its feet. But of course, if you look at it from 2019, it is a
very changeable period because we went through a pandemic, which was
highly disruptive. We had a boom year in the aftermath, then we had hefty
inflation. Now we've got a more constrained consumer, so condensed
into that five-year period, you've got an awful lot of differing conditions and an awful lot of change. By
2022, things started to change as supply chain disruptions
eased. It contributed to excess inventory for retailers. Outlets benefited. It's been pretty difficult for retailers to navigate
all of that very rapid change over a short period of time, even if trading conditions
have been quite reasonable. So retailers have had to be really fleet of foot to
adapt to all of these changing circumstances. Writes like Simon Property Group or SPG and Tanger
Outlets are two of the largest in the industry.

operating nearly half of the outlets in the country. In Q1 2024, Simon Property Group generated $1.3
billion from lease revenue, a near 2% increase from Q1 2019. Occupancy rates were at 95.5%, up 1% from the same
quarter the year prior. The lowest that they got in the pandemic was 91%, and
now they've been coming back, um, maybe a little bit more slowly. But, you know, this is understandable because they
have a much larger base. They have 200 centers. Tanger has about 40. Tanger, whose portfolio consists solely of outlets, saw
Q1 revenue close to pre-pandemic levels. The company acquired three new outlets and entered a
strategic partnership to manage and operate a new location in 2023. Both companies saw stock prices perform over the past
three years. 22 you started to see Tanger outperform both Simon and
the arms, due to some operational changes.

that were made as a result of management changes. I would say that while Simon's stock has
underperformed on a relative basis compared to the REIT index, you've still seen the stock do well on an
absolute basis year to date, as they are generating growth from a same store and earnings perspective. One of the most unique things about the business of
outlets is that REITs have two customers, the shoppers and the retailers. Threading. The balance of keeping both happy is a
delicate one. Many are trying to reduce store count and average
store size at the same time. The competition from e-commerce is getting more fierce
as consumer behavior, especially younger shoppers, favor online shopping. E-commerce sales are poised to hit 41% of the total
global retail sales by 2027. Online marketplaces like Amazon and Sheen generated
$8.9 billion and $8.1 billion, respectively, in 2023. The rise of e-commerce, especially some of the discount
e-commerce platforms. All of those things

provide some potential headwinds to outlet malls, and I think that there are things that outlet malls are really going to have to try and respond to over the next few years. The lines between online and stores are very blurred. You know, no one wants to sit only at home all day and exclusively order stuff off their couch, which, you know, the pandemic made very clear people want to get out, have a reason to get dressed, shop, eat, play. And these are all experiences that, you know, malls and outlets have gotten better at providing. There are a few ways Reets can combat competition, according to analysts. One is creating omnichannel capabilities like browsing online and picking up in store. Another is making shopping an experience with great food options and entertainment. What Simon is doing right now is they're really leaning into an experiential model. So the mall is no longer just this place where you go to buy a couple of shirts and t-shirts and pants and

things like that. It's a place that you go to hang out, to spend your
afternoon at. You're going to see outdoor spaces, you're going to
see these kind of lovely gardens and plazas, and a place that you can enjoy lunch with your family. You know, recently I was at a Simon mall and I had a
margarita in the food court. I mean, this is not the malls of the 90s that we all
grew up in. People can sit on the couch and shop all day if that's
what they choose to do. So you really have to be special, and you have to
provide things not only for the shopper, but for that carload of people that come with the shopper. But there are risks for retailers, too. Some retailers, like Gap and Nike, are heavily invested
in outlets. About 85% of Gap and Banana Republic and 60% of Nike's
U.S.

stores are factory locations. In Q1 2024, the gap in Banana Republic brought in an
estimated $896 million for US sales, 3% up from the year prior. I think it signifies a problem with the main brand. I think it tells you that they are struggling to sell
at full price because the value proposition isn't right. Maybe the brand isn't attuned, maybe the products
aren't quite right because the consumer is willing to spend on that brand at a lower price point, but
they're not willing to spend at a mainstream, fuller price point. Another risk for outlets jumping too deep into luxury,
especially as the median household income for outlet shoppers are a bit lower compared to other categories. Still, analysts like Neal Saunders are bullish on the
outlets future. I think outlets have a pretty secure future, but
there's no doubt the market is more competitive. There is more value for money out there across all of
the offers in retail, including

the mainstream malls, including strip malls, with off
price. So outlet malls are going to have to work harder, but
I think they still have a very important role to play in the retail ecosystem.

Why Outlet Malls Are Struggling In The U.S.

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