The establishment of factory outlet centers as a new retail concept started as a trend in the US. These centers, which tend to be located away from big cities, offer well-known brand product manufactures the opportunity to sell their products with significant discounts to end consumers. Over the past 25 years, such large outlet centers have spread to Europe. While market saturation has been reached in some European countries, such as Great Britain, Germany still has potential for new outlet centers. In 2012, three new outlet centers were opened in Germany, increasing the number of sites from six to nine at that time. However, outlet centers face massive criticism, often by retail or communal associations and, prior to a potential opening, the outlet center has to overcome numerous legal barriers.
Branch experts assume that most of the lease agreements between operators of outlet centers and brand product manufacturers contain prohibitions of competition in the form of so-called radius clauses. Such radius clauses forbid tenants to open up shops in another outlet center within a certain radius.
In this context, a conflict recently arose between Value Retail (VR), the operator of Wertheim Village Factory Outlet Center, and Stable International, the operator of the fashion outlet center in Montabaur, because VR’s radius clauses forbid its tenants to open up shops in other factory outlet centers or individual outlets within a radius of 150 kilometers of Wertheim Village, while Montabaur is only 147 kilometers away from Wertheim Village. In response, Stable called in the German Federal Cartel Office (FCO) claiming a substantial impairment of its freedom of competition because potential tenants, which were already running a shop in Wertheim Village, were restrained from signing a lease for Montabaur due to VR’s extensive radius clause.
In 2013, the FCO sought an injunction against VR. After a preliminary assessment found such radius clauses to be anti-competitive, the FCO conducted a comprehensive market survey. In March 2015, the FCO ordered that VR could not rely on radius clauses in lease agreements with brand product manufacturers “if these extend beyond a 50 kilometer air radius and a term of 5 years”. The president of the FCO said, “Restrictive radius clauses of this scale not only restrict competition between existing factory outlet centers, they significantly hinder companies wishing to enter the market with a new factory outlet center.”
The FCO’s decision is not yet final, but was issued as being immediately enforceable. VR has already taken steps to challenge the decision and has criticized what it sees as a one-sided directing of the proceedings carried out by the FCO, which did not consider VR’s own investigation results that could have been used to defend the radius clause. In particular, in VR’s view, no proof was provided to establish that existing or new outlet centers are adversely affected by the radius clause currently used, nor that tenants’ ability to compete with other brand manufacturers is impaired. Stable, on the other hand, welcomed the FCO’s decision and has indicated that it will amend the already existing lease agreements on its tenants’ request, which provide for a 50-kilometer radius and an indefinite term.
Tenants’ freedom of establishment was at the essence of the FCO’s decision, and it offers not only tenants but also existing operators of factory outlet centers greater possibilities for competition. According to a March 2015 market survey carried out by Ecostra, a leading German advisory company, ten factory outlet centers are currently operating in Germany. These operating outlet centers have a current market share of 1.2 percent compared to the German fashion trade. If the FCO’s decision becomes final, it will not only ease leasing in Montabaur, but will also make opening factory outlet malls more attractive in general.
According to Ecostra’s market survey, twelve further factory outlet centers are already in an early or advanced planning phase. These new outlet centers will benefit from this enlarged freedom of competition. It is estimated that in 2020, approximately twenty factory outlet centers will be operating and the market share will be increased up to a maximum of 3 percent of the German fashion trade – and, very likely, market saturation might be reached.
Even though the FCO’s decision seems instinctively the right one, it remains unclear why exactly the line was drawn at a radius of 50 kilometers and a term of five years. Critical voices recognize arbitrary aspects in this decision. Further developments in this area therefore remain worth following.