The Future Of Luxury Retail Includes Making It Harder To Find A Store

Changing consumer attitudes and rents outpacing sales have forced luxury retail to answer a simple question of survival: Where exactly is the high-end sweet spot? 

“What we’re seeing is some of the biggest luxury brands are shifting higher to make themselves more exclusive while others are playing to the lower ends of the luxury scale,” JLL President of Retail Advisory Services and Capital Markets Naveen Jaggi said. “That’s the secret. Do you play at the high end or at the delta of aspirational creeping into luxury?”

Given its wealthy customer base, luxury retail was previously seen as immune to the ups and downs of the economy. That conventional wisdom has been checked in recent years with several top players in the industry announcing closings. Michael Kors announced in 2017 it would close as many as 125 stores over two years because of increased competition from discount retailers. 

L Brands, the parent company of Fifth Avenue mainstay Henri Bendel, said it would shutter the entire 23-store luxury chain by the end of 2018 to focus resources on its other brands with better growth potential, like Victoria’s Secret, Pink and Bath & Body Works. 

Luxury brands that have survived closings and the so-called retail apocalypse are now mulling their future, and Jaggi said that might mean a reduced footprint or lower price point. French fashion house Hermès actively works at keeping the brand hot by making its merchandise hard to attain. Rather than place stores in secondary markets or have department store boutiques, Hermès relies on its roughly 300 primary-market stores worldwide and its website as the only official places to buy its goods.

“It’s very smart. They are absolutely convinced having a store everywhere is not the answer of the future,” Jaggi said. “Having it everywhere means everyone can have it. You factor in the exclusivity by not having an oversupply of stores.”

American fashion brand Michael Kors was operating 1,000 stores worldwide at the end of June, the company announced in an August earnings report. For more accessible luxury brands like Michael Kors and Tory Burch, Jaggi predicts a future where they adjust their business strategy to appeal to aspirational shoppers who want a luxury label but may not be able to afford it at full-retail prices.

“For that lower layer, we’re seeing some of those brands where they’re just making an outreach to a customer who may buy in if they just lower prices by 20% to 30%,” he said. 

Lowering costs or making a play for enhanced exclusivity are only parts of the luxury retail equation. New York City retail experts have watched as vacancy rates in the city’s best-known luxury corridors soared well into the double digits, something Compass Vice Chairman Robin Abrams attributes to a perfect storm of diminished sales and increasing costs driving tenants out.

The retail availability rate along the “Gold Coast” of Madison Avenue between 59th and 72nd streets in Manhattan is up 5.5% from last year to its current 28.4%, according to Cushman & Wakefield. The high availability on the tony retail stretch is pushing rents down nearly 15% from late 2017. That is presenting opportunities for retail tenants looking to return to or enter the market, Abrams said.

“Renters are believing it’s an opportunistic time where they can lock into long-term deals,” she said. “We’re seeing a lot of tenants that have held back re-engage and look at the market.”

With active tenants pondering a return to places like Madison Avenue, Abrams and Cushman & Wakefield Senior Director Michael Azarian have both noticed changes in how leases are inked. While there were more as-is deals signed in the past without tenant improvement allowances offered, building owners today are trying to woo tenants with sizable improvement allowances that keep build-out costs lower for the retailer. 

Other landlords offer one-year leases or short-term leases with a long-term option. 

“We kind of joke around and say short-term is the new long-term,” Azarian said. 

Retailers are further protecting themselves by making sure leases have a kick-out clause that enables them to terminate a lease if sales aren’t living up to expectations, something Abrams said is becoming the new normal with leases.

“We probably didn’t have these conversations before,” she said. “Landlords are realizing you can’t assume even if you get an enormous signature, that company is going to be in business.”

Despite the heightened caution in the luxury sector, those involved in signing deals say it is still a safe place to do business. O’Connor Capital Partners Senior Vice President Francis Scire has over 25 years of retail real estate experience, including a decade at Simon Property Group as a leasing and luxury accounts vice president. 

O’Connor Capital’s luxury retail holdings include Carmel Plaza in Carmel, California, Canal Place in downtown New Orleans and The Esplanade in Palm Beach. Luxury retailers are posting strong numbers at all three, including to the point where Louis Vuitton is breaking away from a boutique it operates within a Saks Fifth Avenue at Canal Place and into its own center at the same mall. 

While luxury retailers may face rental headwinds on places like Madison Avenue, Scire thinks the sector is still one of the best to operate in for retail — particularly in the face of online competition. 

“When we’re talking about spending $8K on a bag, I don’t think you’re buying it online,” he said. “Part of it is going there and being in the store. The luxury experience is just that: an experience.”