Luxury Retailers Flourish, But Create Limited CRE Demand

Luxury Retailers Flourish, But Create Limited CRE Demand

Neiman Marcus, a retail name synonymous with luxury, is planning a $100-million IPO. The Dallas-based chain’s SEC filing points to increase of ultra-high-net-worth households in the United States and the increasing desire for luxury goods in markets like Asia and the Middle East as catalysts for its growth.

Since 2010, sales for Neiman Marcus Group have steadily increased. For the 13 weeks ended May 2, 2015, the company reported total revenues of $1.22 billion compared to $1.16 billion in the prior year. Comparable revenues increased 2.2 percent.

Neiman Marcus, which operates Last Call by Neiman Marcus, Bergdorf Goodman and MyTheresa.com, is often considered a proxy for luxury sector overall. The chain’s performance indicates strength in the luxury sector. However, that growth isn’t translating into a huge demand in retail real estate, says Nick Egelanian, president of Siteworks, a retail real estate consultant firm based in Annapolis, Md.

“I wouldn't say that any particular luxury brand is aggressively expanding its retail footprint, except perhaps for designer stores completely new to the market,” he notes. “Because the absolute size in households of the luxury market is small compared with the whole, luxury retailers are always constrained.”

Luxury brands more accessible

Personal luxury goods—the “core of the core” of luxury—continue to buoy the market, according to global consulting firm Bain & Co. The firm’s most recent Luxury Study reported that the overall market for personal luxury goods was on target to exceed $245 billion in 2014, triple its size 20 years ago. Demand from Chinese consumers, mature consumers in the United States and Japanese shoppers returning to luxury goods have all helped shore up growth.

Yet that growth is slowing: in 2013, luxury goods grew 7 percent, and in 2014, growth slowed to 5 percent at constant exchange rates. Bain contends that slower pace is more sustainable and reflects the “new normal” for luxury goods.

Luxury brands are no longer exclusive to the super-rich, according to The Nielsen Co.’s Luxury Retail Landscape report, released earlier this year. The research firm says the luxury retail market has gone mainstream, particularly in the U.S., where 33 percent of household are categorized as luxury consumers. 

In fact, three of the five consumer segments Nielsen has identified make luxury retail purchases. The firm says this purchasing behavior highlights the democratization occurring in the luxury sector and ease of access to the luxury goods. The two other consumer segments value and aspire to luxury, but are not likely to make luxury retail purchases. These aspirational consumers make up about 41 percent of U.S. households.

“In an effort to widen their nets, many luxury brands have made themselves and their products accessible to a broader portion of consumers, while many aspirational brands are honing in on exclusive luxury markets,” Nielsen reported. “Striking a balance between appealing to a broader audience without alienating the core customer base is essential to success. Luxury brands must also be careful not to shift the premium and exclusive perception of their brands too dramatically.”

U.S. remain largest luxury market

The U.S. remains the largest global market, bigger than the next four (China, France, Italy and Japan) combined, according to Bain. Moreover, the U.S. is continuing to grow rapidly, with estimated growth of 5 percent in 2014. Consider this: New York City alone is a bigger market for personal luxury goods than the second-largest country, Japan.

The Americas were the undisputed growth engine in 2014, delivering 6 percent growth at constant exchange rates, according to Bain. The firm contends that growth in the U.S. could have been even more robust if it hadn’t been for a harsh winter.

Neiman Marcus’ SEC filings shed light on importance of foreign markets. The retailer plans to use proceeds from the IPO to pay down debt, but more importantly, it indicated that it would pursue international opportunities more aggressively. Earlier this year, Neiman Marcus acquired MyTheresa.com and its flagship store in Munich, Germany.

“With the acquisition of mytheresa.com, Neiman Marcus Group takes yet another strategically significant step towards our long range international strategy to more broadly serve the affluent customer around the world,” said Karen Katz, president and CEO of Neiman Marcus Group, in a statement.

Bain’s luxury study says tourists are increasingly influencing the luxury market in the Americas. For example, Chinese consumers now represent the top and fastest-growing nationality for luxury, spending abroad more than three times what they spend locally.

Shifting distribution methods

Last year, retail channels grew 5 percent, according to Bain. Of that, 2 percent came from new-store openings and the remaining 3 percent came from like-for-like sales growth.

The consulting firm found that company-owned retail stores (as opposed to department stores, for example) continued to gain share relative to wholesale channels. From 2007 through 2014, the share of company-owned retail sales has gained 10 percentage points and now totals nearly one-third of the luxury-goods market.

When it comes to a physical shopping experience, consumers prefer a monobrand environment, which still makes up more than 50 percent of the market, according to Nielsen. Conversely, online, they love variety and assortment and prefer buying in a multibrand e-environment.

In the U.S., luxury retail brands aren’t moving in concert when it comes to their real estate strategies, according to Todd Siegel, first vice president in CBRE’s Chicago office.

As one of the foremost luxury retail leasing experts in the city, Siegel has a unique perspective on luxury retailers. He points to Christian Dior and Versace’s expansion in Chicago as examples of luxury retailers that are beefing up their presence in key markets. These two brands are building out larger flagship stores along Oak and Rush Streets.

However, many luxury brands are eschewing company-owned stores and choosing to establish branded shops in upscale department stores like Neiman Marcus and Barney’s, Siegel says. He blames exorbitant occupancy costs as the motivation for these decisions, estimating that luxury retailers are burdened with occupancy costs of 20 percent of more for “High Street” locations like those found in Boston, Chicago, Los Angeles and San Francisco.  

“This ‘store-within-a-store” model has found a lot of success in Europe,” he points out. “And it’s a model that U.S. department stores have used successfully in cosmetics.”

Neiman Marcus is adapting its store footprint to accommodate this new luxury brand distribution strategy. For example, it plans to open a flagship Neiman Marcus store on Manhattan’s flourishing west side at Hudson Yards. The 250,000-sq.-ft., three-level store, which marks the first for the brand in New York City, is scheduled to open in 2018.

Additionally, the chain plans to open a 100,000-sq.-ft. store in the redeveloped Roosevelt Field Mall in Long Island early next year. It also is investing millions in a comprehensive modernization of Bergdorf Goodman, a Neiman Marcus store on Long Island and a Last Call Studio Store in Brooklyn.

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