Retailers Invest in Showy Flagships as Market Offers OpportunityNov 15, 2011
Recent announcements by retailers as disparate as Uniqlo, Century 21 and Macy’s about launching new mega-stores or significantly expanding existing stores in New York City seem to go against the current trend of cutting back on store footprints.
When everyone in the retailing universe is trying to keep down real estate costs and consumers are holding on to their discretionary income, why would firms invest millions of dollars in huge units on some of the most expensive streets in the world?
The answer is brand-building.
For most retailers that open over-sized stores on major urban thoroughfares, the stores likely won’t reflect a portfolio-wide strategy, says Jeff Green, president of Jeff Green Partners, a Phoenix-based real estate consulting firm. Instead, such stores are meant to serve as flagship locations—showcase stores in areas that benefit from high shopper traffic and tourist counts that can both give customers a taste of what the brand is about and provide a testing ground for new products.
Macy’s Inc., for example, plans to spend $400 million over the next four years to add 100,000 sq. ft. to its already 1-million-sq.-ft.-plus store at Herald Square in New York City, as well as renovating the space and expanding certain departments. But the massive undertaking will likely be limited to the New York store, according to company spokesperson Jim Sluzewski.
“Herald Square is quite a unique store; it has more traffic and more size and space than any other [Macy’s] location,” Sluzewki says. “We really wanted to create an environment in Herald Square that is unique to the setting. It’s a top tourist attraction and really is a beacon for shoppers from around the world.”
Another New York staple, Century 21 department store, has recently asked the city for approval to expand its 120,000-sq.-ft. store in downtown Manhattan by more than 76,000 sq. ft.
“They are a huge destination,” says Robin Abrams, principal and executive vice president with The Lansco Corp., a New York City-based real estate services firm. The downtown store “is actually in a lot of tour books and is known as a great destination retailer.”
Brand-building is also the likely reason for Uniqlo opening its two larger-than-life stores on Fifth Avenue and 34th Street, which together total 153,000 sq. ft. of space. Historically, Uniqlo stores have averaged between 8,000 sq. ft. and 10,000 sq. ft. in size. The same purpose was served by Topshop opening a 60,000-sq.-ft. store in New York City’s Soho neighborhood a few years back when normally the chain’s stores average closer to 30,000- or 40,000 sq. ft., according to Green.
“The smart retailers are looking at a two-phased approach with their bricks-and-mortar” business, says Joe Brady, managing director of corporate retail solutions with Jones Lang LaSalle, a Chicago-based real estate services firm. “The first phase, where you see larger spaces happening, is really about brand-building experiences. They then look to augment the brand with points of distribution that won’t be as big. So you have your large flagships and then you have your smaller satellite stores.”
“And part of [the strategy] with flagships is execution: consumers want the retailtainment experience, where they can look, and touch, and feel the clothes. They want consumers feeling good about the brand in all senses.”
How does it work?
Retailers have to be careful about investing in flagship locations because those stores often end up as money losers. Because the goal is exposure to both local shoppers and international tourists, retailers are limited to a few key markets, with Fifth Avenue in New York City and Beverly Hills in Los Angeles being at the top of the list, according to Green. Some chains might also consider Michigan Avenue in Chicago and Union Square in San Francisco to be appropriate locations for flagships, Brady says.
Yet those areas boast some of the highest retail rents in the world.
In 2011, Fifth Avenue did in fact nab the honors for being the most expensive retail street in the world, at $2,250 per sq. ft., according to a report from brokerage firm Cushman & Wakefield.
Rodeo Drive in Los Angeles came in as the sixth most expensive street in the Americas, at $500 per sq. ft., followed by North Michigan Avenue in Chicago, at $450 per sq. ft., and Union Square in San Francisco, at $425 per sq. ft.
In the past, retailers opening flagship stores on those streets would write off a portion of their rents as marketing expenses, says Abrams.
But in the current market climate, few firms are willing to open unprofitable stores even in exchange for branding opportunities, she points out. Instead, what happened was that the drop-off in rental rates that occurred during the worst years of the downturn allowed some international retailers to close unheard of deals, and made landlords in swanky districts more open-minded about accepting “non-traditional” tenants.
About two years ago, rents on Madison Avenue in New York City, another major retail corridor, were as low as $600 per sq. ft., Abrams says. They are now back to $847 per sq. ft., according to Cushman & Wakefield, and may in some cases be as high as $1,000 sq. ft. in Abrams’ estimation.
“I think Uniqlo secured the space [on Fifth Avenue] when there were not that many retailers willing to make a big commitment,” she notes. “There were other tenants looking at that space and I do think it was an aggressive deal. But now I think it would be even pricier to lease the space they did than it was a year ago.”
What might also be helping some chains make the numbers pencil out on large flagship locations is the willingness to operate on multiple levels. Traditionally, retailers in the U.S. have been reluctant to expand beyond the ground floor. Abercrombie & Fitch was among the first apparel retailers to do so in 2005 with its 34,000-sq.-ft. flagship on Fifth Avenue. Once other chains saw the kind of volume Abercrombie was able to do with its multi-level store, many followed suit. Uniqlo’s new stores, for example, will be spread over three levels.
“Retailers are understanding that if you lay out appropriately and merchandise properly, you can have a flagship store that’s profitable,” Abrams says. “And they found they can reduce the rent by going multi-level.”