Luxury Retailers Sometimes Lose Money To Gain Cachet At Flagships

Luxury brands, once known for being stodgy and snooty, are now at the tip of the spear of innovation, finding ways to delight their customers while delivering that indelible feeling of exclusivity. 

Michael Hirschfeld, executive vice president of JLL’s national retail tenant services group, said luxury retailers want the same thing any retailer wants: shoppers through their doors with a desire for their brand. But they want a location that reflects the brand and gives customers a sense of being special because they buy there. The true luxury brands — Hermes, Chanel, LVMH and others — accomplish this feeling even before the customer is inside the shop through their marketing and the celebrities and events they promote or participate in.  

Creating that sense of exclusivity sometimes means strategically losing money.

Big, glossy flagship stores on brand-name streets are not necessarily moneymakers. Ira Cohen, vice president of real estate at Coach said retailers never open stores to lose money, but in some markets with very high rents but also very high foot traffic, companies sometimes assign a numerical value to that intangible quality of being in that spot, associated with other important luxury names.

Hirschfeld said flagships opened to raise a brand's profile can later be rationalized as good for marketing. The flagship of a new brand to market may only break even or lose a little money, but can have a significant halo effect for the company as its expands into other markets. The brand, if not well-known, makes itself more appealing with a Fifth Avenue, Madison Avenue or Rodeo Drive store. The flagship in this instance needs to be viewed in the lens of a long-term strategy.  

“But when Hermés opens a new flagship I am relatively confident it will almost always be profitable. Same for Chanel and Prada,” Hirschfeld said.

There is one place luxury brands do not compete: online.  

“While no merchant can ignore online I think the real luxury brands use their online presence less to sell goods and more to reinforce brand and image,” Hirschfeld said. “The shopper for a $30k limited edition Birkin is not looking to buy this online. They want the experience of shopping — whether in London, New York, Paris, Shanghai or any of the other gateway cities around the world. Hermés does not have online competition. Chanel couture fashion does not have online competition.”

Because luxury retailers do not count on online sales for their bottom line, the experience of the flagship store must be a sensory-thrilling, heart-grabbing experience. For Coach House, the new 20k SF, three-story flagship on Fifth Avenue, the experience begins on the sidewalk outside. Through the large window, shoppers can see a conveyor belt displaying all the leather handbags. Inside, a two-story dinosaur made of handbags greets customers.

Coach House is designed to tell the story of the brand as a 75-year-old fine leather house, Coach's Cohen said. The store has the entire Coach collection from women’s ready-to-wear to sunglasses and the iconic handbag charms that the company popularized in the early 2000s.   

All 400 Coach stores are undergoing a “modern luxury renovation,” Cohen said, further refining the modern appeal of the stores.

Ira Cohen will be speaking at Bisnow's East Coast retail event on April 4.