Luxury at any (low) price
Outlets are the bright spot going into an otherwise dim retail season.
OXFORD, England (Fortune) -- On an overcast English morning, two women from middle England are out shopping. They duck first into the Gucci boutique, fingering discounted handbags and rifling through racks of last season's fashion lineup. Dolce & Gabbana is next, followed by Armani.
The outlet boutiques -- among 136 clustered along a cobblestone outdoor shopping center called Bicester (BIS-ter) Village about an hour's drive from London -- are mobbed with bargain-seekers even at an early hour.
"You get value for money here," says Ann Prentice, who pauses to chat only briefly before her friend hustles her off to Valentino. "My husband is in business, so it's hard for us just now, but I don't mind paying more for quality."
Luxury outlet malls are the one bright spot of brisk trade going into the holiday shopping season. In recent weeks, retailers have reported small but still rather anemic signs of recovery. Yet sales numbers show that consumers have been flocking to discount outlets all year long, despite the recession.
Value Retail, the London-based company that owns the largest string of luxury outlets in Europe, including Bicester Village, has seen sales rise 20% to just over 1 billion euro ($1.5 billion) in the first three quarters of this year compared with 2008. (Sales totals are for the nine cities where its Chic Outlet Shopping outlets are located, including Milan, Paris, Dublin, Munich, and Madrid.) Foot traffic also rose 10% in the third quarter to 6.5 million shoppers.
When sales are tabulated for the fourth quarter, the growth is expected to be off the charts given the almost complete retail freeze of the fourth quarter of 2008. That compares with predictions of flat or at most a 2% increase in spending across the retail sector over the holiday shopping period.
Value Retail, whose major investor also owns part of the sprawling Woodbury Common outlet mall outside of New York City, has seen its growth this year double the average over the past 14 years, when sales increased at a rate of about 10% annually, according to Scott Malkin, Value Retail's chairman.
"It's human nature to indulge," Malkin says. "I think we've gone away from 'I need more for the sake of more and more,' to people being more discerning in what they purchase."
That sentiment has benefited luxury outlets in a year when full-priced luxury sales have been forecast to fall as much as 10%, according to Bain & Co. consultants.
Rather than view outlet shopping as cannibalizing from their High Street or Madison Avenue sales, luxury retailers in fact have welcomed the opportunity to sell excess merchandise in a slow time, while reaching a separate segment of customers to whom they wouldn't normally be able to sell.
"We're a service to the brand," says Desirée Bollier, the CEO of Value Retail Management. "The brands have a lot more stock they want to dispose of, elegantly. We're a platform for them that is quality, with a customer that is aspirational."
These so-called "aspirational" customers -- those who may not be as wealthy as the typical elite luxury buyer, but will still purchase a few high-end pieces -- now make up 60% of luxury buyers overall, according to Bernstein Research, an arm of AllianceBernstein.
"Before the recession, we were nice to have," says Bollier, referring to luxury outlets. "With the recession we're a must. Our customers are not your fashionistas. She's not going to buy the 'It' bag, but she recognizes the quality of a timeless piece."
Still, some fashion-forward heavy hitters are among the recent shoppers at these outlet malls: Stars Elizabeth Hurley and Victoria Beckham have been spotted in Bicester Village recently. Over the summer, a Saudi princess arrived with a retinue of 70 people. Tipped off in advance, says Malkin, the luxury brands sent out the Arabic speakers from their stores in London for the day to accommodate the entourage.
Most of Value Retail's shoppers make the outlets a day-trip destination from the cities they're visiting, or if they're local residents, they may drive an average of two to three hours to reach an outlet mall. Some of these customers feel too intimidated to walk into a full-priced luxury boutique for the first time, so buying an item at a discount outlet can build confidence and allow shoppers to trade up. Rather than look for a dress to wear for an upcoming Saturday night, for example, they're shopping for more enduring or signature items -- at discounts of up to 60%.
"We use the expression, 'guilt-free shopping,'" Malkin says, a particularly important sentiment in a recession. "What we've seen in the last 18 months is that women will buy something at full price in the center of Paris or London or Madrid and tell people that they bought the item at one of our villages. It's a ways of avoiding conflict, of not wanting to seem better off than their friends and create discomfort and guilt."
The hope, of course, is that aspirational customers will be so satisfied with the items they purchase that they will eventually trade up into becoming luxury customers themselves, paying full price.