When Libby Lassiter began developing the Tysons Galleria in McLean, Va., in 1988, she decided to try something rather novel in those days — anchoring a mall with luxury retailers.
Lassiter, then a development executive with Chicago-based General Growth Properties Inc. worked with her team to lure luxury retailers to the mall in a bid to draw in higher-income consumers willing to spend at any price. An older shopping center, known as Tysons I, was already operating across the street, featuring standard mall-anchor fare like Macy's and Lord & Taylor and she wanted to distinguish the new extension by attracting a different customer base.
Lassiter convinced retailers like Burberry, Chanel and Saks to open locations at the new center, now known in the area as Tysons II. It wasn't too long before she says they saw results. “We started going for the very, very high-end mix and sales rose exponentially.” She adds, “it was so worth it in the end because the strategy absolutely worked.”
Two decades later, the Tysons II blueprint of attracting luxury retailers to bring in high-end shoppers has been replicated throughout the country. Particularly in an uncertain economic environment, these retailers' ability to drive sales among consumers more able to weather economic storms has continued to keep developers calling. “Luxury has seen some very positive growth in the last few years and this is why we are seeing shopping centers upscaling the centers with higher-end stores,” says Erin Hershkowitz, spokesperson for ICSC.
These days — filled with dire warnings from economists who say the nation may already be in a recession marked by inflation and a weak housing market — the upscale market has continued to perform well. “The higher end is affected the least in the economy,” says Lassiter, who now works at Birmingham, Ala.-based Bayer Properties as executive vice president of retail development. But, Lassiter warns, the sector is by no means recession-proof and some luxury retailers are already feeling squeezed. “Have they been hit somewhat? Yes,” she says.
Certainly, for the first half of 2007, luxury retailers seemed immune to the woes of more mainstream retailers like Gap Inc. and J.C. Penney Co. Inc. Sales in the high-end segment continued to rise, according to data from the ICSC, which tracks sales in retailing sectors.
That is, until December, when same-store sales, or sales at stores open at least a year, began declining at luxury retailers. After rising during the prior 10 months, December same-store sales fell 1.1 percent in the luxury sector, according to the data. By February 2008, the sector's same-store sales were down 4.3 percent from last year.
“I think what happened is that after the credit crunch, October became a little soft, November was a little stronger, and then during the Christmas season, some sales began declining,” says Milton Pedraza, CEO of the New York-based Luxury Institute.
The more than $400 billion luxury market is a quirky one and not all high-end retailers are the same. For retailers that cater to the super-wealthy — those with a net worth of more than $10 million — sales continued to grow during the holiday season. Those consumers, Pedraza says, are “pretty resilient.” But for stores that served the millionaires still toiling in the mere seven figures or consumers making over $150,000 a year, sales started slipping and some retail analysts say it might take at least another year for them to get back on track.
Jay McIntosh, a director of consumer products at Ernst & Young, says the luxury market is fueled by two sets of consumers — the people who have a lot of money and are not affected by a slowdown in the economy and the less affluent who “trade up,” or buy products slightly outside of their price range. “What's happened over the past few months is that group of people that's been trading up has largely started trading down,” he says.
Michael Unger, principal at Archstone Consulting, based in Stamford, Conn., says true luxury retailers are Gucci, Prada and LVMH Group, which owns Louis Vuitton, Givenchy, Fendi and Marc Jacobs, among others. Near-luxury retailers, or what Unger calls the “new luxury” market, include Coach, Polo Ralph Lauren and even Starbucks. Near-luxury shoppers are known as “aspirational” consumers.
“They want to experience some of life's better products, so they don't mind spending $500 on a briefcase, which you can do with Coach, but you can't do with Prada,” says Unger. They do that spending mainly when times are good, jobs are secure and investments are growing. But when times are bad and the stock market declines, many stop overextending themselves.
At near-luxury companies with a strong base of customers who are considered affluent but not necessarily wealthy, sales are now waning and companies have had to scale back their earnings forecasts for the year. Tiffany & Co. based in New York and San Francisco-based Williams-Sonoma Inc., both cut their projections and London's Burberry PLC said it could fall short of its 2008 guidance.
New York City-based Coach Inc. reported a 1.1 percent decline in same-store sales during its second quarter — its first in 12 months at its more than 350 North American stores despite overall sales growth of 21 percent in its second quarter ended December 29, 2007.
In February, Dallas-based Neiman Marcus Group, saw its same-store sales fall a whopping 7.3 percent. Burt Tansky, chief executive of the Neiman Marcus Group — which operates both the Neiman Marcus chain and Bergdorf Goodman — told investors during a conference call that the company had anticipated stronger results, but sluggish sales left an abundance of stock on the shelves and racks that had to then be marked down. The prior month, the upscale retailer had offered an additional 25 percent off already-discounted designer merchandise.
During the call, Tansky stated while the company views its core customer as a traditional wealthy luxury shopper, it was still affected by a cutback in spending of its aspirational consumers. “Our sense is that the aspirational customer has pulled back.” Referring to its luxury customer base, Tansky said “downturns are merely a moment in time and do not signal a lifestyle change.” However, he added, “at the present time, the luxury customer has also adopted a more cautious stance.”
Not exactly currency you can take to the bank according to those who follow the luxury segment of the retail market. “What I would say is that we are a little less bullish on luxury than we were a year ago,” McIntosh says.
For those luxury retailers who are still performing well, some of the credit should be extended to foreign shoppers. Cuts in the interest rates, meant to boost U.S. economy, have weakened the value of the dollar, making goods sold stateside much more attractive to overseas bargain hunters. “You have people in Europe with pounds and euros to spend,” says Unger.
Europeans, Asians and Middle Easterners are among those foreign tourists jetting to the U.S. to capitalize on their stronger currency against the dollar. Those tourists are shopping at outlets, malls and designer boutiques for items that could be considered a steal in comparison to those bought in their own countries.
To satiate foreigners' appetites for its accessories, shoes and ready-to-wear collection, Unger notes that Amsterdam-based luxury retailer Gucci Group NV opened a second store in New York City this year on Fifth Avenue.
“For every [American] who won't go there, they will find a [European] who hops on a jet to spend 1,000 pounds or euros here,” Unger says.
U.S. retailers with overseas locations benefit too because when goods are purchased with foreign currency, that currency is then converted into U.S. dollars. That weaker dollar allows U.S. retailers to record higher sales.
The Big Apple
One of the locations most able to take advantage of an influx of foreign tourists is New York City, which is unlike any other in the world of retail. For example, Eric LeGoff, retail broker with New York's Cushman & Wakefield Inc., points to Gucci. While most retailers are watching the U.S. economy for signs of a recession, Gucci went ahead and opened another storefront in Manhattan. On its opening day, LeGoff estimates, approximately 6,000 people shopped the store. “That's an example luxury is still going to do well in this market,” he says.
For a luxury retailer, having a New York address is a must. “Every retailer wants to have signage on Fifth Avenue,” says Victoria Juharyan, a spokesperson for Winick Realty Group in New York. Cushman's LeGoff adds, “everybody wants to be here.”
Retailers covet the prestige of operating in New York City, and as they are cutting back on openings, they are more inclined to open new locations in the city rather than opening stores in markets hurt by the housing slowdown “Are they going to scale back in Arizona, in Florida? Yes, probably,” LeGoff says. Retailers “are going to be more selective about their real estate, not just jump at any opportunity.”
Shopping the market
New York isn't the only place retailers want to be. Lassiter says shopping malls and developments in smaller, second-tier markets are beginning to attract more luxury retailers, even as the economy struggles. Cities like Charlotte, N.C., Nashville and Birmingham, Ala., are increasingly attractive for retailers who cater to the wealthy. “What you're seeing for the first time are emerging markets able to land these luxury retailers,” says Lassiter. She notes that as luxury brands and retailers have branched out into smaller markets, they've seen some positive results. “I think they see tremendous potential.”
An example Lassiter points to in Jacksonville, Fla., is the three-year-old upscale lifestyle shopping center, St. John's Town Center, developed by Indianapolis-based Simon Property Group Inc. In 2007, a second phase opened housing several luxury retailers, including Louis Vuitton, Juicy Couture and Betsey Johnson. A Kate Spade boutique and a Cole Hahn store are both expected to open soon. At St. John's Town Center, whose customers are no strangers to imported luxury vehicles, Lexus drivers can have theirs cars valet parked free of charge. The 1.1-million-square-foot center has been able to attract such discerning retailers even without the draw of a luxury department store anchor — a sea change from just a few years ago when tony retailers relied on one to pull in wealthier consumers. Lassiter says these upscale projects are now luring those desired shoppers through designer boutiques and high-end restaurants (some with celebrity chefs).
While some U.S. retail markets may be doing well, many industry analysts say for retailers overall, 2008 could be a tough year. Pedraza, for example, says that as long as the real estate market is swooning, retailers may not rebound — that could take until 2009.
One analyst notes that factors on the horizon beyond the current economic slowdown will influence retailers' ability to weather the downturn. Pam Danziger, founder of Stevens, Pa.-based luxury market research firm Unity Marketing, says a change in political leadership may be the impetus for higher spending among luxury and near-luxury consumers. “We have a lack of confidence in the direction of the country as a whole,” Danziger says. “When we have new leadership, I think that's going to give a boost to luxury consumers.”
That would be just in time for retailers. “I think it's going to be flat” for much of the year, says Danziger. “It may come back by Christmas, which would be very positive.”
Elaine Misonzhnik contributed to this story.