Courtesy of Cushman & Wakefield

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When the huge Vegas mall opened next door, the Waymart shopping center on the 26th kilometer of the MKAD highway found itself outsized and outgunned. Located barely a kilometer down the road, Vegas featured a total area of 386,000 square meters to Waymart's 30,000, Russia's first indoor amusement park and anchor tenants including popular stores Auchan and M.video, which also had a store in Waymart.

Faced with such a hulking competitor, Waymart owner Way-M chose the "brains over brawn" approach and devised what it hopes will prove to be a clever solution: the reconceptualization of Waymart as an outlet center. Working with developer Rosital and consultant Core Group, it created a new maritime theme, reworked floor plans and renovated the building without closing the mall down. The newly christened BrandCity Outlet Center, which officially opened in September, is arguably the first outlet center in Russia.

"There's a new trend in [consumer] demand, and for us it's important to pick up on this trend, catch it and offer the market a new product in the form of an outlet center," said Sergei Krylov, director of development for Way-M.

Although BrandCity's layout and design is admittedly far from the classical concept of an outlet center, which entails a single level of stores that are usually freestanding, all of its stores are committed to providing goods at 30 percent to 70 percent off the market price, as per outlet center practice. Soon it will be joined by a wave of new-build outlet malls on the outskirts of Moscow: Outlet Village Belaya Dacha is slated to open in April, and Fashion House Moscow and Vnukovo Outlet Village are slated for opening in 2012.

Alongside the first outlet centers, a number of other new shopping center formats are appearing in Russia, including the power center, a type of mall that is dominated by several large anchor tenants. As the Russian consumer goods market continues to expand and evolve, consultants predict that still more formats, such as the neighborhood center, will appear here.

"The most important thing is that the customer is becoming ever more hungry for new forms of retail," said Charles Slater, head of retail at Cushman & Wakefield, which is leasing Outlet Village Belaya Dacha. The shopper "is always wanting the next new thing," he said.

"Here in Russia, we're pretty far behind more developed markets, so there's plenty of scope for new formats," he added.

Even in terms of traditional shopping centers, the Russian market is far from saturated, especially in the regions. Russia built the most square meters of shopping center space out of any country in Europe, with 404,000 square meters — one-fifth of the European total — constructed in the first half of 2011, according to a Cushman & Wakefield report. It is expected to remain in first place through 2012, as a further 2,900,000 square meters of shopping space will be brought online.

Demand from consumers, retailers and investors is driving the boom. Investment in retail real estate is increasing, as are total retail sales: following a contraction in 2009, sales have continued to grow at a rate of about five percent in 2010 and 2011, according to the State Statistics Service.

As more shopping centers are built and more retailers enter the market, however, competition is stiffening. To attract traffic to their malls, developers and retailers will have to set themselves apart from the crowd, which will require them to build these new formats, Slater said.

"What's going to have to happen in this market is retailers will have to get smart to draw the customer in," he said.

"The driver for these [new] formats is growing competition," agreed Maxim Gasiyev, general director of Colliers International. "If you have a land plot or factory next door to some shopping center, there's no reason to build a classic shopping center in direct competition. Both centers will lose money."

Instead, it's better to build a different kind of format that will attract customers with the allure of cheaper prices, such as an outlet or power center, he said.

Of course, these two bargain-based formats are possible only if construction and land costs are kept low, which is why they are usually built on the city outskirts (redevelopment of unused factories, however, can offer a cheap alternative within a city). Thus, a final factor facilitating the building of new retail formats is low construction costs, which have decreased in comparison with pre-crisis levels, Gasiyev said.

Last Season's Goods,  Lower Prices

The new outlet centers opening now are the Russian incarnation of a retail format that was pioneered in the United States in the 1970s. Now the Russian retail market has reached a point where outlet retail makes sense here, consultants said. The appearance of this new format is being fueled by consumer goods brands and their growing interest in outlet retail in Russia, Slater said.

Outlet centers are "very much a brand-driven commodity, how many stores can retailers actually have, how much product can they supply to their outlet stores," he said.

Outlet goods come from two sources: leftover stock and special collections produced by a brand specifically for its outlets. A brand needs to be selling large amounts of its wares before its leftover stock can become massive enough to support an outlet store. Today, such large brands are present in Russia, and foreign brands are ready to put out special collections for outlet stores here, Gasiyev said.

"Our country already has big enough sales volumes that outlets can appear," he said.

Colliers is leasing the Vnukovo Outlet Village project, and so far its experience has indicated brands are ready to go into outlet, Gasiyev said.

"Brands are reacting positively, whereas five years ago it was too early," he said.

The first phase of Outlet Village Belaya Dacha, which is being built by international real estate company Hines and local agricultural company Belaya Dacha, is already over 90 percent leased out, Slater said. Brands that have signed on include Levi's, Calvin Klein Jeans, Salomon, Adidas, Lacoste and Baldinini, many of which are "magnet brands," he said.

The project is poised to become the first outlet center built from the ground up in Russia when its first phase opens in April. Although the center was supposed to be up and running in September, the opening was pushed back to the end of this year and then to next year to "make sure the  vast majority of retailers are ready for trade on day one," Slater said. The new date was also planned to coincide with the start of the fashion season in March and April, so the many fashion brands involved will be able to stock their outlet stores with the leftovers from the current season, he added.

Hines and Belaya Dacha will invest a total of $160 million in the mall, which will feature rows of shops along open-air lanes in a "village" theme, with a cupola at the center.

The 150 stores at Vnukovo Outlet Village, which is being developed by three private investors, will also be laid out along pedestrian streets joined by a central square, all of it designed to achieve a village feel. Investment in the project will total about $55 million, a sum that will be paid off in five to seven years, the project's co-owner, Dmitry Kulkov, told RBC in July.

Fashion House Moscow, with 192 stores and restaurants, will have some outdoor areas, but most of the shopping area will be covered. The project is being developed at a cost of 97 million euros by Fashion House Group with investor Liebrecht & Wood Investment Fund, according to Brendon O'Reilly, managing director of Fashion House Group. O'Reilly said that 75 percent of the center's  retail space is leased or has been agreed to be leased, adding that TsUM, Puma, Nike, Lacoste and many other brands will have outlets there.

Fashion House has opened other outlet malls in Eastern Europe and offers investors and developers a franchising agreement that O'Reilly said is designed to reduce the risks of opening such a center.

Russia's climate would seem to pose problems for the outlet center format and its usually uncovered general spaces, which reduce heating costs and thereby contribute to lower rental rates and, in turn, lower prices for the consumer. But Gasiyev said the weather won't stop deal-seekers and will simply challenge developers and operators to make the shopping experience entertaining all the same.

"I think that such formats will survive in Russia because there always has been street retail here," he said.

After these three new centers open, there could be room for one more outlet mall in Moscow, but after that the market will probably be tapped out, Slater said. The next "big flow of outlet centers" will be in St. Petersburg, he said, where Fashion House owns a land plot and is planning to build another outlet center.

Meanwhile, BrandCity is providing a trial run for outlet center shopping in Moscow. According to Krylov, seven outlets including stores by Baldinini, All Seasons and Samsonite are already open there, other brands including M.video will soon be opening, and several existing stores will switch to the outlet format next spring. About 65 percent of the space has been rented or is already operating at rental rates ranging from 15,000 rubles ($500) to 25,000 rubles ($850) per square meter, he said.

Although the temporary mix of full-price and outlet stores has caused some customer confusion at BrandCity, it continues to develop and will soon attract the Western mono brands that are key to outlet success, Krylov said. "Now we're negotiating with those [retailers] that didn't believe in our project at first because they now understand that outlet stores can work and make money," he said.

Power Centers Growing Stronger

After outlets, consultants predicted the next big thing in Russian retail will be the power center format pioneered in the United States, which Slater said is analogous to the European concept of retail park. This format — a center where big-box retailers take up a majority of space in proportion to the shopping gallery of small specialty stores — will establish itself in Russia within the next few years, Gasiyev said.

"Retail parks will be the next evolution of retail in large cities," mainly in the millioniki, he said.

Power centers, like outlet centers, are generally located on the outskirts of a city so they can save on land costs and thereby offer consumers lower prices. Build costs for power centers are also generally less than those of traditional malls because the design is simpler, and less technology is required: Unlike multiple-floored shopping centers, power centers are typically a single level, and feature easy-access, no-frills design and frame construction. As Slater put it, "it's retail warehousing."

Although traditional shopping centers traditionally make higher profits than power centers, it can be difficult to attract fashion brands — which are vital for the success of a traditional center — to a mall outside the city, Gasiyev said. On the other hand, retailers like superstores and sporting goods, do-it-yourself and furniture stores don't worry so much about how central a location is, as long as it's easily accessible by car.  As a result, shopping center developers working on such plots outside the city will likely start building retail parks or power centers, he said.

According to Gasiyev, a few power-center prototypes already exist in the Moscow region: The Liga Shopping Center in Khimki has several large anchor tenants, including a 6,000-square-meter Karusel superstore and a 3,000-square-meter M.video store, as did Waymart before it was converted into BrandCity. Whereas U.S. and European power centers are often comprised of free-standing stores, each of these two examples is one multi-level building.

Slater said although there are already several malls in Russia that are "pretty close to a power center," there are no full-fledged power centers here.

"Even Retail Park [shopping center on Varshavskoye Shosse] you can't describe as a retail park or power center," he said. "It has some anchors, but then it also has a considerable gallery."

Nonetheless, soon proper power centers will crop up, he expects. Again, retailers are behind the phenomenon.

"There are a number of developers looking at creating retail parks, and there is a demand from big-box retailers for this type of development," Slater said. But he stressed that the appearance of power centers in Russia will be less revolutionary than outlet centers, since the former are simply full-price retail in a slightly different format.

On the more distant horizon, consultants expect more new formats to appear. These include the convenience center, a mall located in the city and geared toward residents of its neighborhood. Often weighing in around 3,000 to 10,000 square meters, a convenience center will usually feature a small supermarket as an anchor tenant, a varied shopping gallery and restaurants or cafes, Gasiyev said.

In addition, Gasiyev noted that another possible new format is the specialty center, usually a multi-level mall comprised of retailers in a single category, such as electronics, sporting goods or furniture. In fact, Moscow already has some malls that evoke this concept, Gasiyev said: the Sport-Hit sporting goods center on Skolkovskoye Shosse and Gorbushka, an electronics shopping center near the famous bazaar of the same name on metro Bagrationovskaya.

The specialty center and power center formats can also work in the city, since they are well-adapted to redevelopment projects in existing industrial buildings, Gasiyev pointed out. Thus, construction costs can be kept low — $300 to $500 per square meter — when developing a multi-level center.

However, Slater noted that such centers could be hard to fill, since currently in the electronics, furniture and sporting goods categories in Russia, "there isn't much depth in terms of operators selling these goods."

Financing also poses a challenge for all new types of shopping centers due to high lending rates, Gasiyev said. "If you build something unusual, the bank will value the risks higher and offer more expensive financing," he explained.

Nonetheless, developers and brands won't be able to create appealing retail destinations without taking inspiration from new forms of retail.

"Customers are always looking for something new, and that's exactly why there are these different formats of retail," Slater said. "There has to be that new experience."