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Retail’s Concession Stand: To Lease or Not to Lease

The European model of leased departments is changing the retail scene in America.

The European model of leased departments is changing the retail scene in America.
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Special Issue
WWD Collections issue 04/15/2013

To lease or not to lease: It’s a touchy topic in luxury circles that boiled over last year when Prada and Barneys locked horns.

In a nutshell, one retail source recalls, “Prada said to Barneys, ‘If you don’t build a shop on the main floor for handbags, we will pull out.’ And Barneys replied, ‘We will not build a shop.’ So Prada pulled out.” 

Who’s to blame—or thank, depending on your point of view? You might say Louis Vuitton, somewhat indirectly.

And Bloomingdale’s has them all to thank.

Vuitton is the archetype of leased shops in the luxury arena and the model that Christian Dior, Fendi, Burberry, Gucci, Coach, Prada and Miu Miu, among other brands, are adopting in the U.S. They’re all pushing for leased shops within upscale department stores for greater control over their businesses and to capitalize further on their lucrative accessory businesses. And there are murmurs that Bottega Veneta might jump on the bandwagon. “At the moment, we do not have concessions in the U.S.,” said Josh Gaynor, communications director for Bottega Veneta.

After Prada bailed from Barneys, Bloomingdale’s seized the moment and set up leased Prada men’s and women’s accessory shops on the main floor of its 59th Street flagship in New York. Bloomingdale’s also established a permanent Prada window on the Lexington Avenue and 60th Street side of the store. Macy’s, Hudson’s Bay and Saks Fifth Avenue are also shifting to accommodating leased shops, while Bergdorf Goodman, Neiman Marcus and Barneys don’t go for it.

With some companies like Prada and Dior seeking leasing arrangements, it’s possible certain stores that usually resist will end up settling for a modified version where the buying is collaborative. “They may take some control of the inventory so when you walk into the showroom they say, ‘Here is the core buy you have to take.’ They might also have some control over the sales associates,” notes one U.S.-based luxury consultant.

At Hudson’s Bay Co., parent of Hudson’s Bay and Lord & Taylor, “We are very flexible,” chief executive officer Richard Baker says. “We do all types of different arrangements—licenses, leases, shops-in-shop—whatever needs to be done.”

Topshop at Hudson’s Bay looks like a leased shop but it’s a franchisee, with Hudson’s Bay getting the rights to buy Topshop on a cost-plus basis.

Another retailer says, “We have strong conditions where we will and where we won’t convert. The brand has to be a real good operator. It has to have significantly more volume under the leased arrangement to make it work for us. And we have to get something in addition,” namely market exclusives. “We go through a very thorough process.”

The new luxury wing at Macy’s Herald Square in Manhattan has large leased shops for Gucci, Coach, Louis Vuitton and Longchamp, and Macy’s at many locations has leased shops for Sunglass Hut, Destination Maternity, Lush, Finish Line and rug departments operated by Kenneth L. Mink & Sons.

“In many cases, the retailer has no option but to accept a concession model,” says Andrew Jennings, ceo of Karstadt, the department store chain in Germany, which has concessions from Reiss, Sandro, Maje, The Kooples, Ted Baker, French Connection, Burberry, Basler, Alessi, Spanx, Karen Millen and Swarovski. “On an international basis, in many stores, concessions are up to 50 to 60 percent of sales.

“Within Karstadt, the premium stores have a high percentage of concessions. Our attitude is that the customer should not be able to see or experience any difference between a concession service level and an own-bought service level.”

“There are countries such as Japan, Korea and Taiwan where department stores have created loyalty programs and offer services such as day care and cooking classes. Having a concession in that kind of environment can be amazing, and another facet of your distribution, one that works alongside a stand-alone store,” observes William Kim, ceo of AllSaints, the British clothing brand and retailer which has stand-alone stores and concessions but does not wholesale.

Concessions are an “underpinning” of the current worldwide revival of department stores, says George Wallace, ceo of MHE Retail, a European consultant. He notes that Vittorio Radice, who transformed Selfridges from a dowdy store into a compelling destination during his six years as ceo from 1996 to 2003, led the way to creating a “house of brands” through the leasing model. “But the trend for concessions has been happening over the past 15, 20 years,” Wallace says.

 

Leased shops, often called concessions, enable brands to manage the merchandising, the visuals, the staffing and the operations, and get guaranteed space for up to five years before renewal. In return, stores get a percentage of the revenues, anywhere from 5 to 20 percent, and the halo effect of having a prestige label on premises. It could help attract other better brands. It’s not a one-size-fits-all model. Retailers and brands have different arrangements on staffing, buying and how to split the costs of the build-out.

The downside for retailers is that much more revenue must be generated to make money, and if the brand goes stale, you’re stuck with it for awhile.

There’s also the risk the store becomes a series of in-store shops and loses its personality and individual way of buying and editing collections. “The idea is that you shop Bergdorf’s over Barneys, or Barneys over Bergdorf’s because of how differently they buy the product,” says the American luxury consultant. “Many department stores have become mini shopping malls,” observes Sagra Maceira de Rosen, ceo of the British brand Amanda Wakeley, which has four concessions at Harvey Nichols, as well as a stand-alone store in London and a wholesale business.

“There are far fewer concessions in the U.S. than there are in Europe because American retail has always been built around taking risks to get rewards,” says Ed Burstell, managing director of Liberty, a London department store that has a few concessions in beauty, jewelry and rugs. “When I moved to London, it was clear that Europe had a concession culture, which I understand—up to a point. As a store you want to be known for your look, edit and focus. The more concessions you take on, the more you give that up. What you do get is a guaranteed rent. Liberty is an 80,000-square-foot store, so the notion of renting out space and simultaneously maintaining our DNA are at odds with each other. What I can’t reconcile is a mediocre financial guarantee versus everything that you stand for as a store. If I have skill sets in-house, why would I go elsewhere to merchandise my store?”

At Bloomingdale’s, leased shops have proliferated in the past few years. It’s most obvious in the main floor luxury arcade. A few years ago, Bloomingdale’s opened a multilevel Louis Vuitton shop on 59th Street and Lexington, which like Prada at the store, also has a permanent window. Europe’s Zadig & Voltaire, Maje, Sandro and Reiss are leased shops as well, though Chanel, which sources said is Bloomingdale’s largest accessories business, is not leased. With food and restaurants, stores often establish leased operations since they generally lack the expertise. Bloomingdale’s 59th Street does it both ways. The Magnolia Bakery is leased, but the Flip hamburger joint is not.

In 2008, Bloomingdale’s cut the ribbon on an 1,100-square-foot Space NK leased beauty shop at the flagship and opened some shops in branches. “It’s something I saw for many years in Harvey Nichols and thought would be very unique for Bloomingdale’s,” says Michael Gould, chairman and ceo. “Many of the Space NK brands, in all probability, we wouldn’t get on our own.” Space NK founder Nicky Kinnaird, Gould adds, “has a very unusual point of view. We are not just buying the brand. We are buying her way of curating the brands. In a way, we were able to get brands that were really, in my mind, Bergdorf-Neiman’s type brands.”

Compared to the U.S., “Some stores in Europe have gone completely overboard with concessions,” says one European retailer. “Every inch of ground-floor space is somebody else’s identity. I think that in the U.S., stores will tip in favor of concessions. Maybe stores are cash-poor and can’t afford to keep inventory and with a concession, you don’t have to worry about discounting and how to liquidate stock. For a store like Macy’s Herald Square, opening up to concessions is a way for the store to attract brands that they would not normally get.”

“There’s no question that in the luxury handbag business, there is a movement to take that leased,” says a U.S. department store executive. “There is a colossal amount of money in the handbag business. Other businesses are not so easy to run. No one wants to lease its shoe business. It’s harder to run and not as profitable,” and typically not merchandised as in-store shops. “Most of the brands are smart enough that they don’t want to take on the ready-to-wear. It’s also harder. One season it’s a good collection. The next season it isn’t. You can’t make the margins on ready-to-wear that you can make on designer handbags. Half the Prada doors are going leased.”

“As we expand our global reach as a brand, working with strategic partners like Bloomingdale’s give us more control over how our brand looks, feels and develops within a market without the capital expense of direct stores. These relationships are as important as our physical store/online multichannel presence,” says Dan Lumb, multichannel director at Reiss.

“Having spent a considerable part of my career in Europe, I have always struggled to understand why leasing isn’t more pervasive for U.S. retailers,” offers Colin Welch, president and chief operating officer of Financo Inc. “The approach is much less inventory intensive and working-capital intensive. But there is a level of push from the brands to have a greater degree of control over the environment showcasing their brands.”

Historically, leasing flourished in China because there was little expertise in retailing. “When China first opened up and developed, you did not have any retailers. The first thing that was built up was real estate expertise,” says Franklin Yao, ceo of SmithStreet, a Shanghai-based consultancy. But the in-store shop model is facing new competition. Retailers selling multiple brands, like Hong Kong’s I.T and Lane Crawford, and Galeries Lafayette from Paris, are opening in China.

In Japan, too, leasing international brands has long been pervasive, though the Isetan flagship in Shinjuku has been renovating floor space on the theory that Japanese consumers already own luxury brands such as Louis Vuitton and want something different. Isetan’s renovations incorporate artists and less-known designers, and an area devoted to kawaii, which means “cute” or “adorable” in Japanese, with an installation created by Sebastian Masuda, who designs the Doki Doki collection. Mannequins wearing the clothes are positioned in front of the installation. It’s part of Isetan’s way of “seamlessly integrating art and fashion,” a spokeswoman notes.

“It is absolutely clear today that consumers are bored with department stores representing the same things,” says Charles de Brabant, founder and ceo of luxury consultancy Saint Pierre, Brabant, Li & Associates, said. “Department stores have to ask the question, ‘How do I recreate the excitement? How do I differentiate myself?’”