The European factory outlet industry continues to mature as developers target opportunities for expansion. Young by U.S. standards, the European outlet market developed in the United Kingdom less than a decade ago. But that fledgling retail niche already is a big hit with consumers.

"It's a strong growth industry, and more manufacturers and integrated retailers are looking at the outlet industry as a new and exciting channel of distribution for their products," says Hans E. Dobke, CEO of Outlet Centres International (OCI) in London. The company was formed in 1996 with the specific purpose of developing and owning outlet centers. OCI's goal is to build 10 to 12 outlets by 2005.

Currently, OCI has an outlet in Scotland that opened in August 1999, a center in Stockholm, Sweden, that opened in October 1999, and a third under construction in Frankfurt, Germany. The firm has sites in the permitting process in Italy, Spain, Denmark and Germany.

European markets, with the exception of Eastern Europe, are equally receptive to the outlet concept, Dobke says. Sales at OCI outlets average in excess of $375 per sq. ft. compared to the U.S. equivalent of about $255 per sq. ft. "In Western Europe, the buying public is very brand conscious and value conscious," he says.

European outlets promote a minimum of 30% off regular retail prices. "Most tenants are obliged within contracts to agree to a minimum savings of 30% compared to High Street prices, and that is controlled and monitored," says Claire Warner, an associate director in the London office of JonesLangLaSalle.

United Kingdom Historically, U.K.'s off-price industry was very "down market," with manufacturers selling goods from the back of the factory, says Lestyn Roberts, the European marketing director for BAA McArthurGlen in London.

The company is Europe's leading developer of designer outlets with 4.5 million sq. ft. of retail space in operation, under construction or in planning stages.

The outlet industry has evolved significantly in recent years, Roberts notes. The participation of leading U.S. and European brands has helped boost the quality and variety of merchandise available.

U.K. developers are adopting much the same strategy as their counterparts in the United States by beefing up the entertainment mix to attract and retain shoppers. U.K. outlets are adding food courts, restaurants, movie theaters and children's play areas. Outlet centers also have become savvier in using nearby attractions to position outlets as destination centers, notes Mark Wilson, regional director at NAI Gooch Webster in Bristol, England.

McArthurGlen owns six outlet centers in the U.K., and a seventh center in Scotland is set to open in October. The 300,000 sq. ft. McArthurGlen Designer Outlet Livingston will feature 80 brand-name tenants, as well as restaurants, bars, an eight-screen cinema with state-of-the-art stadium seating, a health and fitness club, food court and parking for 2,000 cars and buses.

Meanwhile, McArthurGlen Designer Outlet York promotes its proximity to several popular attractions such as the National Railway Museum, the Jorvik Viking Centre and York Races, which combined attract about 10 million visits each year.

Customers continue to show a strong appetite for outlet centers. However, it has become increasingly difficult to secure new building sites. As a result, the strategy for growth going forward focuses on consolidation and expansion of existing centers, Roberts notes.

Since the 96,000 sq. ft. McArthurGlen Designer Outlet Cheshire Oaks opened in March 1995, the center has more than tripled in size to become Europe's largest designer outlet. Located near Chester, the fourth phase at Cheshire Oaks was completed in April to bring the center to 336,000 sq. ft. The center has 130 shops, eight restaurants, a large themed food court and a children's play area.

"The outlet concept is much more advanced in the U.K. than it is in continental Europe," Wilson says. But the U.K. is reaching the saturation point now in terms of the number of centers that can or will be developed. The outlet market in the U.K. is nearly twice that of continental Europe. The U.K. currently has 32 outlet centers that comprise about 3.4 million sq. ft. compared to the 27 outlets in operation on the continent, Warner notes. In addition, the U.K. is attracting more interest from retail manufacturers. The U.K. has more than 350 retail firms that have located in more than one outlet center. In France, for example, only about 190 brands are represented in more than one center, Wilson says.

The continent Developers that have built successful outlet concepts in the U.K. are now turning their attention to other European markets. "The openings in (continental) Europe are going to increase significantly in the next few years," Wilson says. "That's where people are looking now, and where they see the growth."

Although the dense population base on the continent is a plus, development there has lagged behind that of the U.K. due to numerous obstacles.

Foremost, countries have been slow to embrace the factory outlet industry. "There is a huge backlash against factory outlets on the continent, particularly in Germany," Warner says. Even the full-price shopping center market is not very developed on the continent, so the factory outlet sector has been slow to gain momentum.

One reason for such resistance is the strong position traditional retailers hold in local government. Interested parties such as city councils and retail associations exert influence on the planning process to deter outlet developments. Those groups can't stop development, but they can delay approvals and permits - which can be the death of a project, Roberts notes.

Another problem for developers is finding companies that want to operate in outlet centers, says Ulrich Nordhorn, a managing director at Retail Development Group in Koln, Germany.

Some manufacturers hold on to their perceptions that locating in outlet centers will detract from the sale of goods in other traditional retail venues such as department stores.

Whereas U.S. companies such as Gap and Nike have separate divisions devoted to outlet operations, European retailers are not as focused on the outlet side of the business. "There is no retailer in Europe that has its own organization to operate just outlet centers," Nordhorn says. That reluctance on the part of retailers will hold some outlet operators back from investing in new centers, he adds. "Slowly we are getting some more outlets in Germany, but there is still major defense from governments and retail organizations against it."

There is a fear that outlets will take business away from traditional department stores. And retail manufacturers that have relationships with those department store chains are afraid that by opening outlet stores they will alienate their department store customers. Another major obstacle is obtaining building approval for large retail sites. Developers are finding a lack of available land approved for retail zoning. Retail zoning is typically located in and around cities.

The problem that arises with outlet centers is that the centers need to locate away from major trade areas so as not to compete directly with traditional retail merchants. But when developers move further out to those outlying areas, the land is not zoned for retail, Nordhorn explains. Obtaining those building approvals is very difficult. Nevertheless, developers are slowly gaining a foothold in continental Europe. McArthurGlen is using its established track record in the U.K. to illustrate the positive impact factory outlets can have in bringing new business to nearby town centers, Roberts says.

BAA McArthurGlen operates two outlet centers in France, one in Germany, and has another outlet under construction in Italy. Italy is becoming more receptive to outlet center development, and BAA McArthurGlen is working on two or three additional retail sites in the country. "We certainly see the focus of development shifting from being entirely U.K.-centered," Roberts says.