Learning What Works in the Retail Industry

Steven Tanger joined Tanger Factory Outlet Centers (SKT 2.81%), founded by his father in 1981, as the company's fourth employee. The company had grown to 13 outlet centers by 1992, and the following year became the first outlet center developer to be listed on the New York Stock Exchange as a publicly traded REIT, under ticker symbol SKT. Tanger has been president and CEO since 2009, and the company's portfolio, growing steadily, now includes more than 40 outlet centers across the U.S. and in Canada.

Tanger's approach to outlet malls has grown and evolved with the company over its three-decade existence. From a single 35,000-foot strip mall in North Carolina to 44 outlet centers in midmarket and tourist destinations nationwide, Tanger keeps a close eye on what works.

Tom Gardner: The emphasis on location means that you have your particular model of what you look for when trying to identify a great location for your next outlet mall. I just want to go through a few of the factors, and have you explain why that's relevant. Why is it relevant to have a million people within 30-40 miles, with an average income level of $65,000 per household?

Steve Tanger: We are a regional shopping destination. We like to put our shopping centers on an interstate or a major highway system, at the interchange, so that our customers can get on and off the interstate easily, and it's great visibility.

Unlike other neighborhood shopping centers, or a regional mall, that look at population and density and family household and incomes within a one-, three-, and five-mile radius, we look at five-, 10-, and 20-mile radiuses, because we draw from that amount of distance.

We have found, based on our experience in developing probably 40-45 of these already, that we have kind of a matrix of success, and that's what we look for, as a minimum. Household income and base population.

Gardner: And 5 million tourist visits a year.

Tanger: We have basically two types of different centers. One is a tourist location; let's say Riverhead, N.Y., which is at the east end of Long Island. You have the tourists going to the wine country, Splish Splash, all the attractions in the Hamptons, the North Shore and the South Shore of Long Island. That's a tourist location.

Or Branson, Mo.; or Myrtle Beach, S.C.; or Sevierville, Tenn.; or Foley, Ala. These are tourist locations.

Then we have mid-market or in-market centers, like National Harbor, which is both. National Harbor will attract the 35 million tourists a year to Washington, D.C., but also the permanent population in Virginia, Maryland, and the District.

So, we have two different types of studies and profiles.

Gardner: Were these profiles evident in 1984, and you've just tweaked them over time, or did you have major discoveries in finding these factors?

We have so many business owners that are part of our Motley Fool membership base, and they're always interested in the journey that somebody takes toward discovering the new factors that matter most. Has this been set and tweaked -- and almost a strategic model that could be put semi on autopilot -- or has it been a process of discovery and a lot of change over the last, let's say, 20 years?

Tanger: It's been a process of discovery that changes every day, because if you don't change it, you lose it. The first center we opened, of about 35,000 feet in Burlington, N.C. -- a little strip center -- would not really be successful today. We constantly tweak the format.

It evolved from Burlington to small, out-of-the-way tourist areas like North Conway, N.H.; Kittery, Maine; Martinsburg, W.V.; places you've probably never heard of or never went to. But we went where our tenants wanted to go, because in the early '80s, the very fine tenants looked at this as a clearance store and they didn't want to compete against the department stores. But they wanted their brand out there, and they needed to clear excess inventory and to turn it into cash.

Then, we came a little bit closer in and we built, effectively, very nice buildings surrounding a parking lot; a classic strip-center type of location -- if you look at it, almost a "C" -- it's up, across, and down.

Then, probably 10 years ago, that evolved to what we call a racetrack design, which, if you look at a regional mall and take the roof off, is what we do. You have a center of the donut, then you have a loop around, and then outside, so you have concentric circles. You walk around the racetrack, and you can look to your left and to your right, and you have a store on either side. It's a very efficient model, and the parking lot surrounds the buildings, as opposed to buildings surround the parking lot.

That is the evolution of our base model. We are testing one now -- I don't know if we'll find another site after this -- but in Foxwoods, Conn., we are building a bridge connecting the Grand Pequot Hotel and the MGM Grand Hotel casino floors. It will be about a 325,000-square-foot shopping center, but on a bridge. It will just be like one aisle way and you turn to your left or turn to your right, there's a store on either side.

That's an interesting format; very expensive engineering task to build, but we're under construction now.