That’s the question raised in an extensive report on the state of the luxury goods sector published on Friday by a team of Merrill Lynch investment analysts.
“We believe that the proliferation of huge store openings — 7,000 square feet and above — in recent months raises questions about whether these new stores are economically viable,” the report said. “Big does not necessarily constitute beautiful in this particular industry.”
The report stated concern that these shopping temples — such as the new 21,000-square-foot Prada store in SoHo, designed by architect Rem Koolhaas — will hang like an albatross around luxury companies’ necks in coming years.
Prada’s SoHo unit, built at an estimated cost of $41 million, will be profitable quickly if all goes well. But Merrill Lynch said “it’s most likely to take four to five years.”
It said that giant stores “do not represent a natural extension” of the directly owned distribution mantra adopted over the last decade by the most successful luxury firms.
Whereas stores that are three to four times larger than normal stores can generate 100 percent more sales, Merrill Lynch said their rents are also three-to-four times higher. “So it isn’t always a successful formula,” it said. “Instead, we believe that in most cases, the additional risks they pose for the long term more than offset the short-term positives.”
Merrill argued that only a few so-called “super brands,” such as Giorgio Armani, Cartier, Gucci, Hermes and Louis Vuitton, have the depth of product — and enough hot accessories — to sustain a limited number of big stores in major cities.
Still, it said that major cities are quickly becoming saturated with luxury brands — thus limiting their growth potential. It pinned growth on the ability of luxury firms to enter early emerging markets like China and India.