SPECIALTY STORE JUGGERNAUT ROLLS ON
Byline: Sharon Edelson
NEW YORK — Democracy, utility, ubiquity, convenience, focus and fun. These are some of the elements that have given rise to the modern specialty store phenomenon. In fact, the growth of specialty stores has been steady for the past two decades, even, in recent years, overtaking department stores in the race for market share.
At the same time, the designer juggernaut has continued unabated. It seems like nary a day goes by but another designer is announcing a new store opening.
To complicate matters, designers stopped dictating to women long ago, opening the door for the more democratic retail operations such as the Gap to actually set trends.
“It’s hip to zip,” scream banner ads on bus panels featuring Old Navy fleece vests. Old Navy has deemed vests to be the item for fall and stacks of the sleeveless garments can be seen piled on tables and lining the shelves of the company’s stores — and consumers flock to buy them. When Gap billboards proclaim, “Everybody in leather,” it’s a cue that animal skin is in. The Gap division has also given vests its blessing this season at a slightly higher price point. While it’s true that vests — in leather and other fabrications — were seen on many fall runways, the fact is that designers will sell a handful of their mink and shearling creations, while Gap and Old Navy will sell tens of thousands of vests.
In the past decade, specialty chains have risen to a place of prominence on the retail landscape, persistently nibbling away at the market share of department stores, according to retail experts.
Here are some reasons why:
Specialty stores are agile, able to reinvent themselves by changing store design or introducing a new retail format. And because they’re vertical, they are capable of maximizing a trend they feel strongly about, quickly.
Specialty stores are well positioned for where the customer wants to shop. With smaller formats than department stores, they are able to locate in neighborhood shopping districts and downtowns.
Specialty stores present a clear, concise message to consumers: The branding of many specialty chains and the amount of money they spend on advertising — for Gap it’s 5 percent of total sales, and the company’s creative commercials have captured the attention of the public.
Specialty stores have a combination of slightly higher initial markups and lower markdown rates, leading to larger gross margins.
According to the NPD Group and Fairchild Strategic Information Services, total sales of apparel reached $177 billion in 1998, versus $169 billion the previous year. In terms of total apparel sales, the market share of department stores has remained stable at 18 percent in both 1997 and 1998. In 1997, however, the percentage translated to $30.4 billion, while in 1998, department stores sold $31.9 billion worth of apparel to maintain the same market share.
Specialty stores, including chains and independents, had a 22 percent share of apparel spending in 1998, versus 21 percent in 1997. Breaking down the specialty sector, large chains had a 15 percent share or $26.6 billion in 1998, compared with a 14 percent share or $23.7 billion in 1997. Independent specialty stores in 1998 had a 7 percent share with $7.1 billion, versus a 7 percent share or $6.8 billion the previous year, according to NPD and SIS.
Walter Loeb, president of Loeb Associates, shed some historical light on the situation.
“In the early Eighties, Limited and Gap became important companies and began to take over some of the focus from department stores,” he said. “Department stores today have learned a lot from the specialty stores and have adopted some of their methods of selling merchandise so that they look almost like specialty stores.
“The department store has an ability to reinvent itself and to be successful in promoting fashion ideas and develop them for the customer in a more meaningful way, but I still feel there will be a continued consolidation of department stores because of the buying power and the ability to demand being first with suppliers that comes from size. I would not be surprised if some additional stores would be absorbed.”
“The market share transference from department stores to specialty stores has been occurring for the last few years,” said Susan Silverstein, analyst at Bank of America. “As of 1998 and first half of 1999, it seems to be leveling off, but clearly, the same-store sales growth at specialty stores has been significantly outperforming department stores.”
Silverstein said that one of the biggest factors fueling the specialty store boom over the last three to five years has been the branding of specialty businesses, from Gap and Old Navy to Talbots and J. Crew.
“They are brands that have controlled their own destiny and are able to re-create new customer experiences every time they change their floors, from fixturing to product,” Silverstein said. “In the meantime, department stores have been consolidating, which reduces the overall sales growth. They have been much more focused on their infrastructure and cutting costs than on the merchandise, so the consumer has been less than enamored with what the department stores are doing.”
Michael Weiss, president and chief executive officer of Express, agreed.
“Specialty stores started as edited versions of the market,” he said. “Then they became edited versions of the market plus private label. The best specialty stores evolved into brands with a strong point of view. As we became brands, we became vertical in terms of our own design.”
Those specialty stores that strayed from their core customers suffered. Ann Taylor, in the mid-Nineties, introduced baby T-shirts, short skirts and neon colors in an effort to appeal to a younger audience. The company’s loyal customers were disenchanted, which resulted in 13 months of consecutive same-store sales declines and a change in management.
In the last two years, though, Ann Taylor has been moving back on track, focusing on tailored classics such as pinstriped suits, plush jackets with tie belts as opposed to tighter-fitting silhouettes, and sensible pumps.
Certainly, the world of retailing has its cycles, and specialty stores are clearly having their day. Still, there are those who remember a decade ago when the Gap stumbled over fashion and was written off by critics as irrelevant.
In 1995, a spate of specialty chains consolidated or declared Chapter 11, shuttering hundreds of stores. At the time, retail analysts estimated that over one million square feet of specialty space in malls was left vacant by Edison Bros., Merry Go Round, Petrie, Paul Harris and Jay Jacobs.
In the last quarter, the seemingly indomitable Gap has been showing signs of strain in its core Gap stores, whose sales were down in July and August. However, the Old Navy and Banana Republic division keep chugging along. Both posted double-digit gains in August.
While The Limited closed its Cacique chain in January 1998, several of the company’s ailing divisions are turning around, including Express and Lerner New York. The company recently announced an IPO for its hot children’s chain Limited Too, and Intimate Brands Inc., which is majority-owned by Limited, keeps picking up steam.
For specialty stores, a combination of slightly higher initial markups and lower markdown rates led to gross margin gains this year, according to Maura Hunter Byrne, a retail analyst at Salomon Smith Barney. Among department stores, Federated continues to post good results, but national department store chains like J.C. Penney and Sears are still struggling. Dillard’s stumbled in the second quarter, reporting earnings fell 25 percent. The company said it was stung by weakness in its acquired Mercantile stores.
In addition to Gap and Limited — the two dominant specialty chains in the U.S. — several European giants are poised to descend upon the marketplace.
Zara, the Spanish retailer, is opening a 10,000-square-foot store on West 34th Street in November. Zara’s parent Inditex, is a $2 billion retail conglomerate based in La Coruna, Spain, with over 600 stores worldwide.
Hennes & Mauritz, the trendy Swedish apparel chain, signed a lease earlier this month for a massive 50,000-square-foot store at 640 Fifth Avenue on the corner of 51st Street, its first U.S. store. The company is reportedly negotiating for space at the former Alexander’s site on Lexington Avenue, which is being developed by Vornado. H&M had sales of $2.2 billion in 1996, the latest year for which information was available.
“As the Gap is presently undertaking a rapid expansion in Western Europe, the European specialty chains have had a chance to see how they are performing in the face of competition from Gap, and they are fending them off,” said Jeffrey Paisner, senior director at The Lansco Corporation, who leased Zara its 34th Street space. “They are not losing any significant market share against the Gap and that has given them the confidence that they can build a consumer base in America. Right now, apparel is becoming a global market and people are trying to tap into it.”
Loeb noted that department stores in the U.S. have traditionally been locked into domesticity. However, he said the Internet is changing that.
“Federated is into the Internet and May Co. is playing with it,” he said. “By being on the Internet these department stores become a worldwide brand, which will make it easier for them to expand overseas and absorb worldwide department stores.”
In recent years there has also been an onslaught of designer specialty stores such as Polo Ralph Lauren, Prada and Giorgio Armani. Under Prada’s Patrizio Bertelli, the company has been aggressively expanding the retail prospects for each of its brands, including the Prada collection, Prada Sport and Miu Miu. Recently, Bertelli has been on a luxury buying spree, snapping up Jil Sander, and reportedly dealing for Fendi, which could mean a Starbuck’s on every corner and a Fendi boutique in every major city.
Both Prada and Gucci have made no secret that they would like to increase the percentage of sales in their company-owned stores. Prada rang up more than 70 percent of total sales at its retail units in 1998.
In 1997, 68 percent of total Gucci sales came from company stores, but Domenico De Sole, president and ceo of Gucci, said he hoped to see that figure increase to 75 percent. Cashmere manufacturers such as Malo, Tse and Manrico have been opening outposts on Madison Avenue and SoHo. Even Chanel is looking for space in SoHo, where iconoclasts such as Helmut Lang and Vivienne Westwood have opened stores.
In the face of the intensified competition, department stores are frantically working to redefine themselves.
“We are finding new ways to make the shopping experience more convenient to the customer by changing the layouts and design in our stores,” said Terry Lundgren, president of Federated Department Stores. “We also have a number of tests going on that we are very excited about, including an open-sell cosmetics test where the customer can test the products herself.
“We have done the same thing with the entire cosmetics department in a few stores, putting cosmetics, color, fragrance and treatment on open shelves, with lots of interaction between sales associates and customers, and the product all open to touch and experiment with.”
Lundgren said that Federated has opened several freestanding beauty stores in malls under the name Souson, where the concept is open sell. In key stores on the East and West Coasts, the company is creating totally new environments for junior sportswear and dresses, he said.
Interestingly, none other than Sephora has cried foul, filing a legal challenge to the concept. Regardless of who wins, the case illustrates that department stores are starting to think more like specialty stores.
“On the West Coast, we’re experimenting with a lifestyle environment that is very exciting,” he said. “We haven’t finished the installations yet, but we’re talking about doing major changes by adding accessories such as beads, over the shoulder sling bags and great color cosmetics. We’re working on a music deal right now. Our objective is to sell music in the department and in one store where we have enough space, we’re going to experiment with a deejay on the weekends.
“In another store we’ve got just a kids’ department we’re working on, adding accessories for kids,” Lundgren said. “The opportunity I see in juniors and young men’s, I believe is identical to the opportunity in the boys and girls 7 to 16 department. All these things are intended to create a shopping atmosphere that’s a social experience for young people.”
Lundgren believes there is an underlying cyclical nature to the business.
“I don’t know if there is an exact timetable when these cycles occur, but I definitely believe that as we study our business there are trend changes that either favor or challenge each of the categories at different times,” he said. “Not long ago, many of the discounters went out of business. Recently, some but not all the specialty stores have performed better. We just finished perhaps the best spring season in the history of our company. Yet not all department stores are performing well. While there are cycles that favor categories of retail at certain periods, you have to be in a position to take advantage of those cycles.”
Not surprisingly, each business sector believes it is best situated to take advantage of the cycles.
“We have the ability to flex between misses’ apparel, large size, junior apparel, young men’s, boys, kids and all the accessories — jewelry, handbags, belts, scarves and cosmetics — and emphasize the different categories we believe will grow into the future,” Lundgren said. “If we were in a single-category business and that category turned sour, even the very best retailers would have a difficult time winning.”
While Lundgren may have had single- brand specialty chains in mind, Limited’s Weiss argued that vertical chains are not as susceptible as one might think.
“We’re not depending on one designer,” Weiss said. “We have design teams. It’s really not the vision of one particular designer, but the coordinated vision of a team driven by merchants and led by them. I see specialty stores continuing to eat into department store market share.
“The specialty stores that have survived have done so because they have moved with the times and really have learned to be what they originally were, which was a specialty store,” Weiss said.
Weiss, however, has seen several of the Limited Inc.’s retail concepts digress to the point where they became irrelevant or confusing to customers.
“I think it’s evolutionary,” he said. “A store develops a point of view over time. It can profess a point of view from a given date, but over time it develops and becomes fuller and richer. Express has unquestionably come back. It’s an urban- accented brand for young women, and fashion forward, in terms of a brand of our size, not fashion forward in terms of some small boutique in NoLIta.
“What you see with us is a really distilled form of a whole lot of homework and research,” Weiss said. “We travel the world on a ongoing basis. We strategize concepts very far ahead and continue to refine concepts until we put them into work and hope that they have been refined and are appealing to the customer. We target young women in their 20s, but the nature of the product is such that if we’re right fashion-wise, we’re going to appeal to a younger woman and an older woman.”
And Weiss said the company is revving up its advertising engine for Express.
“We’re not in the media, but we do a lot of point-of-sale,” he said. “We’re talking very seriously about advertising, and I would assume that we would get to that.”
While department stores do have a lock on selection, experts said that several factors have been working in favor of specialty stores for the last decade. Time- stressed consumers have been looking for ways to relieve shopping stress, and the best specialty stores are focused and nimble, able to initiate or follow trends at the drop of a dime, saving consumers precious time by presenting edited selections of branded merchandise.
“People are willing to trade up as a way of simplifying,” said Paco Underhill, founder and managing director of Envirosell, a testing agency for stores, banks and merchandising. “Department stores tend to be hard to shop. They deliver poor service without technology and don’t have any brand recognition. The average time people spend in stores and the number of stores they go to is declining. There’s a trade of money for time.”
That trend was borne out in the Kurt Salmon Associates annual Consumer Outlook Survey for 1999. “What’s driving that trend is that consumers are shopping closer to home than ever before,” said Adele Kirk, director of consumer research at KSA. “Closer to home is in their neighborhood area. What’s that’s translating to is shopping in stores like Gap, Ann Taylor and even Old Navy, which is moving into neighborhoods. Consumers love the focused assortment and good service of specialty stores, all in an environment that captures a lifestyle for many of them.”
Indeed, some specialty stores offer tremendous depth within their own brand.
“They thrive on activity, whether it’s the new stream of merchandise that flows into stores every 15 days or so, or the reassortment of merchandise,” noted Silverstein. “It’s going to take some serious marketing dollars and some real excitement and a level of department stores learning how to be nimble to gain some credibility with consumers.
“They are adding brands to draw younger customers,” she said. “Open sell is much more enjoyable, so that could be a lure to the main floor. Adding teeny- bopper brands is a good idea. But it’s a first step in what needs to be a change in culture and in merchandise and strategy.”
While the march of freestanding designer stores has continued unabated, upscale specialty stores have led a roller coaster existence in recent years, dealing with the defections of popular brands that open their own shops. For example, Prada pulled out of Bergdorf Goodman when it opened its own flagship on Fifth Avenue. Prada’s defection from Charivari was also a blow for that specialty retailer, which ultimately ended up closing its doors.
While Barneys New York sought Chapter 11 bankruptcy protection in part due to pressure from a difference of opinion with its business partner Isetan, it was also plagued by overextension and overexpansion, closing its 17th Street store here and several of its satellite locations. But the company seems invigorated under the leadership of Allen Questrom, the former Federated chairman, who is experimenting with niche businesses such as bridal and optical.
Henri Bendel has downsized from six locations to one. The Limited Inc., Bendel’s parent, closed the branch locations last year, but said it is committed to operating the Fifth Avenue flagship. Since then, Bendel’s has bounced back with a buzz, generated by an aggressive in-store event and sponsorship schedule, under the leadership of Ed Burstell, vice president and general merchandise manager.
Burstell says current consumer and fashion trends may play into the favor of specialty stores like Bendel’s.
“There’s definitely a shift in spending patterns, which I call a shift from outfits to items,” Burstell said. “It’s all about individuality. You come to a specialty store to see our editorial point of view. A larger store has sold out from a real estate and creativity perspective. It’s easier for larger stores to walk up the street, see what Bendel’s is doing and try to do it themselves.”
Bendel’s is focusing on providing information and service to customers, as well as lifestyle events.
“There’s a lot of information and service that’s going on here that is lacking in big self-service departments,” he said.
“Our edge is being first,” Burstell added. “You have to be there and you have to be first. The way information travels so fast, it forces us to be quicker. It forces you to experiment with concepts you may not have thought about before and forces you to find resources that were not on your radar screen before. This year, rather than Milan, Paris, London, I’ve been in Sydney and Tokyo. There are a lot of other locations where our type of fashion is happening. It all goes back to this definite shift in the spending patterns and the way that there’s this blurring of new street style and couture. You see something on the street, like cargo pants, interpreted in 100 percent pashmina.”
Stephen Elkin, chairman and chief executive officer of Bergdorf Goodman, a single-unit specialty store, albeit one in a great position to influence high-end fashion, said, “I think there’s a place in the market for specialty stores with a lot more edited and focused assortments. Specialty or specialization comes from the fact that customers want something less broadly distributed, less common. Essentially we’re in a position to react to customer preferences and needs by readjusting our merchandise.
Elkin said he understands the temptation for designers to open their own stores, adding, “The designer wants a place that can showcase their product the way they envision it. Some percentage of those boutiques are not designed to be commercial successes and are treated as advertising vehicles. There’s a limitation to how much a city can absorb those kinds of stores.”
Generally, Elkin said, Bergdorf’s finds a designer boutique is complementary to its own business because it raises the profile and focuses attention on the designer.
“Essentially, some customers buy from a designer head-to-foot, some go to a designer boutique to get an idea and some enjoy buying many products under the same roof,” Elkin said.