NEW YORK — Beyond the chic limestone facades and Italian marble selling floors, difficult decisions are being made in the back offices of designer retail operations.

Call it a new restraint. Call it pragmatism. For many upscale brands that waged store expansions in the Nineties, both American and European, it’s time to cut the losses and rein in the real estate, press for higher productivities, market locally — and less so to the slumping tourist trade —and stock up on items and categories that appeal to wider demographics. Most often, those wider demographics spell accessories, shoes and lower-priced, sportier items like Polo’s Blue Label bridge line, Karl Lagerfeld’s ski parkas for Chanel or Dolce & Gabbana’s growing D&G line.

An expansion-minded Calvin Klein, with new owner Phillips-Van Heusen, is pushing his jeans collection. He’s scouting sites for a Calvin Klein Jeans store in Paris and opening others this summer and fall in Hong Kong and Seville and Marbella, Spain, following the recent openings in Amsterdam, Moscow, Sydney, Melbourne and Chongquing in China.

With the world’s luxury sales slipping, designer brands are reaching for business outside the core ready-to-wear collections that have long been their foundations. Product diversification and new ideas are critical. So is retail expansion, particularly for public companies pushed by Wall Street’s lust for growth, like Polo/Ralph Lauren and LVMH-owned Donna Karan, even when the rate of consumer spending says slow down. Private companies such as Chanel and Ferragamo are already taking cautious retail routes. Yet any retailing strategy must adapt in an age of economic uncertainty.

“It’s called full-court press time,” said Arie Kopelman, president of Chanel Inc.

For some designer stores, time has expired. Tommy Hilfiger recently decided to close 38 specialty stores, and earlier closed its glitzy flagships in London and on Rodeo Drive. The Beverly Hills site got swooped up by Brooks Bros. about a month ago.

However, at Polo/Ralph Lauren, “We are bullish over the long term on vertical retail,” said Roger Farah, president and chief operating officer. He acknowledged that, “in the short run, the market is choppy. But our orientation is really the long term. We’re putting in the building blocks for what will be an important growth phase. It’s a worldwide opportunity.”With 255 owned stores and 85 licensed stores around the world, and retailing generating 40 percent of the company’s $2 billion in annual sales, Polo’s new growth phase will center on the Blue Label line. Three stores were converted to the format last fall, and 4,000- to 5,000-square-foot Blue Label sites are expected to be launched soon, possibly this fall, in the U.S. and abroad.

About a month ago, another new concept, Ralph Lauren Baby, launched on Madison Avenue, and Farah believes there are still opportunities to open additional full-blown Polo luxury stores in the U.S. and abroad. He’s traveled to Russia, Asia and Europe to determine the interest.

“We are strategizing the retail rollout,” Farah said.

At Donna Karan, retail growth won’t be as quick. According to Fred Wilson, chief executive, “We are going to have a slow and steady expansion of our retail stores. There is major potential for our own retail stores and retail expansion,” though not right away. “It will be a slow and steady expansion beginning in 12 to 18 months, depending on the economy. The strategy is not changing, but the timing is.”

At Diane Von Furstenberg, “our retail sector is so new right now that there is an enormous opportunity for growth since we are really in the beginning stages,” said Paula Sutter, president. DVF has a store in the West Village and in Merrick Park, in Coral Gables, Fla., and a London shop will be opening soon. “The DVF brand is so strong globally right now that it is actually a perfect time for us to be maximizing that brand recognition,” she said.

DVF, Sutter assured, won’t make the mistake that other designers made by opening big, bold, costly flagships that did more for brand image than for the bottom line. “Our philosophy for our retail business is really to keep the stores small and special — they will never feel like a cookie cutter.” She sees them as “tiny, glittering jewel boxes, all sharing the image of DVF, but reflecting the mood of the city they are in. Therefore, the customer will have a slightly different experience in each of our shops.”Sutter added: “We have a great number of brand licensing opportunities right now, such as the launch of our beauty-fragrance, sunglasses and tenniswear — so it is important for us to keep expanding our retail locations.

“As far as the economic climate is concerned, we believe that, even in an uncertain economy, you must stick to your plan and really learn to go a bit slowly.”

That seems to be the prevailing mood. “We started our company by borrowing $500, and we still have a philosophy to do things in a prudent manner,” said Sybil Yurman, president and co-founder of jeweler David Yurman, which has just two stores, on Madison Avenue and in Costa Mesa, Calif., and no others on the drawing boards currently. “Bigger isn’t always better, but this is no time to be coasting,” Yurman said. “It’s really time to use all your thinking power and talent. We stay one step ahead of our customers with product diversification. We are always involved in surprising the customer so they come into our stores or the corners and boutiques we sell to, expecting one thing and getting surprised by the diversification and new divisions,” including watches. “We’re known for silver and gold with colored stones, then we did silver with diamonds, which is very new and very unusual. So are our major chain collections — necklaces and bracelets with flexible soft woven handmade chains, from about $300 to $2,500 in silver, and in gold, up to $6,000.”

“Everybody is rethinking the product line, rethinking the distribution, working much closer with their business models and trying to home in on their core competencies, rather than just trying to sell 10,000 square feet of stuff,” said Robin Kramer, of Kramer Design Group.

“Efficiency is the name of the game,” said Massimo Ferragamo, chairman of Salvatore Ferragamo USA. “You must be able to relook at business, cut costs in some cases, but not to the detriment of the customers.”

Squeezed by the rise of such shoe brands as Jimmy Choo, Stuart Weitzman and Manolo Blahnik, Ferragamo has adapted its retail strategy. With the exception of a Fifth Avenue flagship opening in August, new stores will be smaller and skewed toward accessories, with reduced space for rtw. Recently, Ferragamo’s SoHo store was consolidated by closing the lower level, leaving just the main level.“We have a new concept [for retail stores] that we have been working on with slightly less space with a greater presence of our core business — accessories, leathers and silks. We are adapting well,” said Ferragamo. “In smaller cities, obviously we don’t need a full-blown store,” he said, noting that the Atlanta store opened in early May is only 3,500 square feet, with 2,500 square feet devoted to selling space. Previously, Ferragamo would build stores with 50 percent of the space for selling; 50 percent for nonselling. Though stores of the future might be smaller, meaning lower rents, the company, Ferragamo maintained, can keep growing by becoming more efficient in turning over the merchandise and replenishments through improved systems and data. As the balance shifts to accessories, and reduced rtw in men’s and women’s, Ferragamo said the company can recover rtw sales through trunk shows, where the full rtw collections are shown.

According to real estate brokers and landlords, lease activity is decelerating and reports of brands abandoning locations, or reversing decisions about store openings, are on the rise. “People are committing to fewer stores and doing it with more diligence on the due diligence. They are not that aggressive or bullish because of the current economy,” said Nate Forbes, managing partner of The Forbes Co., which operates The Gardens of the Palm Beaches in Palm Beach, Somerset Collection in Troy, Mich., and The Mall at Millenia in Orlando, Fla., shopping centers where 10 to 15 percent of the tenants are purveyors of luxury merchandise.

“Designers need to maximize those stores that are performing, and not suffer with those that aren’t. They are more likely to sublet their space, and willing to bite the bullet,” said Laura Pomerantz, co-principal, PBS Realty Advisors LLC.

Other sources indicated to WWD that there’s plenty of turbulence on the designer real estate front. For instance:

Prada has put up for sale the site for its long-awaited 22,500-square-foot flagship in San Francisco, which was to have been designed by Rem Koolhaas.

Hugo Boss this spring closed two stores, in Atlanta and West Palm Beach, but the company denied rumors its Fifth Avenue flagship is also on the chopping block. To save costs, the Hugo Boss retail operations team was shifted from New York offices to its new Savannah, Ga., distribution facility, but the sales staff remains. The German firm is proceeding with its 10,000-square-foot store in the AOL/Time Warner complex on Columbus Circle, slated to open sometime between August and October.Nars, a niche color cosmetics division of Shiseido, has put its previously announced SoHo store “on hold,” according to the company.

Chanel is pouring money into renovating existing stores, and plans to convert the third floor “suite” at its 57th Street flagship into selling space, though officials acknowledge few opportunities for additional full-line sites. Its smaller, accessories-only format has legs, however.

Tod’s plans to launch its lower-priced Fay line in the U.S. next year and is reportedly looking for store sites in New York to roll out the sub brand. (For a separate story on Fay, see page 8.)

Burberry’s lower-priced Thomas Burberry collection is coming to America this fall, and the first stop will be Bloomingdale’s in SoHo, opening this November. The line is currently only sold in Europe.

Shanghai Tang, which has come and gone and returned to Madison Avenue, is reportedly again looking to get out of its space at 714 Madison, between 64th and 65th Streets. However, Anna Brjevskaia, assistant to the store manager, said, “We are not closing or relocating.”

It’s not only a matter of relinquishing a site when the return on investment falls short. It appears that some designer brands are getting pragmatic by changing tactics to save costs and curtail risk. Nautica-owned Earl Jean, which has a new store format that appeared in SoHo last year, has yet to roll it out to other markets as planned. In addition, H. Stern intended to open a store in SoHo but backed out, and Cartier closed its SoHo store, though the company always said from the start it could be just temporary. In Midtown, the Nautica flagship is up in the air. The company has already admitted it is rethinking its strategy for the site in Rockefeller Center.

As one international store builder said, “We are just seeing so much less work, and whatever is around is so incredibly price sensitive. The pressure on the construction side is worse than I can ever remember it.” Nowadays, the builder lamented, it’s more common to see construction jobs getting bid out. Before, brands would not think twice about hiring the builder it worked with before, one with a track record for quality and getting jobs done on schedule and in time for the selling season. “Designers are looking to get the same thing done for less, without messing with the aesthetic,” he said.Gucci, for example, decided to use Price Woods, a contractor from Arizona, to work on its new flagship at theAmericana Manhasset on Long Island, a unique shopping center with an unusually high proportion of luxury brands. “They can send in supervisory people from Arizona and that’s a lot cheaper than using people from New York,” said a source.

Tomaso Galli, Gucci’s director of communications, said Gucci has used this contractor in at least four locations before, from Honolulu to Texas and Florida. “We’re looking at all our costs very carefully and staying on top of them for about the past year.” But, as other sources said, with consumers holding back on spending, companies have to work twice as hard to keep costs down and still entice spending.

The trick is to do that without losing the competitive edge. “There are things you can do to make your business a little smarter, a little faster in tough times; maybe hold back in certain areas, and no doubt sharpen the pencil. However, you must plan for the future,” advised Chanel’s Kopelman. “You still tighten the belt, with such things as advertising or promotions, but you don’t want to cut back to the point so when business does turn around, you are at a competitive disadvantage because others have been investing.”

At Chanel, “We are heavily investing in our boutiques to modernize them,“ Kopelman added. “Peter Marino [the store designer] has done a whole new look, which we did in Honolulu early this year. The results have been so good that we are accelerating our plans to redo all of our stores. Frankly, they were getting a little dated. They were beautiful stores, but we needed an environment where products were the stars, not the bones. This is a big financial commitment. This is not redecorating. A lot of companies would have pulled back from this kind of rapid rollout.”

Chanel will be building more accessories-only shops, including one in the Mall at Short Hills, in New Jersey, and probably other locations, in addition to the two operating on Madison Avenue and in Orlando. However, as far as full-line Chanel stores, “If we did one or two more, that would be it. Basically, we have a mature distribution in this country, both at retail and wholesale,” Kopelman said. However, “we are never going to have a second-tier line. A diffusion line would have diluent impact.”Hugo Boss has been streamlining. “Considering the money they put into their stores, they were expecting a larger payback,” said a source close to the company. “But the problem is that they are vendors, not retailers. A retailer understands each market and understands the need for advertising and promotion. Hugo Boss does not believe in advertising and promotion for their stores, but they will have to adapt to stay in the American market.” Buying decisions for the individual stores, said the source, are too centralized. A 3,500-square-foot store in Denver, for example, “didn’t even do a million [dollars] in sales. You can’t make a profit off that,” the source said.

Asked if the Fifth Avenue flagship could close, Katja Dovedari, Boss’ vice president of marketing and public relations, stated, “That’s not true. We make money there, but who on Fifth Avenue makes a fortune? No one. We’ll make a lot of money at AOL.” With the AOL complex, the question is whether stores will draw enough traffic to support the rents, which, on the ground floor, are more than $300 a square foot. Stores must also pay huge common-area maintenance charges, at more than $40 a foot, though rents drop to $110 to $135 a square foot on the second or third floors.

Asked about sales at the Hugo store in SoHo, which sells younger, more contemporary styles, Dovedari said, “It’s not an easy thing in SoHo.” The Beverly Hills Hugo Boss store on Rodeo Drive, she added, will undergo a six-week renovation this summer.

There are other signs that designer brands are adapting their retail strategies. “The perfect metaphor for what’s going on is LVMH on the [northwest] corner of 57th and Madison,” said Jeffrey Paisner, executive managing director of The Lansco Corp. “They own the building, but they decided not to use it. Montblanc [which is owned by Compagnie Financière Richemont SA] took over the space. The fact they didn’t use it was compelling. At stores like Burberry and Montblanc, you get the satisfaction of purchasing a luxury item, a bag, a key chain or a scarf, without spending a luxurious amount of money. Montblanc is certainly moving ahead. Burberry is not acting scared in terms of expansion. They’re generating the capital they need to justify opening new doors.“But many brands aren’t in an expansion mode right now,” Paisner added. “They want to keep the fleet afloat, rather than launching new ships. The drop in tourism has really hurt luxury brands.”

It’s also affected shopping centers that have long catered to affluent tourists, among them the 500,000-square-foot Bal Harbour Shops center in southeast Florida. “In my budget, I am focusing on the local drive market,” said Cheryl Stephenson, director of marketing. “We’re advertising heavily in Naples,” which is about a two-hour drive west of Bal Harbour. “We dropped 5,000 catalogs in the Naples market and we’re getting phone calls every day asking for directions. The city does not have the boutiques we have, such as Roberto Cavalli or Dolce & Gabbana.” She also said the center has put up billboards in Fort Lauderdale, about a half hour north of Bal Harbour, for the first time, and overall the marketing dollars have shifted. Sixty to 65 percent of the budget is directed at consumers in the Miami-Dade area and those who are a couple of hours away by car; 35 to 40 percent is directed at tourists. Before, it was just the reverse, Stephenson said.

Marketing dollars might best be spent on successful upscale brands that fall into the sub-luxury zone by creating a designer aura, but without charging the designer price points. Coach, Stuart Weitzman, Lilly Pulitzer, Burberry, and Max Mara are in this league.

There’s also Ellen Tracy, a bridge designer business with a mature business at Neiman Marcus, Saks Fifth Avenue and Bloomingdale’s. Nevertheless, the company said it has plenty of growth opportunities and four main strategies: launching Ellen Tracy stores, international distribution, licensing and accessories. Though it operates outlets, it’s one of the few high-profile designer brands that has resisted opening regular-priced retail stores, until now. The brand will be supported in the expansion by its new owner, Liz Claiborne, which purchased Ellen Tracy last year. The first Ellen Tracy store is expected to open at the Americana Manhasset shopping center this August. Like other brands moving beyond their core rtw collections into different merchandise, Ellen Tracy will be launching handbags and jewelry for fall 2003. It’s also “reemphasizing the luxury element in the product” through new national advertising, stated Glenn McMahon, president.“Despite the fact that we do have strong relations with Neiman’s, Saks and Bloomingdale’s, we think there are tremendous growth opportunities,” McMahon said. “In a competitive market area that’s been challenged, we are happy to say we are holding our own and are on plan. We think that in this difficult environment, the strong get stronger. We’re looking for increased market share,” including at its three key retailers. As far as additional retail stores, the strategy for now is to concentrate on finding sites in the New York metro area “for the time being,” McMahon said. Meanwhile, Claiborne is closing its 22 remaining Liz Claiborne stores, reflecting how difficult it can be for vendors to become retailers.

Yet, it is important for them to understand retailers’ needs, and try to accommodate their retail customers more. For example, at Tuleh, a growing designer brand, “we don’t take things back, but if we see a coat at Bergdorf Goodman that hasn’t sold, and I know I have a customer, I’ll take it back,” said Tuleh’s Bryan Bradley. Consignments are out of the question, he stated.

In any case, bending to please smaller retail accounts could be beneficial and some boutiques are noticing a difference. For example, at recent buying appointments with Miu Miu in Milan, Karen Daskas, co-partner in Tender, a 3,000-square-foot designer shop in Birmingham, Mich., also selling Pucci, Blumarine, Etro and Paul Smith, has been surprised by what she got — some time and attention.

“They were sitting with me, watching me buy, everyone from Jay Sternstein to Joh Siff,” respectively, the rtw sales manager, and senior vice president of sales and marketing of Prada. “They sit there with paper and pen, and it’s been that way increasingly in the last two years. They are watching. There is a new appreciation of the specialty store in the U.S. because of the growing demand put on designers by department stores. There’s co-op, markdown money, guarantees and the new thing is consignment. It’s really happening.”

“Over the last 24 months, strong luxury brands have focused on continuing to build their brand, like Vuitton, Burberry, Gucci and Tiffany,” observed developer Nate Forbes. “They’ve really contemporized their businesses, in the marketing and the merchandising. They’ve broadened their appeal in anticipation of the shrinking urban older customer. They’ve gone younger in age, and in the old days, they targeted those with $150,000 incomes or higher. Now, it’s dropped to $100,000 and up.”

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