Not “so last season”: the designer outlet trend

18 March, 2020

In previous years, retail brands that have been unable to sell their unsold stock have incinerated or shredded it, often offshore, to avoid their goods being sold at reduced prices.  The issue arises as retailers do not want to compromise their exclusivity by cutting prices.  For a consumer, this may appear like an exercise in vanity but for luxury retailers, unable to sell unsold stock, it is argued that they have a reputation to protect and the usual high street “sales” diminish a brand’s exclusivity.

With the need to be sustainable on the rise, brands are now looking at designer outlets to shift unsold stock.  Designer outlet stores sell items that could not be sold at full price elsewhere, typically at a 70% discount.

With more and more luxury and mainstream brands opening stores in designer outlet villages and thousands of thrifty buyers flocking to them to bag the deals, the concept is booming.  It comes as no surprise that millions of pounds are being invested in opening new designer outlets and extending existing ones across the country.  Ashford Designer Outlet Centre unveiled their £90m extension only last year and there are plans for the new Cotswold Designer Outlet to open near the M5 in 2022.  Out of an estimated €281bn in personal luxury sales last year €37bn were made in physical off-price stores, according to the consultancy firm, Bain.

So what can you expect in a lease of a store at a designer outlet village?

Turnover rent

Most likely, you can expect to pay a rent calculated by reference to the store’s turnover rather than a traditional fixed rent for the duration of the term with a rent review at certain intervals.  The benefit of a lease with a turnover rent is that it offers flexibility to the landlord and the tenant.  A cautious tenant may be more tempted to take a new unit with a turnover rent.  However, turnover rents provide a degree of uncertainty for both parties.  The landlord does not know how much rent it will receive over the duration of the term and the tenant does not know how much it will pay either.  To allow turnover rent to be calculated, the tenant must frequently provide accurate turnover information to the landlord, which can be an administrative burden on the tenant.  Similarly for the landlord, there is a burden in relation to the reliance it places on the receipt of accurate turnover information, in good time.

Landlord’s break right

To offset the risk taken on by the landlord in granting a lease with a turnover rent, you can expect to see a right for the landlord to break the lease.  This allows the landlord to terminate the lease if a tenant is not financially performing to an appropriate standard within the outlet.  It also allows landlords to have ultimate control over the tenant mix within the outlet.  The risk to tenants is that they will spend significant amounts on store fit-out and recruiting staff for an uncertain lease term.  Upon exercise of a landlord’s break right, the tenant will be required to strip out the store and reinstate it to the condition it was at the beginning of the lease, or to a condition the landlord desires.

Whilst leases of designer outlet stores are not always favourable to a tenant, with the need to be sustainable on the rise and shoppers becoming more savvy with their spending, designer outlets are an attractive opportunity and a wise business move for retailers wanting to shift excess stock in a quality environment.

If you are thinking about taking a lease at a designer outlet or would like more information on the above, please get in touch with Lorna Young at lorna.young@crippspg.co.uk.