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Say Aloha to Hawaii: Luxury Brands Expand With Hope of Upturn

LOS ANGELES -- Luxury firms have faith in the future of Hawaiian retailing, and are backing up their expectations with their checkbooks.<P>The drop-off in tourism -- especially from the Japanese -- and luxury spending notwithstanding, some...

LOS ANGELES — Luxury firms have faith in the future of Hawaiian retailing, and are backing up their expectations with their checkbooks.

The drop-off in tourism — especially from the Japanese — and luxury spending notwithstanding, some high-profile brands are building sizable flagships for what they hope will be a bonanza in Hawaii, one of the regions hit worst by the post-9/11 tourist drought.

Chanel, Gucci, Yves Saint Laurent, Boucheron, Tod’s and Tiffany & Co. confirmed that they are putting significant stock in the region by erecting multilevel stores at 2100 Kalakaua Avenue, a 110,000-square-foot project developed by the Honu Group Inc., in Waikiki on the island of Oahu.

These units are not the typical boutiques for the companies. At sizes ranging from 5,000 to 20,000 square feet and inhabiting three-story town houses, they are among the largest doors in their fleets.

The $140 million project, at the corner of Kalakaua Avenue and Kalaimoku Street, is slated to open Nov. 1 with a party planned for Dec. 6. The complex is about 75 percent leased; two 10,890-square-foot spaces were still available at press time.

Plans for the stores were in the works long before the September 11 tragedy, of course, and project executives said they are playing Hawaii like a chess game, establishing strategic geographic positions for long-term growth opportunities.

“It’s true,” said Arie Kopelman, Chanel Inc.’s U.S. president and chief operating officer. “When we made the decision to do it, things were rolling along pretty nicely. Sept. 11 married to a softening economy tragically changed that. But I think we made the right decision and I’m not disappointed.”

Retailers said they are putting up stakes now, in part, to position themselves for a Chinese tourist market that’s expected to grow significantly over the next decade. That is coupled with the awesome spending power of Japanese tourists, expected by most economists to rebound fully some time next year, and the expectation that local economic conditions will improve. Even in its current condition, retailers claim Hawaiian stores bring in sales rivaling Madison Avenue.

“Historically, Hawaii has been a very important, very successful market for Gucci,” said Domenico De Sole, chairman and chief executive officer of Gucci Group. The European conglomerate represents the largest investor in the project, having picked up three spaces — for Gucci, YSL and Boucheron. “I’m sure that every brand will confirm that. When I became chairman and ceo 18 years ago, the first thing I did was acquire the Gucci franchise in Hawaii.”

China’s entry into the World Trade Organization last December has helped fuel the optimism. In 2000, the latest statistics available, some 36,549 Chinese tourists flocked to Hawaii.

“It’s widely believed that the number of Chinese travelers to Hawaii will rise over the next decade,” added Chris Kam, director of market trends at the Hawaii Visitors and Convention Bureau.

The prospects are not lost on Claudio Castiglioni, president of Tod’s USA.

“For sure, the Chinese market is part of it,” he said. “Hawaii is geographically positioned and interesting to many people from the Orient. It’s where they stop first.”

China’s population alone — particularly the unofficial rising middle and upper classes — is attractive.

“Everybody looks to China and says, `Holy cow. Just think if we could get a chunk of that,”‘ said a spokesman for Hawaii’s Chamber of Commerce.

Luxury retail is no stranger to Hawaii. In the early Eighties, brands landed en masse, eager to capture some Japanese tourist dollars. Since then, they have considered the region a shopping mecca — at bargain prices — because of the yen’s strength against the U.S. dollar.

Anecdotes about the Japanese appetite for designer goods are rampant among locals.

“I heard a Japanese couple on honeymoon tell somebody that by [shopping luxury stores in Hawaii], you could save enough money to pay for the whole trip,” said Paul Brewbaker, chief economist for the Bank of Hawaii.

But last summer, troubles began to mount. Economic troubles in Japan compounded with lagging markets caused by recession in the U.S. resulted in Hawaii’s first significant downturn. It only spiraled downward after Sept. 11. Tourism halted and the region fell into a depression. Japanese tourists visiting Hawaii totalled 100,961 in April, a decline of 22.3 percent against April 2001, according to the Hawaii Visitors and Convention Bureau. In May, there were 119,135 Japanese tourists, off 8.3 percent from the same month a year ago. “May was a pretty dramatic month,” said a spokeswoman for the bureau. “The Japanese tourists have been steadily regaining ground,” even though they are still 25 percent below 2001 levels.

Year-to-date, overall tourist arrivals remain 11 percent below last year’s pace. Accounting for seasonal fluctuations, some 5.6 million tourists are expected this year, according to the Hawaii Visitors and Convention Bureau. That’s down from 7 million people who visited the state in its most recent peak year, 2000. American tourists have returned faster than the Japanese.

And businesses suffered as a result. Total visitor expenditures in 2000 were $19.9 billion, according to Hawaii’s Department of Business, Economic Development & Tourism. Spending dropped to $17.9 billion in 2001, according to the Hawaii Department of Taxation.

“We had stores reporting a 50 to 80 percent drop in business,” said Carol Pregill, executive director of the Retail Merchants of Hawaii, a trade association. In the thick of it, small specialty stores were asking vendors for 30- to 60-day terms on payments, she said.

Although signs of a comeback are starting to emerge, there are other elements influencing the decision to travel.

“There’s a whole cultural aspect to this,” noted Darren Iverson, vice president of marketing for the Ala Moana Center, a 43-year-old retail institution near 2100 Kalakaua Avenue with about 250 luxury and mid-market shops. Iverson said the center’s sales have been adversely affected by the depression.

“It’s just not respectful for the Japanese to travel to a country that is in a state of war. After Sept. 11, Hawaii had to move quickly to develop a Japanese ad campaign to convey that it is safe and even respectful to travel to Hawaii.”

There is a considerable amount at stake. Japanese tourists typically spend 40 percent more in Hawaii than those from the U.S. mainland, economists pointed out. An American from the West Coast typically spends $145 a day over an average stay of 10 days, according to the Bank of Hawaii. Americans from the East Coast spend a little more, about $165 per day. Japanese visitors, there usually six days, spend $235 a day.

During the business lulls, however, retailers didn’t stop looking for real estate. Although specific details weren’t talked about, executives and developers indicated good leasing deals were struck during this time. “Hawaii is in a state of demand right now,” said Stephany Sofos, president of SL Sofos and Co. Ltd., a real estate consultant specializing in retail properties.

One source said retail rents in the three to six months following Sept. 11 plummeted as much as 50 percent in some areas, including hotels and shopping complexes. Rents and business levels, though, are beginning to come back, along with the tourists.

And while the specter of another terrorist attack hangs heavy over all tourist-dependent retailing, executives basically are confident in the resiliency of the region.”During the next three months, will we converge on prior volumes or will 9/11 and its legacy continue to linger in the minds of Japanese travelers?” asked Bank of Hawaii’s Brewbaker. “The odds are that we’ll get back to normal this summer. It sounds to me as if [2100 Kalakaua Avenue] has a shot at it.”

“You can’t look at business in one quarter,” observed Gucci’s De Sole. “Even when times are difficult, Hawaii remains a very viable market and still has very high volumes. Historically, it bounces back.”

Chanel’s Kopelman concurred. “I think it’s a matter of time before people start coming back to Hawaii. I don’t think there’s any question that tough times are share-building opportunities for the strong companies.”

And Kalakaua Avenue is the premiere luxury shopping route in Waikiki and is where the action takes place. The 2100 Kalakaua Avenue project expands the artery, filling in a “dark zone” two miles east of the Ala Moana center, where Chanel, Christian Dior, Valentino, Burberry, Emporio Armani, Escada, Polo Ralph Lauren, Prada Sport and St. John are housed.

Each luxury company’s in-house design team is working in concert with the project’s architect, Tim Kobe, to create six unique storefronts, each reflecting its own interpretation of Hawaiian architecture. Tiffany & Co. is modeled after classic tropical architecture; Chanel is building terraces to give visitors views of the ocean.

YSL and Boucheron are newcomers to the market. YSL is taking a 7,500-square-foot store, marking its 46th worldwide, and using lava rock in its decor, while Boucheron’s 5,204-square-foot unit brings its total to 12 stores globally.

Gucci, which operates five stores on the islands, will take a 19,372-square-foot space built in its usual Indiana limestone. A Gucci accessories and shoe shop in Waikiki will close when the 2100 Kalakaua Avenue space opens. It will be Gucci’s 29th store in the U.S. and 166th store in the world.

Common areas at the project will feature waterfalls, lava rock benches and lush plants. A seven-foot bronze sculpture of a seated Hawaiian woman embodying the islands’ storytelling legends will be erected in the courtyard.

De Sole, who returned from a visit in April, said the complex was progressing well. “It’s going to be so beautiful. I think we can present our brands properly.”

Chanel and Tod’s are opening Pacific flagships, which will be the largest stores in the region for each company.

Chanel’s three-level unit, at 12,500 square feet, is among the largest of 200 Chanel stores in the world. It currently owns and operates three stores in Hawaii, including a location at Ala Moana that will close when the project opens.

Kopelman declined to reveal expectations for the store that, aside from an unobstructed ocean view, promises a full representation of goods, including the region’s first complete access to ready-to-wear.

“Ready-to-wear has become a very important part of the Hawaii mix,” noted Barbara Cirkva, Chanel’s executive vice president. “Five to 10 years ago, it was skewed toward accessories. Accessories is still a big business, but rtw has taken on a new dimension and now, with three floors of retail, we’ll really be able, finally, to give rtw just due.”

Tod’s Castiglioni noted that the Italian luxury maker is constructing a seven-story flagship in Tokyo to open in 2003, its first freestanding store in the Japanese market. A stepping stone to Japan, the 2100 Kalakaua Avenue unit, which is 5,217 square feet, is its eighth store in the U.S. and 100th worldwide.

Tiffany & Co. will occupy an 11,200-square-foot, three-story corner space with two floors of retail. A classic Tiffany archway will be integrated into old tropical architecture with bronze details, dark travertine marble, copper gutters and a green-tiled roof.

“The idea was to distinguish it with the natural beauty of the local culture and history of Waikiki,” said a spokeswoman, noting that the space is among the largest in Tiffany’s 125-unit chain. There are five Tiffany boutiques on the islands — two on Maui and three on Oahu. Two boutiques in Honolulu’s Hilton and Sheraton Surfrider will close when the project opens, leaving a total of four units in the region.

At the market’s height in the late Nineties, real estate sources said individual retailers at Ala Moana were racking up as much as $10,000 a square foot annually, and even figures like $6,000 to $8,000 a square foot didn’t raise eyebrows.

Real estate sources said tiny shops on Madison Avenue could reach sales of $10,000 a square foot, but that’s rare.

Analysts project 2100 Kalakaua Avenue’s sales in its first year could reach $2,500 to $3,000 a square foot, making it among the highest mall productions in the country. “For that caliber of retailer and that complex, those sales projections seem reasonable,” said Pregillof the Retail Merchants of Hawaii.

The Forum Shops at Caesars Palace in Las Vegas is currently considered the highest in the U.S., with about $1,200 a square foot. The Kalakaua figure would be significantly higher than Rodeo Drive estimates, which run between $700 and $800 a foot.

“For that caliber of retailer and that complex, those sales projections seem reasonable,” said Pregillof the Retail Merchants of Hawaii.

“These retailers are not making ego statements, these are profit centers,” said Tom Applegate, president of Honu Group Inc., who, along with Mona Abadir, chief operating officer, and Andy Smith, ceo, are founders of the project. “It’s comparable to many other top streets globally. When times are really good, they’re unbelievable. When they’re so-so, it’s still quite good.””