When Ragtrader last reported on Australia's chain of Direct Factory Outlets (DFO), its parent company Austexx was weeks away from opening the doors on its ninth centre in Melbourne's South Wharf. The development represented Austexx's first foray into the more luxury or premium end of the outlet market, the likes of which were trading all over the US. Austexx managing director Frank De Rango said at the time the move was set to take the company “to another level”.
Eighteen months on and Austexx has indeed slid to another level – just not likely the one it was hoping for. In the wake of accumulating debts reportedly amounting to $1.2 billion and allegedly unable to meet loan repayments to lenders including Suncorp Metway and St George Bank, 2010 marked the year Austexx began to offload its assets.
In December 2010, DFO South Wharf part-owner the Plenary Group increased its share in the development from 25 to 50 per cent. Colonial First State (CFS) Retail Property Trust snapped up the other 50 per cent, as well as picking up 100 per cent ownership of DFO Homebush (NSW), DFO Essendon (Vic) and DFO Moorabbin (Vic). The deal cost CFS a total of $498 million and granted the company ownership rights of the DFO brand name within Australia.
Three months on from the finalising of the ownership changes, CFS Retail Property Trust fund manager Michael Gorman and director for property Darren Steinberg reveal to Ragtrader why the DFOs were an attractive investment and what changes the company plans to make to the centres.
Why buy DFO?
The factory outlet retail sub-sector in Australia is still “immature”, Steinberg says.
“When you look at the outlet sector in Australia versus offshore markets, in particular the US, they've been going in the US for close to 20-odd years,” he says. “In Australia, the outlet sector's only really been established for about 10 years. Retailers in the US are a lot more used to operating in that environment while here they've still been learning it.
“What we are seeing [in Australia] is that they've obviously taken to it quite well and they're now seeing the outlets as part of their normal distribution of product.”
Even though retailers may be getting used to the channel, there's still room to achieve more, Gorman says.
“I think what we see at the moment is an emerging concept of what outlet centres can be. For example, if you want to buy something to eat in most outlet centres, the offer is not wide, is not comprehensive and there's an opportunity to make the whole experience better. On other types of retail complementary to apparel, there's a lot of potential there.”
The rise of e-tailers such as brandsexclusive.com.au and the theoutnet.com, created purely to offload excess and discounted stock, do not detract from the potential of the bricks-and-mortar outlet stores, Steinberg argues.
“The key is they're not mutually exclusive, they're complementary,” he says. “We're in the business of assisting retailers to distribute product whether they do it through the super regional malls or the sub-regional malls or the outlets, that's what they're looking to do. We believe good retailers operate through all those channels, including the internet.”
While product available via DFOs and online discount e-tailers may be similar to one another, the opportunities for retailers do differ across each avenue, Gorman adds.
“You might have a specific idea in mind when you go to the internet about what you want to buy, in the same way you might have a specific idea when you walk into a store. The retailers' great opportunity – and many of them do it extremely well – is to convince the consumer to buy more, that with the pair of jeans goes the t-shirt or the belt or the shoes, that you turn what intends to be a single purchase into a whole outfit. It's a bit harder to do that on the internet.”
New owners, new tenants
The acquisition of the four DFO centres has seen CFS Retail Property Trust take on an additional 547 tenants and the company has flagged its intent to “remix tenants where appropriate” and “increase tenant interaction”. Of the former, Steinberg says CFS Retail Property Trust's 26 years in the retail market segment is its major asset.
“The benefit of a group such as ours getting involved in the [outlet] sector is that we have very broad and deep retailer relationships. In fact, we have over 5600 customers in our buildings. A number of retailers called us when we first took possession of the centres and said '...we'd like to talk to you about taking space in the centres'. They know us, they like the asset class and its complementary to their distribution channels.”
Steinberg won't name names on which brands are preparing to deploy into DFOs for the first time – “you'll see them shortly in the centres” – but says the benefits to retailers who operate within the centres are clear.
“In the outlet centres there's relatively low occupancy costs compared to traditional shopping centres and they can be a highly profitable retailer environment because they don't have the same level of fit-out or staffing levels that traditional centres have,” Steinberg says.
As well, DFO centres have traditionally had a higher proportion of apparel retailers than other specialty tenants. In documents released by CFS Retail Property Trust to the Australian Stock Exchange in September 2010, for example, the company revealed apparel stores made up between 79 and 88 per cent of tenants in the four DFO centres it acquired. This compares to apparel retailers comprising just 55 and 53 per cent of tenants in Chadstone Shopping Centre (Vic) and Chatswood Chase (NSW), also centres owned by CFS Retail Property Trust.
While the new owner of DFO Homebush, Moorabbin, Essendon and South Wharf will work to adjust the brands within the apparel tenancy mix, Steinberg says the company is “comfortable” with apparel's domination of the centres.
“Apparel is a class of retailer that does work very well in the outlets. In fact, some retailers actually manufacture directly for the outlets. As it gets more sophisticated, they also put some new product in there, which is how they raise overall margin in these stores,” he says.
The key change for tenants will be more one-on-one interaction with the centres' new owner, Gorman says.
“The way that we run the regional malls or the sub-regional malls in our very large portfolio, there's always people at the shopping centres who are retail experts who will walk the shopping centre every day, who will talk to all the retailers every day so you build a relationship at that level with the store managers.
“They're always the ones who can say 'We need a bit more space' or 'We need a bit less space' or 'We want to bring in a new format' or 'This is what our marketing plans are for the next couple of months'... We've been able to put people in place in each of the DFO centres we now own and we're getting immediate feedback on how strong that's been.”
To market, to market
CFS Property Retail Trust will promote the DFO centres it has acquired, including the retailer offer, across radio, local print media and via tourist information resources. Despite the company's belief in the increasing importance of the outlet segment, there are no immediate plans to increase the number of DFO sites in the market just yet, Steinberg says.
“We've only owned these assets for around three months so our strategy at the moment is to work the assets in the current format, to fully work with the retailers in understanding how they want to operate in the outlet centres in this country. Once we've got a full understanding, we'll be looking forward to selectively growing the portfolio in Australia.”
Even then, fashion retailers need not fear the landscape will be bombarded with DFOs, potentially adding to the culture of rampant discounting that retailers would like to see melt away.
“We have 22 or 23 million people and from our research we believe that in time you can support 16 to 20 outlet centres of which there's certain aspects we think make for a very good outlet centre,” Steinberg says.
“It's access, it's parking and it’s the scale of the number of retailers you can attract. When you look at that, we believe if there's going to be 20 over time, there's only 10 to 15 good outlet centres that can be developed and will trade profitability in this country.”