Luxury goods purveyors are clinging to hopes of a 2nd-half rebound in fortunes.
When the refurbished Yves Saint Laurent Rive Gauche flagship opened on Fifth Avenue in New York last year, it brought together for the first time under one roof the Rive Gauche women’s, men’s and accessories collections and YSL fragrances and cosmetics. The 8,500-sq.-ft. store was also touted as the precursor to a rollout of 40 such stores worldwide over the next two years by the unit of Gucci Group.
Nearby and just up the avenue at 57th Street, Tiffany & Co. last November opened the first phase of a planned $50 million renovation of its 10-story flagship Art Deco building. And down at 52nd Street, Cartier has just unwrapped its latest multi-million-dollar redo.
These high-profile real estate moves along New York’s most fashionable street symbolize the importance luxury retailers are placing on building their brands and their image, in the hopes that some of that pixie dust will blow westward toward their stores in other parts of the country.
But New York has always been a different animal, the brand leader, and all of the fancy new façades don’t tell the whole story. Luxury leaders have been taking heavy axes to their costs after years of doling out billions to acquire new companies. But a healthier luxury segment could reap many potential rewards for all retailers, developers and investors. Luxury brands are major traffic drivers for other inline retailers, and elevate any property’s prestige when it comes to merchandising its tenant mix to consumers.
Much has happened to knock the high-end world off its pedestal in the past two years. The luxury niche seemed almost impervious to previous economic downturns and chugged merrily along in the late-1990s and into 2000, but was hit by a double-whammy in mid-2000 and 2001, first by the deepening worldwide recession and then by a dramatic drop in tourism in the wake of the 9/11 terrorist attacks.
After a sluggish start to 2002, luxury goods makers have been less expansion minded, particularly when it comes to opening new stores in their favorite venue outside New York — regional malls — but thankfully not that many new malls have been built lately, so opportunities have been scarce.
In general, the market for luxury goods is an expanding one — baby-boomers, who are getting older, more affluent and now account for 65% of total consumer spending in the United States according to the Census Bureau, are a prime target of the luxury makers.
Despite the recent doldrums, many luxury retailers are forecasting more opulent times ahead, with a turnaround in sales coming as early as the second half of this year.
"A lot of them are doing better than anticipated, but it is a holding pattern, and they are hoping for the rebound," says Andrew Goldberg, senior managing director in the retail group at New York-based Insignia/ESG. "A lot of them after September 11 had to redo all of their 2002 numbers, so you had some months that were much better than their newly revised pro formas, but now everybody is looking toward the second half to see what really ends up happening."
New York has an established track record as the luxury gateway to the rest of America, so what happens there is often a precursor for what developers and other retailers will be seeing on the streets and in the malls of Chicago, Dallas, Houston, Denver and Los Angeles.
"This is the financial and tourist capital on a year-round basis. If there’s a luxury retailer that wants to establish his brand and get better visibility, he’s got to have a store in New York," says Faith Consolo, vice chairman at New York-based Garrick-Aug Worldwide Ltd. and one of the leading brokers of luxury retail space in the city. "Even if he has a store in San Francisco or LA or Miami or Paris or London, he’s got to be in New York."
And many like to move around. Louis Vuitton, the top brand under the LVMH Moët Hennessy Louis Vuitton flag, the No. 1 luxury goods purveyor in the world, first moved from 57th Street between Madison and Park avenues to 54th and Fifth Avenue, and now to the former Warners Brothers store at 57th and Fifth for a scheduled 2003 opening.
"They just keep increasing their positioning and increasing the size of their store so that the world will recognize they are the luxury brand leader, at least of the LVMH group," says C. Bradley Mendelson, executive managing director of the retail group at Insignia/ESG.
Outside the Avenue
What luxury retailers do in their high-profile New York stores does set the general tone for the rest of the country, but New York is also a unique market, with super pricey real estate, high overhead costs and a mix of rich tourists and natives who demand the best of the best and the newest of the new.
"Doing retail business in Manhattan is not like doing it anywhere else in the country," says Elaine Francolino, vice president and senior credit officer with Moody’s Investors Service. "You may not get the profit levels that you could get if you put a store in Chicago or Birmingham, Ala., because there is so much more that’s difficult about operating stores here. There are a number of reasons why we say we will never make a judgment about a retailer’s total store base or operations based on what their Manhattan stores look like because that may not be indicative of what the chain looks like."
But trends that start in New York often find their way to malls in Atlanta, Dallas, etc. Luxury goods makers use malls as the next logical step to extend their brand by reaching a wider audience. Often when one luxury store signs a lease, it brings in a bevy of followers, so a common mall leasing practice is to lure a "lead" name like a Louis Vuitton with a package of lower rent and the promise to merchandise the mall and tenant mix in a certain upscale fashion.
Even the largest mall developers shop New York when they’re looking for hot new tenants. "The shopping center guys — the Simons and the Taubmans of the world — you know where they come to do their malls? They walk up and down Madison Avenue and Fifth," says Consolo.
One of the top developers of malls catering to luxury tenants is Bloomfield Hills, Mich.-based Taubman Centers Inc. Recent results for the mall real estate investment trust have reflected those of its luxury tenants. In first-quarter 2002, the company posted flat funds from operations (FFO), a common measure of REIT performance, after excluding a one-time positive item.
But David Weinert, group vice president of leasing at Taubman, believes malls are a strategic fit for luxury vendors. "New York is not the only avenue for luxury retailers to enter the States. We prospect New York for new retail on a regular basis. We also have people in Europe working with luxury retailers in an effort to bring new luxe tenants to the States in our shopping centers. These retailers have discovered that significant volumes and profits are attainable in the high-end shopping centers in the States."
Luxury retailers tend to flock to the same markets to be near their peers, which presents challenges to developers such as Taubman — including the specter of too much competition.
"While Taubman has continued to execute a high-end strategy, it has not always picked markets that need such a product," says David Fick, managing director of real estate securities research at Legg Mason Wood Walker in Baltimore. "For example, we understand that two of Taubman’s most recent projects, The Shops at Willow Bend [Dallas] and Dolphin Mall [Miami] are significantly underperforming retailer expectations. In both cases it appears that there is simply too much existing competition for mall shopper attention."
Weinert says Taubman has a competitive advantage when it comes to working with luxury retailers. But he admits, "Luxury sales, in general, were slightly off for 2001 in our centers. This year so far, the sales are basically flat. That being said, Louis Vuitton, for example, finished last year with double digit comp store increases at our Beverly Center in LA and Short Hills in New Jersey. There are other stories like this — to some degree it is about who is hot, and not only the economy."
Others argue that malls and luxury goods aren’t always the best mix for every luxury retailer, especially from a practical sales vs. cost standpoint.
"The luxury brands are withdrawing from a lot of secondary markets, a lot of the malls, because the sales really just weren’t there," says Insignia/ESG’s Mendelson. "The concept was always come to Fifth Avenue, open up a flagship and then all the luxury shopping center developers would come and offer you turnkey deals to be in their luxury development. A lot of those luxury developments didn’t pan out; some of them worked really well and some didn’t work at all. Malls by definition are pedestrian. There are very few top-shelf luxury-brand malls."
Consolo, too, isn’t convinced. "They [mall stores] are going to do sales but they’re not going to do the volume. They can do the volume out of one store in New York that they can in five mall stores. Even when you go to the other so-called luxury streets — Rodeo Drive, Worth Avenue, Michigan Avenue, Newberry Street — you do good volume but nowhere near what you do in New York."
That helps explain why luxury retailers are exploring urban-based options away from traditional malls, including more Main Street-type locations, such as the traditional Rodeo Drive, Fifth Avenue and Michigan Avenue locales. "They go where the wealthy shopper lives — whether it be Boca Raton or Palm Springs, they want a venue there," says Fick. "In most cases, the high-end shopper does not want to put up with the parking and inconvenience of the mass mall format, preferring the simple street-level entrance now being favored by many designer and boutique retailers."
Can luxury rebound?
The world’s two leading luxury-goods makers — Paris-based LVMH Moët Hennessy Louis Vuitton and Zug, Switzerland-based Richemont — suffered poor results in 2001 after posting sterling performances in 2000. Both went on shopping sprees in the late-1990s and then failed to get a firm grip on costs and maximize their economies of scale in the face of declining worldwide sales.
Today’s LVMH stable of brands includes Moët & Chandon, Louis Vuitton and Givenchy. Most recently, it finalized its acquisition of Donna Karan.
Richemont’s luxury brands include jewelers Cartier, Van Cleef & Arpels and Piaget, specialist watches Vacheron Constantin, IWC and Baume & Mercier, as well as Mont Blanc (writing instruments and accessories), Alfred Dunhill (fashions and accessories) and Purdey, a renowned gunmaker dating back to 1814 London.
Signs of a turnaround are evident at both companies. Thanks to better cost and inventory management, LVMH achieved decent results in the January through March 2002 quarter, posting overall sales of $2.6 billion, an 8% overall sales increase across its brands over first-quarter 2001 but a far cry from the heady days of 2000.
"I would attribute some of LVMH’s problems to being in an acquisition mode so quickly that integrating some of these companies was part of the problem," says Merrie Frankel, vice president and senior credit officer for real estate finance at Moody’s Investors Service in New York.
LVMH’s DFS (duty-free shops) division, which runs duty-free exchange shops around the world, was seriously damaged by the 9/11 attacks. But according to Jacques-Franck Dossin of Goldman Sachs equity research in London, LVMH has cut some $150 million out of DFS’ annual costs this year.
LVMH counts on fully 46% of its fashion and leather goods division sales coming from Japanese customers. At DFS, estimates peg the Japanese influence at a whopping 65%. Dossin estimates that Japanese travel was cut by 45% following September 11, but he expects decreased terrorism fears to boost sales at both DFS and Louis Vuitton in the second half of this year.
Hughes de La Presle, a credit analyst with Standard & Poor’s in London, agrees things are on the upswing. "We expect [LVMH’s] debt measures to show further significant improvement in 2003, as a result of management’s clear focus on reducing debt."
But Louis Vuitton, traditionally LVMH’s flagship brand, saw first-quarter sales rise a meager 2%. That’s in sharp contrast to 2001, when Vuitton was the only brand to post an income gain, with operating profit rising 9% to $1.15 billion. For the fiscal year ended March 31, 2002, Richemont saw sales increase by 5% to 3.8 billion euros, but its operating profits slipped by 32% as it struggled to get its expenses in order.
Clear winners?
Gucci Group, which successfully spurned a hostile takeover attempt by LVMH in 1999, has also been on the acquisition trail. Its Yves Saint Laurent fashion business, for which it paid a cool $1 billion in November 1999, is paying off handsomely. More recent acquisitions include jeweler Boucheron and fashion houses Sergio Rossi and Bottega Veneta.
Gucci’s first-quarter 2002 sales declined significantly and the company reaffirmed its forecast for a 3%-16% decline in earnings per share for 2002. But analysts are high on the company’s prospects. "Gucci continues to be our favorite stock among the luxury names," says Sagra Maceira de Rosen in JP Morgan’s equity research office in London.
Dana Telsey, a retail analyst with Bear Stearns in New York, is touting two high-end companies of her own — Coach Inc. and Tiffany & Co.
Coach designs, produces and markets accessories for men and women, including handbags, luggage, gloves, scarves, outerwear, business cases and travel accessories. With fewer than 200 stores in malls across the country, Telsey reasons it has room to grow the brand domestically. Much of its growth, though, may come from overseas markets, especially in the lucrative Far East. Telsey’s estimates for Coach earnings per share are $1.87 for 2002 and $2.17 for 2003.
Coach posted strong sales for its fiscal third quarter, ended March 31, 2002, with a 29% increase in net sales, to $161.9 million. Even better news — net income was up 89%, to $14.7 million.
"We’re confident that our momentum will continue through the seasons ahead," says Coach chairman and CEO Lew Frankfort. The brand’s new women’s footwear line now appearing in 23 U.S. department stores and free-standing Coach boutiques, is a particular standout, Frankfort says. By August, the shoes will roll out in 60 stores nationwide for the fall selling season.
"Given the continued strength of Coach’s domestic retail and department store businesses and international initiatives, we are confident that Coach can double its business over the next 4-5 years," says Robert Drbul with Lehman Brothers in New York.
Tiffany will rely on its strong brand image and new-product introductions to grow, even in tough times, says Telsey. "Since the U.S. accounts for approximately 60% of Tiffany’s annual sales, we believe that the company is highly leveraged to an economic recovery in its domestic market. The second half should also be helped by the introduction of a revitalized watch collection that will help to elevate the brand’s prestige in this key luxury goods product category."
Other firms, though, have less reason to be optimistic. Bulgari, the largest jeweler worldwide after Richemont and Tiffany, posted lower first-quarter 2002 sales, with operating and net profits down 40% and 60%, respectively. While Bulgari’s jewelry sales trended 17% higher, they weren’t enough to offset a 29% drop in watch sales.
"The key concern here is not industry trends, but the company’s control over cost," says Andrew Gowen with Lehman Brothers in London.
Getting their acts together
With larger conglomerates now tending to dominate the luxury brands category, a key to future growth will be integrating their acquisitions under the parent’s corporate umbrella, something that has so far defied achievability.
"They have certain advantages, but I’m not sure they have maximized the synergies yet," says Insignia/ESG’s Goldberg. "Each one of the brands is prestigious in their own right and have executives that run just that brand. What we were having was two subsidiaries from the same company bidding on the exact same space without the parent knowing it. When you realize this [acquisitions] has all happened in the last two years, it’s not all that long to begin getting this integrated. Not impairing the brand is the most important thing."
Retailers will also need to deploy real estate strategies that make the most sense for each brand name.
"These are companies selling a product, but they’re also brands selling an image. They’ve gotten to be major players in the New York real estate market," says Goldberg. "As great spaces came available, you had the next brand in their stable that needed to be reinvigorated to have a flagship presence."
A good example is Gucci, which snapped up space at the corner of 66th and Madison and debuted the first New York store for its Sergio Rossi division. "You have companies taking the real estate to lock up the identity and then figuring out which product they’re going to sell from it."
And despite the economic times, Consolo predicts that the next 3-6 months will see half a dozen new luxury brands in New York, each with the potential to roll out across the country.
"The shopping center guys have respect for the retailers in New York because they know it’s the most competitive, difficult market that there is. It sounds so cliché, but it’s really true — they know if they can do it here they can do it anywhere."
Viva Vacations
Luxury is thriving in America’s biggest tourist towns
Louis Vuitton loves Las Vegas. "Their [sales] numbers are unbelievable," says Maureen Crampton, marketing director at The Forum Shops at Caesars Palace. But apparently Louis Vuitton’s measly 2,000 sq. ft. isn’t enough — it’s moving into a new 7,000 sq. ft. home as part of a third phase expansion to the Forum Shops.
"They can only sell so many handbags and wallets in their little space. They’ll bring over a rolling rack [of clothes] and within moments the merchandise is gone," says Crampton.
Faith Consolo, vice chairman of Garrick-Aug in New York, says Louis Vuitton’s Vegas store rakes in around $20,000 per sq. ft.
Best known for its gambling venues, Vegas has seen an explosion in high-end retail space in the past three years.
Simon Property Group, which owns The Forum Shops, is now building a 200,000-sq.-ft. expansion of the Roman-themed center with prime Las Vegas Boulevard frontage and a 2004 completion.
Crampton estimates that 80% of her business comes from tourists. "You’re talking about a very affluent international customer who is very brand and quality conscious and can purchase in large quantities. They don’t buy one, they buy 10. They have disposable income."
The numbers bear this out — Crampton pegs The Forum Shops’ sales at $1,300 to $1,500 per sq. ft.
Some 2,300 miles to the east, in the tourist-centric mecca of Orlando, Fla., Nathan Forbes, partner in Southfield, Mich.-based The Forbes Co., is waiting for the wraps to come off the latest luxury baby he’s building in a joint venture with The Taubman Co. just minutes from Disney World — the Mall at Millenia. The 1.2 million-sq.-ft., 140-store mall is set to open on October 18, 2002, with tony tenants including Louis Vuitton, Burberry, Chanel and Tiffany & Co.
Forbes describes the mall as "Somerset Collection meets Short Hills." Forbes built the high-end Somerset Collection outside Detroit, with tenants such as Cartier and Gucci, while Taubman owns the luxury-minded Mall at Short Hills in Short Hills, N.J. "We felt if we could duplicate the tenant mix of Somerset and Short Hills, we’d have a helluva center," says Forbes.
Las Vegas’ success in luring luxury retailers hasn’t escaped his notice, either — the parallels between the Vegas and Orlando permanent and tourist markets are uncanny, from the 120,000-plus hotel rooms to the draw of international tourism.
Forbes wanted to bring international retailers to Orlando, but first he lured anchors new to the market, including Macy’s, Bloomingdale’s and Neiman-Marcus.
Forbes isn’t complaining about much these days — Mall at Millenia is 80% leased three months before opening. u