LUXE FIRMS UNDETERRED BY ECONOMIC JITTERS, SHOOT FOR BIG GROWTH
Byline: David Moin / With contributions from Janet Ozzard, New York / Holly Haber, Dallas
NEW YORK — Neiman Marcus and Saks Fifth Avenue may have few affluent urban areas left to tap, but never say “maxed out.” It’s just not in the language of luxury retailers and designers.
New formats, brand extensions, acquisitions, younger customers with an “item orientation” and no particular loyalty to one label, and a few shopping centers in the pipeline — the kind with valet parking and terrazzo piazzas — should drive many luxury firms to another strong year.
The luxury sector, after a compounded annual growth rate of at least 5 percent for the last five years, should at least match that rate in 2001, and double the meager gains expected in more moderate sectors.
Based on that pace, global sales of luxury products, including ready-to-wear, accessories, jewelry, watches, fragrance and cosmetics, are estimated to top $60 billion this year. The sector grew from $47 billion in 1996 to $58 billion in 2000, according to statistics from the Comite Colbert and Traveler Retailer International. Fifteen years ago, luxury was estimated to be a $20 billion industry.
Just last week, Polo Ralph Lauren Corp., where the term “luxury” is getting ingrained in the culture and has failed to escape any announcement lately, reported a 56.7 percent income gain in the last quarter. The company said retail growth is focused on full-price stores; no more building outlets. That old axiom, that luxury is impervious to economic swings, seems to be holding up.
The same day Polo promoted its results, Saks Inc. reported it killed a planned spinoff of the Saks Fifth Avenue division, and that Saks Fifth Avenue’s comp-store sales declined 3.4 percent in the last quarter, attributed, at least in part, to a perceived slowing in the luxury sector.
However, Saks sees a recovery happening soon. “There is no fundamental reason why we can’t get on an even footing again, with growth and expansion,” said Sheri Wilson-Gray, Saks’s executive vice president of marketing.
Other retailers, designer executives and developers with tenants that cater to the rich, interviewed over the past week, also sounded undeterred by the economic slowdown that’s dragging retailing and consumer confidence down.
They’re as eager as ever to open stores, whether it’s downtown in SoHo, which is undergoing another retail revolution led by high-end European and American design names, or down in South Florida, where retail square footage keeps beckoning. For example, LVMH’s Christian Dior division sees 20 more this year for a total of 112, and over 150 units eventually operating. Ferragamo’s Emanuel Ungaro division is eyeing 35 openings over the next few years, and Gucci’s Yves Saint Laurent envisions around 50 to 60 in a couple of years.
“We’re smoking,” said Stan Whitman, developer of Bal Harbour Shops, in Bal Harbour, Fla., among the nation’s few high-end malls that’s tenanted almost entirely by true luxury firms. “Our problem is we don’t have the space for the laundry list of these fantastic luxury merchants that want in. We have only 500,000 square feet. We’re a small center. We’ve got a very unusual situation. We have been through a lot of recessions and in no year have we ever gone behind the prior year, even the year when Bonwit Teller closed in 1990. And that was a pretty good chunk of space. We are a unique cat.”
“The numbers are still strong today, and even though there are signs of weakness here and there in interfacing with luxury brands, most are still interested in doing additional stores in the right projects in the country,” observed David Weinert, senior vice president of leasing, Taubman Co. “Their expansion has always been selective and needs to be.”
Chet Hazzard, president of Vera Wang, which is planning to unveil a new retail concept and brand extensions, maintained: “We’re quite aware of the economy and the concerns over whether the consumer will continue to spend. Stores in the fourth quarter were off, but we beat our plan by about 20 points and we were really aggressive compared to the past year. We felt nothing as it related to any softening of the market.
“What is unique about our brand,” Hazzard continued, “is that we are very focused on a product segment. For the future of luxury brands, it’s very, very important to be focused. We really stay focused. We’re not trying to be everything to everyone. We understand who our customer is and we are designing into that customer. We want new customers and try to deliver that, but you must have an identity.”
Hazzard also believes that consumers are shopping for “that great handbag or great ballgown of the season” and are more often mixing items from different luxury brands, or with lower-priced brands, to individualize their outfits. “People can find good-looking items at even less-expensive prices. They’re not dressing head-to-toe in any one designer, and that’s creating more business in the luxury world. Younger customers are buying into these luxury brands more than ever before, and young people are really interested in mixing things up.”
“Any designer or brand that has developed its business on the basis of fashion, quality, status and value has a significant opportunity to grow, and not only through the category they are in, but through product extensions,” said Arnold Aronson, managing director of retail strategies, Kurt Salmon Associates. “That’s exactly why LVMH bought [Donna Karan’s Gabrielle Studio business], because she’s underdeveloped in accessories. That’s a huge opportunity to exploit her reputation for fashion and status and quality. LVMH is very good at that. Gucci’s acquisition for two-thirds of Bottega Veneta is another big opportunity.” LVMH is also negotiating for Donna Karan International, a public company.
As for retail expansion, some designers want more, more, more, though they’re beginning to learn about the pitfalls, like overexpansion, licensing deals and distributions gone awry and the pressures of public offerings.
“It’s a question of control,” said John Idol, chief executive officer of Donna Karan. “It’s very important for any designer brand today to own and operate its own stores. I think stores should represent well over 50 percent of a company’s revenues. You should control your destiny, and it’s difficult to do that in department stores, because they don’t always present the product the way the designer might.
“That doesn’t make them any less special, but clearly a store will not convey the image the way you want to be perceived globally. You have to be careful to focus on profitability and comp-store increases. There are plenty of markets around the world, but you have to make sure the stores that are opened are continually productive.”
As a public company, said Idol, Donna Karan is under pressure to grow consistently, and its every business move is scrutinized and criticized. “Because we’re in the fashion design business, there will be different points where we are very, very hot, and other points where that is not so. What magnifies this is the pressure of the public environment. We all have a responsibility to deliver increased earnings, and some of that is driven through new store openings. But that can’t be the only reason we open them.”
Store openings aren’t planned strategically at Marc Jacobs, said company president Robert Duffy. Currently, the designer has a women’s and a men’s signature store here, and a women’s store in San Francisco. All of those, said Duffy, “were emotional decisions. I always felt that we designed so many things that I never expected our stores to carry. Still, it was frustrating because we were having so much editorial support and we knew customers were having trouble finding everything.”
The women’s store on Mercer Street opened five years ago, and Duffy said it changed the way department and specialty stores bought the line — for the better.
“It prompted the stores to buy us more as a collection. It gave us a bigger voice,” he said. The men’s wear store, on Bleecker Street, grew out of the women’s store, said Duffy. “It’s been a natural evolution. We didn’t have a marketing plan to open a million stores.” That said, Duffy is close to signing a deal for another women’s signature store in the West Village here, and would like to open a store in Paris.
At the Bal Harbour Shops, officials do say they’ve had some months when business was off, including last December when specialty stores, excluding Neiman’s and Saks, fell 1.2 percent. However, for the year, those smaller specialty stores gained 9.6 percent in sales, while Neiman’s and Saks averaged more than 7 percent, according to Whitman. “Our sales were $1,342 per square foot last year, compared to $1,187 in 1999. We had a very good year. We went to $332 million from $305 million the year before.”
The center recently spent $2.5 million to resurface the walkways, add two ponds, tropical plants and a sculpture garden, but Whitman said it was not a response to increasing competition, which could come from the Village of Merrick in Coral Gables, Fla., currently under development by The Rouse Co., and about a 40-minute drive away.
“We upgrade every year,” Whitman said.
Bal Harbour has also strengthened its tenant roster. Recent openings include the first Van Cleef & Arpels boutique to open in the U.S. since 1969; The Art of Shaving, a Madison Avenue-based men’s boutique offering luxury shaving and related articles; Alfred Dunhill; Max Mara; and Stephane Kelian, a women’s designer footwear boutique modeled in the style of the French designer’s Paris location.
Opening soon are Piaget, Marina Rinaldi, Valentino, Thierry Mugler, Ferre and Yves Saint Laurent. Some tenants are expanding, including St. John and Chanel.
“Retailers are very cautious people and the most cautious of the cautious are the upper end. They don’t go into unproven markets. They won’t do it.”
He’s suggesting that his tenants won’t defect or duplicate their stores at The Village at Merrick Park, and some could be restricted by lease clauses that specify additional stores can’t open within a certain radius of the mall. But The Rouse Co., which is building The Village at Merrick Park, has a strong sales pitch. “This is our most upscale project yet,” said Anthony Deering, chairman of Rouse. “The total investment, including department stores, is $400 million. Our share is $260 million. It’s not a giant project. It is very upscale. It’s kind of a precious space. Luxury customers demand small and intimate settings.”
The Village at Merrick Park, slated for completion by fall 2002, will house Neiman’s and Nordstrom. No designer fashion boutiques have been announced yet, though the leasing process has just begun.
Luxury brands that do come in will be clustered on the first-floor “garden level.” Of the 140 speciality stores envisioned, probably 20 to 30 percent will be luxury, Deering said. Asked how far down the price spectrum the other stores will be, he said: “You might see Banana Republic, but I’m not sure you’d see Gap. Our focus is the higher-end best presentations,” from retailers such as Gap, or perhaps even The Limited Inc., “where you might see a smaller store that’s more exquisitely stocked.” Coral Gables, Fla., has an average household income of $90,000, but the average Neiman’s customer in the area is from a $150,000 household, Deering said. The center is also expecting to draw a wealthy tourist clientele, particularly from Latin America.
He described The Village at Merrick Park as a mixed-use development being created on a 20-acre site with low-slung Spanish architecture scale that’s not monolithic, that’s primarily open air, and with an outdoor park. It’s modeled after Rouse’s development in Phoenix called Arizona Center.
“There will be elements to encourage people to linger, walk around and loiter in the park, but that’s not to say we won’t encourage shopping,” Deering said.
In the fast-growing Dallas suburb of Plano, Tex., there’s a Taubman project under way called The Shops at Willow Bend. Luxury shops will account for 25 to 30 percent of the mix when the 1.5 million-square-foot mall opens in August. High-end firms that have signed leases include St. John, Armani Collezioni, Hugo/Hugo Boss, Nicole Miller, Wolford, Charles Jourdan Paris and Lalique, as well as Neiman’s, Saks and three department stores.
“We will have another major announcement of additional tenants prior to the grand opening, and there will be designer names in the next round,” Taubman’s Weinert said. “We’re very pleased with where leasing is at today — exactly where we intended it to be.”
That’s not the only upscale Taubman project in production. The company in September will unveil the International Plaza in Tampa, Fla., with Neiman’s, Nordstrom, Tiffany, Louis Vuitton and Christian Dior among the tenants. And the following fall, Taubman plans to open the Mall of Millennia in Orlando, Fla., anchored by Neiman’s, Bloomingdale’s and Macy’s, which will be new to the city. Additional luxury brands are expected to sign on.
Taubman, which has the most high-end reputation of any major mall developer, pulls in the highest average sales per square foot of shopping centers nationwide, further supporting the case for luxury. In 1999, sales at Taubman malls hit $453 per foot on average. In 2000, the figure is seen at about $480 a square foot. Top properties are The Mall at Short Hills in Short Hills, N.J., Cherry Creek in Denver, Beverly Center in Los Angeles and Biltmore Fashion Park in Phoenix.
While development keeps forging ahead, Saks’s Wilson-Gray did acknowledge that the company is being “careful in our approach to new markets” and how Saks units are merchandised. “I don’t think we would say we feel ‘tapped out,’ she said, though she acknowledged, “There is a small number of sites left where you could have a powerful new full-line Saks,” that’s weighted to luxury goods. “We have a very luxurious positioning as a brand, but we have lots of merchandise everyday folks without extraordinary incomes can afford,” giving Saks more expansion possibilities. “We have true luxuries, but also we have regular bridge-priced merchandise in every category.” She also cited the “Live a Little” ad campaign launched last year that presents a more casual lifestyle and more casual merchandise that would be less expensive than top-priced Saks offerings.
This falI, in addition to opening a small store in Riyadh in the Mideast, which won’t sell men’s wear, Saks is opening in Columbus, Ohio, and Birmingham, Ala.
“For a brand with a well-defined image that understands the customer, we still think there are opportunities for growth. It has not reached a peak,” said Wilson-Gray.
“Saks has done reasonably except for the last quarter,” said Aronson. “Their future is good. Barneys will do well, too. Maybe the opportunities are not as expansive as they have been, but there still are opportunities to develop new formats, like Neiman’s gift and jewelry business,” called Galleries at Neiman Marcus. Whether that becomes a rollout vehicle remains to be seen with Neiman’s currently tweaking the few sites that have opened.
“The luxury category of business not only represents the rich who will always have money but also exploits the aspirational qualities of Generation X and Y,” Aronson observed. “Today, we have a society willing to spend, willing to go into debt and willing to have things that turn them on.”
But companies like Calvin Klein, Gucci and Donna Karan, he warned, “have got to be careful about distribution and that exclusivity is watched carefully, so luxury does not deteriorate into a commodity. Privately held companies don’t become victimized by the inexorable demand for week-to-week, month-to-month, quarter-to-quarter sales performance, where there is continual investment scrutiny.”