Prime time at the bargain bin Factory outlet empire of Prime Retail REIT looking to double in size


Prime Retail Inc. is about to become the Godzilla of factory outlet center malls.

Like the oversize movie star, the Baltimore-based real estate investment trust will become larger than life this week if shareholders approve its nearly $1 billion purchase of a Michigan company.

The acquisition of the Horizon Group Inc. -- expected to be ratified by stockholders Friday -- would double Prime Retail's size and give it control of 49 factory outlets.

At 13.6 million square feet -- about the same size as all of the office space downtown -- the company would be the world's largest outlet owner and operator, and would own one-fourth of all the nation's discount retail space.

"We're really going to get the benefit of size," said Abraham Rosenthal, Prime Retail's chief executive officer. "We'll have the ability to get better talent, for instance, and we'll be able to sit down with a manufacturer and offer them a wider array of options."

But swallowing Horizon isn't the only thing Prime Retail is doing to try and stomp its competition.

The company, a decade old this year, also is planning new projects, including a 340,000-square-foot center in Hagerstown scheduled to open in August and expansions to existing centers. In addition, it is preparing to unveil a $10 million plan to create brand-name recognition with customers.

The "branding" concept, designed in the hopes of crafting cross-marketing deals with gasoline stations, fast-food restaurants and other consumer goods outlets, will result in changing the name of the company's centers and creating uniform signs. For instance, the Western Maryland project will be known as Prime Outlets at Hagerstown.

"Brands are something that people look for in outlets," said William H. Carpenter Jr., Prime Retail's president and chief operating officer. "People understand Nike and Ralph Lauren/Polo. What we're going to do is based on that concept."

Perhaps more notably, Prime Retail is turning the real estate tables by launching its own stores. If the plan to sell upscale merchandise by Versace, Hugo Boss and other top names works, Prime Retail intends to put the Designer Connection stores not only in its centers, but others. So far, three of the stores exist.

"No one in the real estate development business is doing that," said Mark A. Millman, president of Millman Search Group, a Towson firm that is a leading outlet center tenant consultant.

Prime Retail is also toying with the idea of expanding centers to accommodate home furnishing outlets, claiming that it could boost earnings significantly if it captured even a fraction of the $80 billion spent on furniture, carpeting, wall hangings and other such items each year.

The REIT believes that both concepts work, in part because busy Americans who are unable to spend time shopping rely on branded items and their familiarity. If the Designer Connection stores take off, Prime Retail might eventually try to spin them off as a separate company, Rosenthal said.

Challenges loom

But even as it celebrates its monster size, Prime Retail recognizes that the fast-growing outlet center business of the future is likely to be fraught with challenges, including increased competition from department stores and the increasing professionalism of the outlet center, which Prime Retail is credited with bringing about.

Perhaps most threatening to Prime Retail is a slowdown in new development, which along with acquisitions has primarily fueled its growth in recent years. Last year, for instance, Prime Retail generated operational income of $46.7 million, 38 percent more than in the year before, thanks in part to 1.4 million square feet of new space added through purchases or expansions.

Industrywide, the slowdown has begun. Seven outlet centers opened last year, a huge drop from 13 in 1996. From 1987 to 1996, by comparison, the number of outlet centers rose from 108 to 329, according to the International Council of Shopping Centers, an industry trade group.

The primary reason for the lack of new projects can be attributed to a lack of high-quality sites.

"America is saturated with outlets," Millman said. "And as a result, there aren't many great sites left. There are challenging and trying times ahead, and companies like Prime Retail are going to have to have vision to keep their momentum up."

Sales at the nation's 337 centers have continued to rise, however, topping $12 billion last year.

Prime Retail is unfazed by the slowdown, contending that stronger companies -- and centers -- will outperform weaker ones.

'People love a deal'

"I don't care how much money you make, people love a deal," Carpenter said.

The strength of Prime Retail's centers stems largely from distinguishing characteristics such as landscape architecture, food courts, playgrounds and clean stores brimming with merchandise, qualities absent from typical outlet malls of the past.

"Once upon a time, outlet malls were 60 miles away from everything; they had concrete floors and big bins full of dingy merchandise, but the prices were sure great," said Carlton Meyers, president of Factory Outlet Consultants, of Burke, Va. "And, while things have evolved, outlets will continue to grow because people can still save money."

Prime Retail projects have stood out in other ways, too.

"They've done a great job of marketing their centers and balancing tenants," said Larry Gore, senior vice president of retail operations for Reebok International Ltd., which has stores in 70 percent of Prime Retail's projects. "They're not just interested in leasing space."

Higher rents

But in making its centers more attractive and its marketing more professional, Prime Retail has been able to charge higher rents than other outlet centers, a move that has cut the rent differential between traditional retail hubs and outlets considerably.

As rents in outlets increase, and merchandise prices rise to pay them, some manufacturers fear outlets will lose their reputation as value-oriented centers that are chock full of bargains.

"I'm somewhat worried about rent escalations, but if the center is producing it's not an overriding concern," Gore said. "Still, there's a danger that if you make a center too nice, it'll scare people away."

Prime Retail remains unfazed. Nor is the company apparently fazed by the nearly $1 billion worth of debt it will have to repay in the wake of the Horizon purchase.

The REIT notes that outlet center sales represent 2 percent of all retail transactions in the United States, leaving ample room for the industry -- and its own profits -- to grow.

But perhaps more than any other move aimed at countering a potential downturn, Prime Retail is studying developing outlet centers in Europe. The company has already examined sites and partners in Germany, France and the United Kingdom, where outlet malls are rare.

"We see overseas as a very strong part of our future growth," Rosenthal said.

In the United States, nearly 300 million people have 55 million square feet of outlet malls in which to shop; across the Atlantic, about 250 million Western Europeans shop at outlet centers totaling just over 3 million square feet.

But several obstacles stand in Prime Retail's way. For one, European governments strictly limit commercial development, creating monopolies for some retailers and hopelessness for others barred from entering markets.

The European challenge

Several U.S. developers -- including the Rouse Co. -- have tried and failed or given up attempting to crack the European nut with retail projects.

"The jury is still out on how Europeans will react to outlet centers," Millman said. "And a lot of tenants won't go overseas because they don't have the proper licensing agreements or the concept is too new."

If Prime Retail is able to build, it will most likely have to do so in urban areas, starkly different from the suburban settings of its U.S. centers. The sharp contrast could alienate some retailers, who have become accustomed to Prime Retail's sprawling, well-manicured malls.

It also will face merchandising challenges as it tries to persuade European shoppers to buy American goods.

"Europe goes crazy for American products like Nike, and they're wiling to pay premium prices for those products," said David M. Fick, a Legg Mason Wood Walker Inc. analyst who tracks Prime Retail.

Despite the many potential hurdles, Prime Retail, like the towering reptile of screen fame, remains supremely confident.

For instance, it pledges to be in Europe, in some fashion, within the next year.

'Pieces of a puzzle'

"The Horizon deal, the branding, our own stores, the potential for Europe, all these things are really pieces of a puzzle, part of a grand design to create the dominant outlet center company in the U.S., and in time, the world. The main question for us is whether our customers are happy and whether they're buying," said Rosenthal.

World domination. Godzilla should be so lucky.

Pub Date: 6/07/98

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