DESIGNER STORE FEVER: ARE THE BIG RETAILERS BEGINNING TO SWEAT?
Byline: Sharon Edelson
NEW YORK — No longer mere “laboratories” for design and merchandising experimentation, designer boutiques have become bona fide businesses, and department and specialty retailers are crying the blues.
Flush with success, design houses are revealing rising retail ambitions that include generating a greater proportion of sales through their own stores.
“We’re concerned because a lot of the major players are doing a large percentage of their total volume through their own stores,” said Sheri Wilson-Gray, senior vice president of marketing at Saks Fifth Avenue. “Beyond one or two stores, it becomes more than a laboratory; it becomes a profitable enterprise that adds to the bottom line of a corporation.”
Prada, which just opened an 18,000-square-foot flagship on Madison Avenue, is reportedly searching for a 10,000-square-foot site on Fifth Avenue.
Patrizio Bertelli, co-owner of Prada, has said the company will control its distribution more closely and move toward channeling more than 70 percent of group sales through directly owned shops by 1998.
“That’s a huge number,” Wilson-Gray said. “They’ve become a competitor. They’re suppliers and competitors at the same time. That’s a little uncomfortable. It’s not at the laboratory stage for many of our major vendors, so you must revise your perspective to say they are our competitors.”
“This is a big issue with these designers becoming vertical,” said Barbara Weiser, executive vice president of Charivari. “It’s certainly something that I have felt.
“When I opened a store on Madison Avenue, I wanted some lines that were indigenous to that store, and gradually I lost some prime people because they opened their own stores,” she said. “Max Mara had approached us about opening a shop-in-shop in our store and we did. They told us they would never drop an existing account. Then they opened their own store and dropped us.
“Frankly, I have never minded competing, even with my illustrious neighbors, because I have a point of view different than Bergdorf Goodman and Barneys New York,” Weiser said. “I find it very difficult when I’m not given that option. Now, it’s just the way life is.”
When Ralph Lauren built one of the first high-profile designer temples on Madison Avenue in 1986, he predicted it would raise consumer awareness and increase sales of his goods in department and specialty stores.
Many retailers said Ralph Lauren continues to perform in their stores. But Lauren, who now has a string of boutiques in upscale shopping districts and high-end malls, is one of the few designers with a large enough following and broad enough product range to succeed in both distribution channels.
Gianni Versace, Giorgio Armani, Valentino, Moschino and Etro — all part of last fall’s unprecedented wave of Italian designer openings on Madison and Fifth Avenues — are slightly more rarefied in terms of price and audience.
“I think designers are in competition with us and are going to do more and more business with their own stores,” said Michael Gould, chairman and chief executive officer of Bloomingdale’s. “They see the analyst reports on Gucci, which wants to do 75 percent of sales in its own stores. When you look at the kind of profit you can make when you’re both the manufacturer and retailer, and margin you’re making on it, it’s very appealing.”
At Gucci, 68 percent of total sales are generated by company-owned stores. Domenico De Sole, president and ceo of the Gucci Group, has said he would like to see that figure rise to 72 to 75 percent.
“Our view for the future is more directly operated stores,” said De Sole, noting that Gucci currently has 69 directly operated and 92 franchise stores.
In Europe, where there are few department store chains, designer stores have a long history and are the primary form of distribution for many designers. That may explain why the European firms have been so aggressive in building their retail empires.
“That’s the way they distribute in Europe,” said Massimo Ferragamo, president of Moda Imports, the American subsidiary of Salvatore Ferragamo. “It’s an easier thing to understand. For some European firms, it’s hard to understand how department stores work in America. It’s a completely different culture. Some have a hard time adjusting to it. With one, you control your environment. With the other, they control it.”
Control is the operative word, and if a brand is strong enough, the balance of power can easily tilt in its favor.
“In 1980, we were the broker for Trump Tower,” said Robert Siegel, president of Metropole, a broker specializing in renting retail real estate. “The biggest problem we had in those days is that the department stores wouldn’t hear of designers opening their own stores. They threatened the designers and said, ‘If any of you consider Trump Tower we will stop buying from you.”‘
But clearly, times have changed.
By 1999, Escada aims to generate 75 percent of wholesale volume through company-owned or franchised stores and shops-in-shops, Wolfgang Ley, ceo of Escada Group, told an industry group in Frankfurt in December.
Jil Sander in the next two years plans to double the number of flagships and franchise shops or corners to 120, while reducing the brand’s current 300 retail doors to about 250, Roland Bohler, managing director, said at the same meeting.
Thierry Mugler has opened close to 20 boutiques in the last two years, according to Didier Grumbach, director. Ferragamo now has seven stores in North America, including a new 14,000-square-foot flagship on Fifth Avenue. The company is opening in March a 12,000-square-foot store in Chicago, Massimo Ferragamo said.
“Every primary city of the U.S. is a target,” he added. “Dallas, Houston, San Francisco, Las Vegas and Bal Harbour are all places where we will open if we find the right location.
“Those cities are big enough that they can handle it,” Ferragamo said. “It’s useful to see a company store where you see all the products together. It has to be played very carefully. In smaller markets or shopping malls, it could be a serious problem. I know that problem to be happening with other people.”
Perhaps the retailer that stands to lose the most is Barneys New York, which has seen a veritable shopping mall of designer boutiques flower around its Madison Avenue and 61st Street flagship. The irony is that Barneys was an early champion of some of the designers that have opened stores, such as Prada and Jil Sander. Barneys is also largely credited with energizing Madison Avenue when it opened its store in 1993.
“The difference between now and before is that their [designers’] stake in retail was based on a 5,000-square-foot format, and now they are building 20,000-square-foot stores,” said Gene Pressman, co-chairman and co-ceo of Barneys New York. “They have a big stake in retailing.
“Can a monolithic concept like theirs sustain a profitable retail business, and will it have any effect on their retail customers? These are questions that will have to be answered,” he said. “So far, it hasn’t had any negative effect on us. A lot of customers really enjoy shopping in a store that offers many different opportunities. Our Prada business, for example, has never been better.”
Pressman said, however, that there are always brand options for the big stores. “It’s a big market out there,” he said. “There are plenty of other suppliers. Also, retailers have the opportunity to do their own brands as well.”
“There is always an immediate impact when a new flagship opens,” noted Stephen Elkin, chairman and ceo of Bergdorf Goodman. “Versace opens and you feel it for a period of time. Then it settles down.”
More ominous is the thought that some of Bergdorf’s most cherished resources would stop selling to the store.
“I would hope we are the 25 percent that they do sell to,” Elkin said. “If we’re not, we’d be disappointed. We believe we complement the designer boutique and do a first-class job on presentation and create an environment consistent with the way the designer likes to see their clothes presented.”
Faced with the prospect of losing some designer business, department and specialty chains are pumping up private label.
“To Bloomingdale’s, our own brands like East Island and Metropolitan View and the development of small resources that are unique to us become more and more important,” said Gould.
“If we are unable to get that [designer product] from the market, then we will produce it ourselves under private label,” said Terry Lundgren, president and chief merchandising officer of Federated Department Stores. “That done properly and done well is a compelling reason for the customer to shop.”
But Lundgren cautioned, “To make that mind shift and become a retailer and manufacturer is not an easy task. The same would be true about a manufacturer that wants to become a retailer. If they think it’s easy to just open up stores, they’ve got another thing coming.”
“I don’t think we have complete flexibility to say that if some of the big fashion players were to open their own stores we would reduce our buy,” Saks’ Wilson-Gray said. “That’s not satisfying the customer. But if manufacturers open freestanding stores and if we can’t profitably sell their merchandise, then too many points of sale are too many points of sale.”
According to Elkin, the current tensions between designers and chains may be due to retailers’ ongoing demands for chargebacks.
“Dealings in the designer market historically have been very different than other apparel markets,” Elkin said. “For the most part, with designers you bought and sold things and were on your way. In other sectors, there is a history of pressure that’s brought to bear on vendors by retailers. It’s possible that certain retail customers are beginning to make very similar demands, perhaps because some of the designers are unprofitable for them.
“Some of these designers are hot as pistols and very independent,” Elkin added. “They are saying, ‘Why should I have to produce merchandise for stores that come back at the end of the year and cut my profit margins.
“We do a very significant business with upscale designers,” Elkin said. “We don’t run margins below our norm in those businesses.”
“You’re hearing more noise from department stores about designer stores because the retail expansion by designers has gotten to be a lot more aggressive,” said Richard Seligman, senior managing director of Edward S. Gordon. “For a long time, it wasn’t a major interference. Now, they’re not just opening one store as a flagship, they are opening chains. In addition, all these designers are making major inroads in the outlet business.”
Historically, many designer flagships were money losers that were thought of as expensive image campaigns.
“Nobody wants to build stores as loss leaders, as they did in the late Seventies,” Seligman said. “Fashion houses getting into retailing still want an economically viable business that can stand on its own. They don’t want to build an edifice that puts them in the red at the end of every month.”
The new breed of designer store is fueled by an almost cult-like following and unprecedented demand for key styles. It is also characterized by a strict control over image. Salespeople are steeped in the house’s culture, dressed head-to-toe by the designer and trained to know every detail of a collection.
“Why would anyone go to a department store when they can come here and get everything they want?” Prada’s Bertelli said in October, referring to the company’s new flagship. “Department stores need to change their attitude. One who can afford to can very easily do without department stores.”
Sure, designer stores can out-assort, out-sell and out-present department stores, but they’re often only as good as their last collection.
Retail experts said that while designers are riding high today, they may long for the traffic a Saks Fifth Avenue or Neiman Marcus can provide if or when their collections cool off.
“These designer stores are depending upon having a coterie of almost blind loyalists that come to their store and don’t go to any other,” said Arnold Aronson, managing director of retail strategy at Kurt Salmon Associates. “While there are some designer loyalists today, they’re getting fewer and fewer. The crossover that characterized general shopping will start to invade even the loyalist part of the designer business.
“Can they be strong enough perennially to live off their own loyalists?” Aronson asked. “When you’re hot, it’s terrific, when you’re not, you lose the opportunity to feed off the traffic that a more broad line specialty store can give.
“Staying hot is not forever,” he said.
“Designers feel they can control their own market share, and obviously it’s better for them to be vertical, and they have their own strength,” Weiser said. “The other side of the coin is, does a single designer store maintain its interest? It’s very impressive initially to see these great monuments built from a designer’s perspective. After a while, it becomes boring.”