The establishment of factory outlet malls as a retail concept initially started in the USA. Over the past 25 years similar shopping developments have appeared in Europe as well. While in some European countries, such as the UK, market saturation has been reached, Germany still has some potential for new outlet malls.
These are mainly situated just outside big cities and offer well-known brand manufacturers the opportunity to sell their products to consumers at a significant discount. Unlike conventional stock sales, goods are not sold at the place of production. Instead, factory outlet malls are typified by a number of individual outlet stores in a mall in which different brand manufacturers sell discontinued lines, slightly imperfect goods, etc. In 2012 alone three new outlet malls were opened in Germany, taking the number of such sites from six to nine at that time. However outlet malls have come in for some severe criticism, often from retail or community associations, and those wishing to open an outlet mall often face numerous legal hurdles.
Most of the lease agreements between operators of outlet malls and brand manufacturers for outlet stores contain restrictions on competition in the form of “radius clauses”. These clauses forbid tenants to open up shops in another outlet mall within a certain radius. In this context a conflict arose between Value Retail (VR), the operator of Wertheim Village Factory Outlet Mall (Wertheim Village) and Stable International (Stable), the operator of the fashion outlet mall in Montabaur (Montabaur). VR’s radius clause did not permit its tenants to open up shops in another factory outlet mall or individual outlets within a radius of 150km of Wertheim Village. A mall was opened in Montabaur, 147km away from Wertheim Village. Stable referred the matter to the German Federal Cartel Office (FCO) claiming that under the terms of its radius clause, its tenants were restrained from signing a lease with Montabaur.
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 then ordered that VR could not rely on radius clauses in lease agreements with brand manufacturers if these extend beyond a 50km radius and last for more than five years. The president of the FCO said: “Restrictive radius clauses of this scale not only restrict competition between existing factory outlet malls. They significantly hinder companies wishing to enter the market with a new factory outlet mall.”
According to the FCO, Wertheim Village’s catchment area consisted of customers living within a 100km radius and of customers passing through the area using the mall as a shopping facility. VR’s radius clause therefore exceeded the relevant geographic market, and was not required as an essential part of the lease agreements it had with its tenants. Further, such clauses were aimed at restricting competition from present and future competitors of Wertheim Village by preventing brand manufacturers from becoming tenants of other outlet malls.
The decision of the FCO is not yet final but was issued as being immediately enforceable. VR has already taken steps to challenge the decision and has condemned what it sees as the one-sided nature 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, VR argues that there is no proof that existing or new factory outlet malls 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, has welcomed the FCO’s decision and is set to amend the current, more restrictive lease agreements at its tenants’ request.
The FCO’s decision enhances tenants’ freedom of establishment and opens up opportunities for competition not only for tenants but also for existing operators of factory outlet malls. According to a market survey carried out by the research company, ecostra in March this year, there are currently 10 factory outlet malls operating in Germany. Between them, they have a market share of 1.2 per cent. If the FCO’s decision becomes final, it will not only ease the letting situation in Montabaur, it will also make opening factory outlet malls more attractive in general. ecostra states that 12 more factory outlet malls are currently in early or advanced planning phases. These will obviously benefit from this greater freedom of competition. It is estimated that in 2020 approximately 20 factory outlet malls will be operating and that their market share will reach a maximum of 3 per cent of the German fashion trade, when market saturation may be reached.
Although the FCO’s decision seems instinctively to be the right one, it remains unclear why exactly the line was drawn at a radius of 50km and a term of five years. Critics have noted the apparently arbitrary aspects of this decision. Further developments in this area may be anticipated.