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Trade down? Neiman Marcus never would, no matter how the economy and stock market perform. There doesn’t seem to be a limit to how high, offbeat or over-the-top Neiman’s merchandise will go, whether it’s a Russian sable coat for $37,000 or the “his and hers” chocolate mummies — $60 for the sarcophagi set. Such items are as important a part of the mix as the more typical $1,000 Prada bags and $4,600 Loro Piana capes.
In the material world, no one basked in the unique and in catering to the rich like the late Stanley Marcus, son of Neiman’s founder Herbert Marcus. “Mr. Stanley” made the store synonymous with luxury and exclusivity, and that’s even truer today, as Neiman’s celebrates 95 years in business.
“In the last eight years, we’ve been trading up and doing it very successfully,” stated Burt Tansky, chairman and chief executive of the Neiman Marcus Group. “We have got the greatest share of the most affluent customer. We’ve spent eight years building to serve that customer and will continue to do so. The mandate of the company is to maintain our point of view during these challenging periods.”
Designer partnerships are strengthening. In women’s, couture and evening collections and designer sportswear represent 57 percent of the volume and are seen exceeding 60 percent by 2004, from 40 percent five years ago. Contemporary and bridge — Neiman’s opening price rungs — will comprise the remaining 40 percent.
Also, new stores contain 15 or more “hard” shops for designers — meaning permanent installations with the designer’s signature decor — such as Chanel, Giorgio Armani, St. John, Prada, Escada, Yves Saint Laurent and Dolce & Gabbana, but “in the context and framework of Neiman Marcus architecture,” said Steve Kornajcik, senior vice president of marketing and creative services.
Neiman’s introduced the hard shop concept four years ago at its opening in Honolulu, with just a couple of shops. But the concept is growing, as are co-op advertising and designer events, such as personal appearances and trunk shows. “Several stores do four or five a week and get a rigorous ROI,” said Kornajcik. Last spring, Merrill Lynch estimated that Neiman’s top-10 vendors represented 23 percent of total sales, and listed them as Chanel, David Yurman, Donna Karan, Ellen Tracy, Ermenegildo Zegna, Escada, Giorgio Armani, Prada, Salvatore Ferragamo and St. John.
It’s that balance of status-brand marketing on the one hand and a conservative capital structure and disciplined store growth on the other that keeps Neiman’s on track in difficult times and is part of a press for greater productivity out of its stores. Neiman’s is also pressing for more productivity by building up relatively underdeveloped categories and areas — like casual sportswear, in-store gift galleries, catalog sales — and major store remodels and enlargements.
The program is all the more crucial in light of Neiman’s limited prospects for finding suitable sites for new stores. The chain is already in 34 affluent, fashion-minded markets in the U.S., with very few untapped that could support a luxury pad the size of Neiman’s. The pace of store openings is cautious, with the only openings set for Oct. 25 in Orlando, Fla., a market virtually untested in luxury goods, then San Antonio in 2005 and north Atlanta in 2006.
“There will be others we will announce in the next six months,” said Tansky. “I can’t tell you how many.”
But Merrill Lynch vice president Stacy L. Turnof said, “We are projecting one store opening a year over the next five years,” which is consistent with what’s been Neiman’s pace for many years.
Another source said the retailer is considering Naples, Fla., which would probably be the company’s last unit in the state. Aside from Orlando, Neiman’s other Florida branches are in Fort Lauderdale, Palm Beach, Tampa and Bal Harbour.
Elsewhere, the company has long been eyeing Long Island, and specifically Oyster Bay, but has been unable to come up with a suitable site. Taubman Centers, which along with The Rouse Co. is a primary Neiman’s landlord, wants to build a mall on Long Island and would be the likeliest venue for a Neiman’s there.
Last year, Neiman Marcus Group’s net income fell 7.4 percent to $99.6 million with sales down 2.2 percent to $2.95 billion. Of the total pie, the Neiman Marcus division accounts for about $2.2 billion in sales; Bergdorf Goodman, $280 million, and direct sales and brand development [its majority interests in accessories company Kate Spade and beauty firm Laura Mercier], about $520 million. Of the group’s total sales, women’s apparel, shoes and accessories represent more than 50 percent; women’s apparel alone, 33 percent.
There’s been some slippage in sales- per-square-foot productivity at Neiman’s, which peaked at $502 in 2000 and drooped to $470 in the last fiscal year ended Aug. 3. However, that’s still way above Saks Fifth Avenue and Nordstrom, which are in the $380 range, and mainstream department stores at around $190 on average, enabling Neiman’s to have more staff and merchandise per square foot.
“It’s hard to predict when business will pick up and we again see the pace that we’ve enjoyed in our last 20 years,” Tansky said. “It’s hard to [say] how much our customer is invested in the [stock] market. Downturns in the market are unsettling and certainly have an impact on the way people shop. One thing we know is that our customer will not trade down. They buy less, but will not trade down. They maintain a sense of quality, a desire for the right fashion and styles and important looks. The demographics favor us. Clearly, baby boomers are reaching their prime earning power, and the next 20 years will see the greatest transfer of wealth in the history of this country. Parents will be passing on their wealth to their children.”
Neiman’s average customer is 43 and earns approximately $200,000, while InCircle customers, who get gifts and other amenities based on purchase frequency, earn $350,000 annually and have a net worth in excess of $5 million. InCircle customers also represent 15 percent of the customer base, but 50 percent of total sales.
Addressing how Neiman’s will grow, Tansky said: “We’ve grown internally very well and that should continue. Our productivity per square foot is at an industry high and we should continue to get greater and greater productivity out of our existing stores. We are in the process of three major remodels — San Francisco, Las Vegas and Fashion Island in Newport Beach, Calif.” Las Vegas will be completed in November, the other two in 2005.
For the 2002 to 2006 period, the company has budgeted $258 million for store remodels, $181 million for information technology and $219 million for minor store remodels. The company considers remodeling a low-risk, high-return investment strategy, and estimates 2 to 3 percent annual square-footage increases, from the current 5 million square feet.
Other growth strategies cited by Tansky:
Gift galleries. They’re modeled after Bergdorf Goodman’s seventh floor and currently are in only two stores, in Coral Gables, Fla., and Plano, Tex.
Catalogs, including Horchow, a furniture, linens and gifts catalog which has been trading up, too, serving a classic, traditional customer, and the Chef’s catalog, which has grown very well, Tansky said. (See related story on page 42.)
Online sales. Neiman’s 2 1/2-year-old online operation “has exceeded our expectations,” Tansky said. “It’s really an unusual opportunity for continued growth in the future.” Horchow went online in August and is off to “a crackerjack start.”
Focusing more on local populations with less dependence on tourists. That could involve more targeted advertising, such as in the Nuevo Herald in Miami, owned by the Miami Herald, where Neiman’s started running ads this year.
Building up the men’s business, with greater emphasis on sportswear and blazers.
Acquisitions of small emerging brands, through the brand development arm. According to Tansky, the company is continuing to investigate potential acquisitions, though there hasn’t been one made since February 1999, when a majority stake in Kate Spade was purchased. In December 1998, Neiman’s bought a majority stake in Gurwitch Bristow Products, the manufacturer of Laura Mercier makeup.
Asked why nothing else has been purchased in almost four years, Tansky replied: “We wanted to get these two settled, see them work and how they operate. We are looking for other opportunities, yes, with high growth potential, product that we can carry and highlight in our stores. The criteria has not changed at all.
“I am not going to rush into anything and buy just for the sake of buying. We are very thoughtful, strategic and meticulous.”
According to Jim Skinner, Neiman’s chief financial officer, the company is interested in acquiring firms in the jewelry, accessories, handbags, shoes, beauty and home markets under its brand-development strategy. “We’re not interested in apparel,” he said at a recent Goldman Sachs Global Retail conference. “We want to stay away from fashion risks. We don’t feel pressured [to buy anything].” There’s been speculation that Neiman’s is pursuing another cosmetics firm, which could be managed under the Mercier operation.
In addition, younger customers are being sought, through the development of contemporary and casual assortments, and to fight perceptions that the store is for more mature shoppers. In the last couple of years, “we’ve really seen tremendous growth in contemporary, driven by trend, fashion and the denim business, which we didn’t have,” said Ann Stordahl, senior vice president and general merchandise manager of ready-to-wear, citing Seven, Earl Jean, Paper, Denim & Cloth and ABS. Contemporary is yielding “very high double digits. It’s the number-one growth category in the company,” Stordahl said. “We quantified from our marketing that half of our designer customers shop in contemporary, whether it’s for themselves or their daughters. It’s synergistic business.”
In designer, “fewer and fewer [retailers] are really staying in it, or growing it, and despite the challenges of the last year, we have not seen that business really diminish,” Stordahl said. “Each season, we prioritize picking up a few new designers and see how they develop. Right now, there seems to be, despite the challenges of business, quite a few new people — Zac Posen this past season, and Alexander McQueen. We are also encouraged that Eskandar is now going into cosmetics and the home business. With Ralph Rucci, we’re very supportive of his couture.”
On private label, “we do virtually none,” Stordahl noted. “Our customer really comes to Neiman Marcus to find the labels they want, with a good assortment and with superior service. Except for some classifications business, they really haven’t been interested in a private-label type of business. With exclusives with designers or the bridge category, we always use the designer name.”
With casual merchandise, “We are offering more, but it is a challenge for us to find the right quality,” Stordahl said, though she noted Eskandar, St. John and Loro Piana have been showing “great growth” on this side of the luxury business. The contemporary department also has a casual side that’s growing, and Stordahl envisions casual offerings becoming more prevalent throughout women’s, rather than as a department.
Across categories, some other key designers cited by Stordahl were Akris, Ellen Tracy, Laundry by Shelli Segal, DKNY and Carmen Marc Valvo.
Neiman’s could also grab a chunk of customers from Jacobson’s, which was liquidated this year and sold some high-end goods like St. John and Armani. Like Neiman’s, it also had a good service ethic. However, market-share gains might be offset by the slow economic recovery and tourism declines. Neiman’s units in Honolulu, Las Vegas, San Francisco, Bal Harbour and, to a lesser degree, Beverly Hills have been most affected by the lack of tourists. Some newer stores, such as Willow Bend and Palm Beach, which is seasonal, are said to be performing below expectations.
So are the Galleries units, Neiman’s small specialty store offshoot selling jewelry, gifts, tabletop and other home products. Tansky acknowledged that Galleries has been “a disappointment,” explaining, “It was an experiment to learn about smaller stores and we are not discouraged. We have learned so much. We closed one store, in Seattle, and are operating two, in Phoenix and Cleveland. They’re growing, but a little bit slower than we anticipated. We will take this learning experience to other opportunities as they arise.” Is Galleries a growth vehicle? “Not Galleries per se, but there are other concepts out there that clearly could grow and we will not make the same mistakes twice,” Tansky said. “I don’t want to get into the specifics of that. It was just a series of things — a learning process. They are operating very well now. They are losing a little bit [of money] but not enough to be meaningful.”
A major acquisition seems remote and not part of the stated strategy, although four or five years ago, there were discussions with Saks Fifth Avenue. Such an acquisition now would be very risky and complicated, since SFA is financially and operationally wrapped tight into Saks Inc., and is having its own difficulties. Sources said it is not in the cards, particularly with the current economic uncertainties.
After the events of Sept. 11, 2001, Neiman’s adjusted fast to the decline in demand. “We got ourselves in position to come in clean for spring,” Tansky said. “Through most of spring we ran with approximately $100 million less [in inventory] than the year before. Some months higher, some months lower, and regular-priced retail was very strong. That’s one of the most important criteria for us. It builds gross margins and customer relationships.”
For an outsider, there’s no noticeable signs of inventory cutback. While newer stores are being planned with an eye for shallower departments and possibly less square footage, they are also planned with the capacity for enlargement later. Also, with key suppliers, Neiman’s can be demanding financially, in return for providing them with space for broad merchandise presentations.
As Michele Ateyeh, president and ceo of Angela Cummings Fine Jewelry Inc., said, “Neiman’s gives us the opportunity to display the breadth of our collection, and we do have a broad range, from $500 18-karat-gold earrings, to diamond-and-platinum necklaces for $150,000. We believe in the partnership and we support it in many different ways, including financially.” Ateyeh noted that Angela Cummings sells to 12 Neiman’s stores, as well as Bergdorf’s and Caribou Jewelers in Aspen, but nowhere else in the U.S.
“Neiman’s has always bulged with inventory, with each store having the totality of what Neiman’s has to offer,” observed Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates. “The editing will not affect customer perception. Neiman’s is Neiman’s in most locations. There’s no change in character. There’s no Class A or Class B.”
Tansky said the company liquidated “marginal categories or peripheral vendors that did not contribute much to the top or bottom line,” without specifying which ones. Stordahl acknowledged that certain designers were only dropped in certain locations, not entirely. While the inventory cuts were a prudent response to the aftermath of Sept. 11, it was still an especially dramatic occurrence and for the first time, Neiman’s really rattled the vendor community. Historically, Neiman’s has a clean payment record, a disposition for advanced planning and generally smooth dealings with suppliers.
Showing greater grace under pressure, Neiman’s 34th store opened on Sept. 27, a three-level unit in the Village at Merrick Park in Coral Gables, Fla. The store is drenched in designer shops and exclusive and one-of-a-kind items, ranging from Jay Strongwater Christmas ornaments ($50 to $200) to a $32,000 turned-wood vessel created by artist Ted Knight. With 130,000 square feet for selling, and about 30,000 for back of the house, sources projected that Coral Gables would generate a first-year volume in the $45 million to $50 million range and would cost more than $50 million to build.
There has been speculation the store could cannibalize some business from Neiman’s in Bal Harbour, about 35 to 40 minutes away by car. Though, according to Wayne A. Hussey, senior vice president, properties and store development, Bal Harbour is more tourist oriented and there will be “minimal transfer” of business. “We feel they are two totally separate markets,” he added.
“Coral Gables is one of our new generation of stores,” said Tansky, which includes those in Palm Beach, Fla., and the Shops at Willow Bend, both of which opened in the last few years, and upcoming units. Along with deeper designer presentations, they’re outfitted with some new technologies, including interactive art vitrines to explain certain pieces of art and cosmetic mirrors with built-in instructional videos.
Building new stores is no simple feat for Neiman’s. “There are going to be other markets that will surface over the next five or 10 years,” Tansky said. “There will be markets that today we don’t feel comfortable with their demographics, that we don’t feel have a large enough affluent population to support one of our stores. That could change over the next five or 10 years. We’ve seen these towns turn in our favor.”
Along with the hunt for sites, there’s another compelling search that Neiman’s must initiate, if it hasn’t already —Tansky’s successor. He turns 65 in January, although there is no mandatory retirement policy and no signs he’s ready to retire. “We are absolutely studying the whole succession plan,” Tansky stated. “We’re working on the details, refining them constantly, and identifying people in our organization that have high potential. Succession isn’t only for me. When you put together a succession plan, you put it together for a lot of people.”
“To the outside world, there’s no apparent visible succession,” said Robert Kerson, president of the global retail practice of Korn/Ferry International. “If I were a shareholder I would be concerned. But for whoever comes in, there’s no need to reinvent Neiman’s. They’ve got to keep developing powerhouse designer brands to run alongside the national brands.”
“There’s no succession in sight, but Burt Tansky has done a superlative job of running the company and maintaining the quality image throughout the whole chain,” said retail analyst Walter Loeb of Loeb Associates. “New stores are exciting. Today, he has access to any major designer brand for his stores. There’s archwork in the architecture, lots of art, unusual ambience. It’s probably one of the few stores that hasn’t lost the art of salesmanship. Neiman’s trains people for a long time, and there is pride in working for Neiman’s that stems back to Stanley.”
“Many companies operate from a financial plan and the consumer is just secondary. Neiman’s, being a public company lives by financial plans and expectations, but their first concern has always been the consumer,” observed Kurt Salmon’s Aronson. “Their stores’ organization is very strong. A tremendous service ethic emanates from each location, and then they lay the inventory in. It’s the culture.”
“The staff they provide us in the fine jewelry salon is keenly familiar with the products,” said Ateyeh, from Angela Cummings. But the real key, she added, is “certain rewards and services and clever promotions that catch the clients and keep them extremely loyal. That’s the key to Neiman’s — extremely loyal clientele and being very creative in marketing to that clientele through the InCircle, ‘butterfly days’ promotions, gift cards — their whole loyalty program. They know how to keep that top-end customer happy and coming back.”