HAS CASUAL TREATMENT SLIPPED THE SHACKLES ON DESIGNER APPAREL?
Byline: David Moin
NEW YORK — Diamonds, houses in the Hamptons, millennium cruises, platinum jewelry and $4,000 “baguette” bags: With more millionaires than ever, the luxury market is booming.
But is designer fashion falling behind?
In many camps, it’s getting tougher to match the heady gains of years past in high-end ready-to-wear, especially for those designers who haven’t adapted to a more casual lifestyle.
In over a dozen interviews, retailers that cater to the nation’s most affluent customers said that they have begun to rethink what designer lines to sell, how to sell them and where to open new stores.
Other apparel markets have always dealt with the bruising, unpredictable nature of the fashion industry, through perpetual self-evaluation, market research and reformulating of lines. Luxury fashion, however, always seemed impervious, posting record results even through stock market gyrations and recessions, retail or otherwise. Now that’s changed, and there’s a host of explanations. Among the most often cited:
The casualization of America.
Consumer priorities shifting to increased expenditures on homes, travel and entertainment.
Too much retail square footage.
Mature designer brands that have failed to innovate.
U.S. sales of luxury fashions and accessories are expected to exceed $50 billion this year, roughly $5 billion more than a year ago, according to Tactical Retail Monitor, a New York-based consulting and research firm. That’s largely due to a combination of price hikes and anticipated healthy growth in specific categories, such as accessories, jewelry, sportswear and shoes. But unit sales of designer apparel is seen as flat or slightly below last year’s level, according to Tactical.
To step up the growth, stores such as Saks Fifth Avenue, Neiman Marcus, Tiffany’s and Bloomingdale’s are focusing on building catalog and e-commerce businesses to attract wealthy families not inclined to shop luxury stores or who live too far from them. They’re also focusing on developing new store formats, primarily smaller units that can be supported by untapped emerging pockets of wealth where they know the rich want to spend, or more specialized units, such as those selling just men’s wear or home goods, or catering to resort communities.
Currently, the strongest growth efforts seem directed at raising the productivity levels of the best big urban locations, through renovations and expansions. Saks, for example, is spending $60 million to renovate its Fifth Avenue flagship, while Bergdorf’s is spending $30 million to build a new beauty floor and renovate the main floor. Stores are also profiling customers and blitzing them with special events, sales and systems for rewarding the big spenders, otherwise known as “loyal shoppers.”
“We are all working harder, and we’re working smarter,” said Jack Mitchell, owner and chief executive of Mitchells of Westport, the designer specialty store in affluent Westport, Conn. “I dare say my counterparts must feel the same way.
“It’s not like the old days. You can’t just have the financing. You have to have a passion for this business, because you are up against wonderful stores like Saks, Neiman’s and Barneys. But there’s room for people willing to give extraordinary service and willing to develop client relationships. It’s easy to say, but difficult to execute. We’re focused very much on the customer, that includes our merchandisers and buyers, and the sale associates, who are on the floor talking to customers and listening to them. When our buyers shop Armani, Escada, Ralph, Calvin, here or in Paris or Milan, they go in and say ‘this piece is right for Sally, or this is right for Betty, or Beth.”‘
After the stock market dropped hundreds of points last July and August, department, specialty and discount stores rebounded with gusto. Surprisingly, however, some luxury stores have sputtered in their climb back, as the numbers reveal. Saks Inc. last month lowered its earnings expectations for the year to $1.80 per share, compared to the $2.10 projected earlier, partly because of inventory problems at the Saks Fifth Avenue division, which became too dependent on low-margin, top-priced designer collections. Some labels will be dropped from the lineup, though executives see no letup in the demand for luxury goods in general and feel the loss of revenues from designers axed from the program can be made up by broadening the buy on others.
Neiman Marcus was hurt by the stock market plunge, and business at the Dallas-based specialty chain didn’t return to normal until last November. Earnings for the chain’s fourth quarter ended July 31 fell 83.2 percent. Still, August was strong at Neiman’s, and the outlook remains positive among Wall Street investors and store insiders. The company blamed the period’s decline on weak July selling of marked-down merchandise and a change in the promotions’ calendar. The renovation at the Bergdorf Goodman division, disrupting traffic on the main floor, didn’t help.
Some retailers acknowledged privately that bridge and designer goods are tougher to sell, particularly with more designer customers cross-shopping at discounters. However, “Our best merchandise continues to sell well,” stated Burt Tansky, president and chief operating officer of the Neiman Marcus Group, when asked about the state of the luxury industry.
“There is no question that there is a greater and greater desire for luxury merchandise because it represents quality,” he added. “Pricing is not an issue. There is more money around than ever. Unemployment is at a low level. The financial community is doing very well. There is a prosperity in the country leading people to buy higher quality homes, bigger homes, better cars. They want our kind of our merchandise. But it can’t just be stuff. There has to be an element of uniqueness in the design. We are constantly looking for new, unique, interesting merchandise.”
Not everybody was quite so bullish. One New York City fashion retailer, for example, acknowledged: “[Designer sales] have not been constantly great, from the spring right through now. I feel Prada, Gucci and Jil Sander are strong, but perhaps it’s that some designer businesses have almost peaked and need another infusion of exciting design to stimulate the customer.”
For many retailers, contemporary collections, where items as opposed to collections are emphasized, offer the most opportunity for growth. There’s a lot of fashion for the dollar in such lines as Guess, Katayone Adeli, BCBG and ABS, and each of them seems to be motivating shoppers, retailers said. So are certain major collections, particularly those lines created with color, style and fabric innovations, according to retailers. Such designers as Ralph Lauren and Gucci, as well as Dolce & Gabbana and Michael Kors, rate an “A” on the performance lists of many stores.
Retailers are also encouraged by the steadiness of accessories, particularly handbags, as well as shoes, sweaters, and certain evening looks, with the millennium as a catalyst. The gift side of the luxury market seems most robust, with companies such as Tiffany’s performing well, and others, such as Saks Fifth Avenue, seeking to get deeper into the gift business by playing up non-apparel areas more, including Frank McIntosh tabletop, which the store has exclusively in some markets.
And illustrating the continued strength in jewelry — some see it coming at the expense of apparel — Zale Corp. chairman Robert J. DiNicola said: “I strongly believe we will have an exceptional Christmas with regard to the luxury business. The economy is very strong. People are feeling extremely optimistic about their own position and about the future. Coupled with that, the millennium is on our doorstep. There’s an increase of interest in jewelry, and diamonds in particular. We view this as a banner year. I can’t imagine an environment more positive, and it seems to be getting stronger.
“But for everyone it comes down to execution — providing the customer with the service they are looking for. We’re selling a lot of diamonds, and that will continue to grow as the year ends. In, addition, we’re selling a great deal of platinum. It’s by far the biggest emerging category in jewelry and it’s generally 25 percent higher [per ticket sale] than average.”
Ready-to-wear retailers have other reasons to be optimistic. Compared to spring, fall usually means dressing up more. Still, many seemed cautious in appraising the state of the luxury business, and selective in discussing the upsides.
As Stephen Elkin, chairman and ceo of Bergdorf Goodman put it, “Accessories and jewelry have had better success. Part of this is that the apparel business is in a transition state. There is a change in the way people are dressing. Lifestyle changes are affecting trends. The constructed jacket disappeared last fall.”
Elkin noted that some important labels are making changes to adapt. “Chanel has made a major departure in their collection, with sportswear, easier garments, less traditional, and customers are responding.
Armani, Elkin also said, is recognizing the change in lifestyles, and in a recent WWD interview the designer promised to inject “more character” into his collection. In fact, Le Collezioni for fall ’99 did have some new twists, such as geometrically detailed sweaters and crisp cap-sleeved tops, and more color, complementing the enduring softly tailored jackets and pants in luxurious fabrics.
Elkin added that Michael Kors for Celine has had “great acceptance” while Burberry is “emerging.” He also characterized Jil Sander as “unconstructed, light and a very modern business that is composed of separates and pieces. Customers are getting more and more comfortable in their ability to pull wardrobes together. They’re not coming in for top-to-bottom ensembles.” Thus, a women might buy a Chanel jacket and mix it with a pair of jeans.
When a designer comes up with a luxury product that women desire, regardless of its price, “it sells like crazy,” said Kal Ruttenstein, Bloomingdale’s senior vice president of fashion direction. But there seems to be few in the market lately. Ruttenstein did cite Fendi’s thin shoulder baguette bag, the Gucci hobo bag and Louis Vuitton’s signature bags, and also said cashmere pieces from several collections have been strong.
Stanley F. Whitman, developer of Bal Harbour Shops, a luxury mall in Florida that has introduced many designer collections to the South, was more pointed in his opinion. “Basically, women’s and men’s wear have been in the tank. But there is a very strange phenomenon. Where designers have men’s and women’s in the same store, they do well.”
Jewelry is also doing well, Whitman noted, adding that the mall’s sales overall, “continue to go up, because every year we replace the merchants that aren’t doing well.”
There are other issues. Casualization, for many executives, is nothing to be casual about. It has cut into the demand for career wear, suits, jackets, ties and tailored looks, while opening up other merchandising opportunities that many stores have yet to fully seize upon. Rather than a question of money, it’s a new psychology of spending and dressing that’s challenging luxury retailers.
According to Philip Miller, chairman and ceo of Saks Fifth Avenue, people wearing less-formal clothes in the workplace has reduced the demand for tailored clothing. “By the same token,” Miller added, “the customer who is used to wearing fashionable, good clothes still wants them. Retailing and manufacturing have to catch up to that shift a little.”
And while the wealth factor for Saks customers is strong, Miller noted “a wider range of spending money, on homes, travel, and entertainment. That’s cyclical, and sometimes there is an intense interest in fashion.”
The summer season just hasn’t been one of those times, at least for Saks. “It was just OK,” Miller acknowledged. But currently, “Early fall selling indicates a strong interest in apparel and accessories. Such designers as Gucci and Prada are top of the mind now. They’re particularly strong, though there has been some softening in the more traditional, high-end design sector. But I don’t think that’s any indication of a continuing malaise in luxury goods,” Miller insisted. “On a month-to-month basis, our comps beat department stores.”
Allen Questrom, chairman and ceo of Barneys New York, does see a softening of sales of luxury men’s clothing, particularly in New York City. Nevertheless, he’s predicting a pickup this fall.
“On the men’s side, it’s clearly challenging, particularly ties,” said Questrom. “People have shifted to more casualization. Often, they’re not wearing ties when they go out at night. The luxury suit business was affected last fall, but has improved over the last several months; sportswear is quite strong. Ties still struggle.”
Aside from the here and now, luxury retailers are looking for long-term growth, though store expansion opportunities seem limited. Neiman Marcus and Saks Fifth Avenue are already in most of the affluent U.S. cities that could support their stores, and some executives even complain privately that there is still too much retail square footage and too many people pushing the same products. They’re surrounded by new competition emanating from a volley of specialty store openings in the past year to 18 months, some by designers themselves opening boutiques, others by entrepreneurial fashion retailers. That’s a change from most of the Nineties, which saw scores of designer shops shutting down, including Charivari, Amen Wardy, and Martha’s on Park Avenue.
“Clearly, the competition is at higher levels than it’s ever been,” said Miller. “There is a resurgence of specialty stores coming on the scene, whether it’s Jeffrey or Scoop, and manufacturer stores are a bigger factor.”
Jeffrey, based in Atlanta, opened a 10,000-square-foot designer store in the Chelsea section of Manhattan last month; Mitchells is opening a Richard’s store in Greenwich, Conn., next year, and Scoop has grown to become among one of New York City’s closest watched specialty stores.
“There’s an overabundance of luxury products in the marketplace, all targeted to a relatively narrow customer audience,” said a fashion retail executive. “That creates sales and margins pressures.”
Asked if expansion opportunities are limited, Tansky replied, “That’s not a problem. We have five more stores coming up — three in Florida, one on Long Island, and we’re expanding in San Francisco. There’s a lot of activity coming up. Obviously, there are always going to be communities where you can’t put in a full-size Neiman’s store. We’re examining a strategy for smaller markets.” It includes a store in Palm Beach, Florida, on Worth Avenue, with 49,000 square feet, about a third the size of a typical Neiman’s.
To expand, luxury stores must be more creative, by developing prototypes or new real estate formats, or pumping up the sites with the most traffic and potential to excel. Some are doing that, such as Saks, which, as noted, is spending $60 million to renovate and expand selling space at its Fifth Avenue flagship, and Neiman’s, which is expanding its West Coast flagship on San Francisco’s Union Square, spending $50 million there. Neiman’s wants Union Square to be its first store to crack $200 million in annual volume.
They also must do rigorous market research on spending habits, not just income levels. “In Minneapolis, the demographics are unbelievable,” asserted Tansky. “It’s loaded with wealth.” And Tansky wishes more of it would be spent at the Neiman’s store operating there for about 10 years. “There’s this Midwestern conservatism,” affecting business in the Nicollet Mall.
Tansky’s point is that there is more affluence in this nation than ever before, emerging in such places as Tampa, Orlando, northern California, Fort Worth and Minneapolis, all markets that luxury retailers long considered secondary to New York, Chicago, Beverly Hills or even Short Hills, N.J.
In the U.S., there are an estimated four million millionaires currently, yet most chose not to live in the lap of luxury. By the year, 2005, there is expected to be 5.6 million households with incomes of at least $1 million annually, according to “The Millionaire Next Door,” the best-selling book that documents the lifestyles and spending habits of the rich. The book’s basic premise: Most millionaires don’t drive Mercedes or wear Rolex watches. They’re more apt to shop Sam’s Club than Saks, and have Chinese takeout before taking a table at “21.”
Tansky said being rich doesn’t necessarily mean spending big. The affluent are often savers, living discreet lifestyles. Opulence matters less than funds for their children’s future. It’s a minority of millionaires and celebrities that flaunt their wealth, casting the impression that millionaires know how to spend and love it.
“There are many pockets of affluence out there that aren’t being served, but it’s a more complicated issue,” Tansky explained. “We have to measure psychographics — the study of lifestyles and buying habits and how people shop — before we open stores. Not just demographics. We know that people in Minneapolis have money and people in California have money. But people in California are different. They have different spending habits. They are more into buying and the importance of status and showing it off, and there’s a real stretch of this, from Beverly Hills to Palm Springs. There are millionaires everywhere in this country. The majority drive eight-year-old cars and have been living in the same house for 40 years and don’t spend a lot of dough. There is affluence out there, but it doesn’t necessarily mean it’s good for stores.”
The question is where.
“There are still some other niche markets that luxury retailers can certainly explore,” said Steven B. Greenberg, president of the Greenberg Group real estate advisers to retailers. “Among them is SoHo, where in the past year a dozen or so designers opened shop, as well as South Beach in Florida; Chestnut Hill, Massachusetts; Chevy Chase in Maryland; Knox Street in Dallas, and Greenwich, Conn. They are familiar areas of affluence, but they are generally underserved. There’s also Lincoln Park in Chicago and Manyunk in Philadelphia, which are becoming big on the home furnishings side.”
Greenberg also cited The Shops at Wailea, in Maui, Hawaii, where reportedly Prada and Louis Vuitton may wind up as tenants when the center opens, possibly in two years.
Saks Fifth Avenue has been aggressive in pinpointing new markets, through its multiformat real estate drive, to increase penetration in key markets. “We’re trying to position ourselves in local communities where pockets of affluence exist, and we feel we can serve customers better by being closer to where they live,” said Saks vice chairman Christina Johnson, explaining the chain’s expansion philosophy. “We believe there are many unserved secondary markets, such as Tampa.” That’s where Saks opened a 100,000-square-foot unit last November, beating Neiman’s and Nordstrom into the market.