DESIGNER MEGASTORES RUNNING OUT OF SPACE IN LONDON BOOMTOWN
Byline: James Fallon
LONDON — Designer stores are springing up here in an unparalleled retail boom. It is a retailing rush that has virtually eliminated large sites suitable for flagship locations, sent rents spiraling and, above all, raised doubts as to whether any of the stores will ever be profitable.
It has also raised questions as to how long the boom will last.
The boom began percolating 18 months ago with the opening of the 12,000-square-foot Giorgio Armani store in Sloane Street, beside the city’s first Prada unit. This came shortly after the designer’s third Emporio Armani unit in London, on New Bond Street, and was followed last fall by the arrival of the 9,000-square-foot Donna Karan Collection store farther down the road, near her DKNY store that opened in 1994.
Since then, stores have opened or been announced almost weekly by almost every luxury-goods company and major design house in the world. A brief list includes:
CK Calvin Klein’s 10,000-square-foot store on New Bond Street, which will open next month.
The 12,000-square-foot Versace Jeans Couture store on New Bond Street, due to open the same month.
Giorgio Armani’s 6,750-square-foot store for his Le Collezioni label, opening in May on New Bond Street.
Tommy Hilfiger’s 18,000-square-foot European flagship on New Bond Street, which is due to open in fall 1998. Hilfiger also has taken a 2,400-square-foot site on Sloane Street, slated for a fall 1997 opening, that will be devoted to men’s sportswear.
Louis Vuitton’s three-floor, 12,000-square-foot London flagship on New Bond Street, opening this summer.
The 9,800-square-foot Prada store on Old Bond Street, opening this summer, as well as a Miu Miu store beside it.
Ralph Lauren’s 22,000-square-foot European flagship on New Bond Street, scheduled to open early next year.
And that’s just the Bond Street area.
Across town, Sloane Street is seeing a similar opening schedule, with new stores from J.P. Tod’s, due in March; Alberta Ferretti, in May; Escada, this summer; Gucci’s European 15,000-square-foot flagship, late this summer, and, next year or in early 1999, Calvin Klein’s 10,000-square-foot London flagship on Sloane Street.
Meanwhile, Guess opened its first freestanding London store on Brompton Road last week and will open another store on New Bond Street this summer.
“It’s a phenomenon,” says Caroline Collis, a director of the boutique Brown’s on South Molton Street, which introduced such designers as Giorgio Armani, Ralph Lauren, Calvin Klein and Donna Karan to the British market.
“Never before has there been such a rush of these large design companies into London that are able to pay huge sums for whatever location they want,” says Collis.
There are several theories as to why the openings are all happening now. London, as has been reported many times, is the city of the moment and designers want to capitalize on its status while it lasts. But the openings also are a result of changes in the industry’s structure, with designer diffusion lines becoming the growth engine.
“The top designer names are beginning to capitalize more and more on the casualwear side of the market,” says Chris Philips, a partner at property agents Healey & Baker. “These collections are appealing to a wider market, and the designers need big stores to promote their images. Plus all these designers now have fragrances as well. They need these flagships to back that up.”
The rush is literally changing the landscape. The demand for retail sites of 10,000 square feet and up has caused property companies to take small stores and knock them into large units suitable for designer flagships. Bond Street, once a mix of designer stores, jewelry shops and art galleries, is becoming dominated by worldwide designer brands ranging from Guess to DKNY. Sloane Street, which was always mainly designer stores, is almost completely rented out with only a few independent retailers remaining on the street.
“It’s a dangerous market at the moment,” says Eric Eastman of Michael Pedder & Co., a property agent that found the sites for the Prada, Armani, Donna Karan, DKNY, CK Calvin Klein and Calvin Klein stores.
“A lot of international names seem determined to do London before any other major city in the U.K. and that is creating quite considerable pressure for sites of 10,000 to 15,000 square feet in size,” says Eastman. The demand has sent rents skyrocketing over the last year.
Peder Bertelsen, the retailer who helped spark London’s last designer boom, in the mid-Eighties, last fall opened a 1,500-square-foot Strenesse store on Sloane Street at a cost of $161,000 (100,000 pounds) a year in rent. But six months later, when he began looking for a site for his Ferretti store, rents had quadrupled. Escada finally got the 5,000-square-foot site for its second London store at an annual rent of $724,500 (450,000 pounds). Even the property’s owners, The Cadogan Estate, became concerned about the high rent, however, and eventually asked Escada to lower his bid by about $161,000 (100,000 pounds).
Ralph Lauren’s 45,000-square-foot building at the corner of New Bond Street and Burlington Gardens came at an even higher price. Prada was days away from signing a contract for the site, but wanted only the first two floors for its London flagship. Lauren stepped in and bid $483 (300 pounds) a square foot for the entire six floors. The normal rule of thumb in London is that designer stores must achieve at least 10 times the rent to meet their annual rental costs. That means that on the face of things, Lauren’s flagship must achieve sales of $107.2 million (66.6 million pounds) a year to meet the rent — excluding such additional costs as property taxes, utilities and staff.
Several analysts contend Lauren is unlikely to ever get a return on his investment, but claim the designer probably views the store as much as an investment in marketing as it is in retailing.
Some property agents, however, point out that Lauren may get a quicker payback because he’s taken the top four floors as well and can get the revenue from renting them out as office space.
The same can’t be said for many of the other designers.
Tommy Hilfiger, for example, has agreed to pay rent of not less than $1.45 million (900,000 pounds) a year for his Bond Street store, meaning he needs sales of at least $14.5 million (9 million pounds) to cover the cost.
Guess bought the old Kurt Geiger store on New Bond Street for $80,500 (50,000 pounds) in key money and an annual rent of $552,230 (343,000 pounds). Ferretti’s store in Sloane Street is costing about $563,500 (350,000 pounds) a year in rent, plus decorating costs of $1.13 million (700,000 pounds). The Calvin Klein store in Sloane Street will cost about $1.29 million (800,000 pounds) a year in rent when it opens early next year.
“It’s all about hype,” says Bertelsen, who saw the bubble of designer retailing burst in the late Eighties when the recession hit and property values plummeted. “One designer opens a store somewhere and then they all want to be there. There are no more customers around for designer clothes now in Sloane Street. The stores are simply taking customers from each other.”
The demand for designer shops is being driven by a handful of London retailers, led by Christina Ong, owner of Club 21. The company owns the stores for Donna Karan Collection, DKNY, Prada, Miu Miu, Bulgari, Armani, Emporio Armani, Armani Le Collezioni and Guess as well as the Halkin and the new Metropolitan hotels. While some property agents pin the blame for the spiraling rents on Ong, others point out that she has always taken shops in out-of-the-way spots or when prices were at their lowest.
The 12,000-square-foot DKNY store on Old Bond Street, for example, cost only $644,000 (400,000 pounds) a year in rent, while a similar site now would cost about $1.21 million (750,000 pounds).
“In a way Mrs. Ong is her own worst enemy,” says Alison Littlewood of property agents Hillier Parker, which is preparing a study of designer retailing in the world’s major cities. “She’s the one driving the demand for all these stores, and the only hope is that she can get in and get the best sites at a good price before others bid for them.”
But while some observers are skeptical of the economics of the mega-boutiques, others point out that rental values on Sloane and Bond Streets are still far below what they were in the mid- to late-Eighties.
“Rents in Sloane Street are going up, but they are still a long way behind their peak in 1988 and 1989,” Philips says. “Shops there now average about $483,000 (300,000 pounds) a year in rent compared with $644,000 (400,000 pounds) nine years ago.”
And unlike the last boom, the current craze for designer shops is being driven by global brands that can afford the losses these flagships might generate. That’s how badly they want to be in London.
These brands want to be on Sloane and Bond Streets “as an address on their shopping bags,” Littlewood says, adding that the shops are as much a part of the companies’ marketing budgets as they are about retailing.
“These stores give these companies a window on the world,” Philips said. “Not all of them will pay back, but they have to be looked at in relation to their worldwide costs. Often, if looked at as a single unit, they don’t make money, but these companies are now operating globally, and they have to have a location in London to project their images.”
The last craze saw small shops being opened for such brands as Basile, Erreuno, Krizia, Gianfranco Ferre and Karl Lagerfeld. The owners of those stores generally backed them following several strong seasons and then closed them if the collections got weaker or business fell. The difference in London this time around is that the huge shops being opened by such brands as Lauren, Klein, Karan, Hilfiger, Versace Jeans, Emporio Armani, Gucci and Prada are likely to remain in those locations for years.
Yet questions remain as to how much longer the London boom will last. Some property agents say designers refuse to open stores outside Sloane and Bond Streets even though there are hardly any large sites left. Eastman of Michael Pedder, however, says his company is preparing a plan to open several major designer stores on the fringes of those two major streets to begin linking the areas of Knightsbridge and Bond Street.
The strategy mirrors the one Club 21 adopted with its Emporio Armani store in Covent Garden. Its location was considered ill-advised for a designer store when it first opened. Now Covent Garden is one of the hottest shopping areas in town and has begun attracting such other labels as Zegna, Diesel and Pepe Jeans.
“The boom, I’m afraid, has arrived, and in a way I’m surprised it’s lasted as long as it has,” Eastman says. “Now the market has to be more ingenious in finding the right sites for these designer stores.”
Some observers also wonder whether the arrival of an endless stream of designer boutiques is good for London retailing and, eventually, for the brands themselves.
“These diffusion lines are taking more and more of the market,” Littlewood says. “The question is whether the brands will still have their cachet if they are available in shops throughout Britain. Once there are all these huge supermarkets of fashion, will they lose something?”
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