Wednesday, October 31, 2007

Direct factory outrage

Direct factory outlets are a dirty trick: a way for retail property developers to build on cheap industrial land, writes Natalie Craig.

IN SPRAWLING sheds trimmed with foil insulation and fluorescent lights, shopping is an epic adventure. Outlet centres are hunting grounds for that thriving species, the consumer maximus, who will scale mountains of mini-skirts and wade through rivers of size 16 swimmer bottoms in search of discounted prey.

The streets of suburban Melbourne are usually quiet on a Wednesday afternoon, but at the Essendon Direct Factory Outlet the foot traffic is frenzied. Shoppers carry several bags on each arm, half-running from one shop to the next, many with children in tow. Other shoppers wander around dazed, perhaps overwhelmed by the bargains being paraded.

Justin Chen is one such hunter who has emerged triumphant from the DFO. He's here from New York visiting family, and drove about 15 kilometres to Essendon from his temporary home in South Yarra. He's got five bags full of clothes, including two-for-one T-shirts bought at Just Jeans for $40 and a spotty grey blouse from Witchery for his girlfriend, reduced to $59.95.
"I think the trek is worth it," he says. "The clothes are much cheaper than in the US. I'm very happy with what I bought."

Unknown to him, identical T-shirts and blouses were available this month at the same stores for the same price in the city. When I give him this price check, he doesn't mind. "It's still a bargain," he says, beaming.

But perhaps what he does not realise is that regardless of the value of shopping at outlet centres, it is the property developer, not the consumer, who is really making the killing. The cost difference between retail and industrial rents gives outlet centre operators a distinct advantage over traditional shopping centres. And while the sector continues to expand rapidly in Australia, the genuine "factory" savings are diminishing.

Australian Retailers Association director Michael Lonie says outlet centres are clearance houses for retailers. "At the end of the season shops end up with broken ranges where all of the key sizes have completely gone," he says. "They want to get this stock out of their normal stores."
Myer chief executive Bernie Brookes is less diplomatic. He says some retailers are manufacturing clothing especially for outlet centres.

"What was once the competitive advantage of being run-out merchandise at bargain prices has now become the same merchandise under different labels, engineered specifically for those stores," Brookes says. "I would confidently say that the majority of merchandise you're now getting in an outlet mall is not clearance merchandise."

"Direct factory outlet" is a misnomer. Twenty years ago, factories sent their damaged or unwanted stock directly to cheap, Spartan shops nearby, such as those on Bridge Road in Richmond, where shoppers scavenged for one-off bargains. But clothing manufacturing has moved offshore, Bridge Road now resembles a normal shopping strip, and enclosed outlet centres, which look like shopping malls in industrial sheds, are thriving.

The property industry has renamed them "retail outlet centres", and they turn over about $1 billion each year. A Jones Lang LaSalle report in June stated that "the majority of the tenants in an outlet centre are first and foremost retailers, not manufacturers".
A DFO brochure entices shoppers: "How much shopping can you handle?" In Australia, and particularly Melbourne, the answer could be "not much more". There are 15 centres across the country, but expansion plans suggest there could be up to 30 within five years, or one centre for every 730,000 people. The US has about one centre for every 1 million people — and the industry has been declining, with the number of centres shrinking from 329 in 1996 to 225 in 2005.

Brookes says the outlet centre will become a "dinosaur" and that many outlet centres in the US look like "ghost towns". He says the cost of petrol puts people off, and that the business model has lost its competitive advantage, because the same deals are available at clearance sales in department stores and other shops.

Yet developers remain confident. DFO, the market leader, owns three of Melbourne's four outlet centres, at Spencer Street, Essendon and Cheltenham, each with about 25,000 square metres of floor space. (The fourth, Brand Smart at Nunawading, has only 7500 sq m of space and is owned by MacarthurCook Retail Property Trust.) DFO plans eventually to operate 15 to 20 stores across Australia.

DFO's main rival, the Harbour Town franchise owned by ING and Lewis Land, is building a new retail outlet centre at Docklands, just a few kilometres from the booming Spencer Street DFO. Construction is also under way by MAB on a Brand Junction centre at its housing development at University Hill near Bundoora, about 20 kilometres from the Essendon DFO.
How can they afford it, if the market is indeed in danger of oversupply? An Australian property researcher, who declined to be named, says the answer is "deception".

"They are charlatans — retailers masquerading as factory outlets," he says. "Industrial rents in Melbourne average about $60 a square metre, while retailers in DFOs in the same area would pay about $150 to $200 a square metre.

"Shopping centre owners make a substantial investment compared to outlet centre owners, with similar gains.

"If they were selling the stuff nobody wanted to buy, nobody would mind. But besides all the garbage and the size-six shorts, there is full-line stuff in there that you can get in the city."
A SURVEY by The Age found that in all three DFO-owned centres, most shops carried at least some full-price, current-season stock, available at normal shopping centres. Some carried a majority of new-season stock. Discounts, if available, ranged from 10 to 70 per cent.

The purchases of two shoppers at DFO Spencer Street exemplify the new mix of discount and full-price merchandise. Margie Lindley and Brigitta Hudson, who make an annual shopping trip from Adelaide to Melbourne, sit at a cafe in the centre with their shoes kicked off after a long day on their feet. Brigitta has bought some Peter Alexander bath products discounted from $19 to $5, while Margie shows me a cute lime-green T-shirt she bought for her great-nephew for $20 from Seed. She admits sheepishly that it was not on sale, but "she had to have it anyway".
But does it matter if the discounts aren't as good as they used to be? DFO managing director Frank De Rango says there is nothing wrong with merging discounted and full-price stock, and that DFO Spencer Street had a different business model. "It's more of a mix — the Spencer Street DFO is a very prominent site and has a very different flavour," he says.

Shopping Centre Council director Milton Cockburn has no problem with DFO Spencer Street, but is concerned by centres on cheap industrial or airport land, including Melbourne's Essendon and Cheltenham DFOs. He says the Airports Act of 1996, which led to the privatisation of federal airport land, has created an unfair playing field and caused major planning issues. "On one side of the road you have the state planning authority with a retail plan in place making the decision," says Cockburn, "and on the other side of the road you have the federal transport minister.

"Decisions made about major trip-generating activities are being made by the Federal Government without any sort of proper planning advice."
A spokesman for State Planning Minister Justin Madden agrees: "The redevelopment of Commonwealth land in isolation from planning scheme requirements … can undermine state policy, contradict centre planning and affect the viability of nearby strip shopping centres."

DFO had planned a new centre on Hobart airport land, but a decision this month by federal Transport Minister Mark Vaile to approve a smaller centre prompted DFO to shelve its plans. The approval for a 10,000 sq m centre (instead of one measuring 18,000 sq m) was dismissed as too small to gain the "critical mass" needed to attract people to the outskirts of the city.
The Hobart DFO is on the backburner, but in Canberra, opponents perhaps have a better chance of a practical and moral victory. DFO is building a 21,500 sq m centre at Fyshwick — notorious home of Canberra's homemaker centres and porn shops — on land zoned expressly for bulky goods, not retailing. Yet despite the planning discrepancy, major controversy lies with the way DFO bought the site.
On a hot afternoon in December 2005, registered bidders including Canberra Airport owner Terry Snow and Austexx chief executive Geoff Porz walked into an auction room near Lake Burley Griffin, armed with pre-auction valuations of about $13 million.

Incredibly, the site sold for $39 million to Porz. Snow pulled out at $18 million, then slumped out of the auction room, apparently muttering that he thought his was a brave bid.
Tom Snow, who manages his father's Canberra outlet centre, Brand Depot, believes DFO knew something the other bidders didn't: the ACT Legislative Council would allow an outlet centre to be built on land zoned for bulky goods.

"It was bulky goods without exception," Snow says. "But DFO had other evidence that retail would be possible."

The ACT Government introduced retrospective legislation in light of the dispute, and the ACT Auditor-General found that there was nothing improper with the sale.

The matter is before the Supreme Court. "They've put themselves in a very dangerous position by starting construction," Snow says. "There is a potential that the centre will be closed down."
De Rango says he is "not aware of anything before the courts". "As far as I'm concerned all the claims have been dismissed," he says. "We're spending $100 million to build the Canberra DFO, so obviously we don't see that there's going to be a problem.

"People have been agitating against us for years … In venues around the country that we're looking to establish, we expect to have hotly contested debate and perhaps litigation on developing those sites. Everywhere we go, unless we're able to secure a site that has a very clear, precise zoning, we would expect to have someone contest."

The pay-off for all this litigation and angst is the gains to be made from the gap between retailing and industrial prices. While shoppers such as Justin, Brigitta and Margie believe they've nabbed a good deal during recent jaunts to DFO centres, it's nothing compared with the deals retail property developers can reap by setting up on cheap land.

A Canberra Times editorial recorded a pertinent moment at the auction on that hot December day. Porz, while waiting to sign the necessary documents for the shock $38 million sale of the Fyshwick site, allegedly sent his wife a one-word text message: "Bargain."