Luxury-Goods Makers Pay Millions to Build Megastores.
Egos Before Economics? The big guns of high fashion seem to be suffering from an edifice complex.
In the commercial equivalent of an arms race, European luxury-goods makers are now rushing to build ever bigger, ever more imposing stores. From Los Angeles to London to Tokyo, they're jostling for choice real estate, then erecting elaborate showcases, appointed with plenty of marble and designed by prominent architects such as Jacques Herzog and Pierre de Meuron.
The size of some might make Wal-Mart blush. In Milan, Giorgio Armani SpA has sunk 86 million euros into a three-level megastore that now hogs an entire city block in the Golden Triangle fashion district and resembles a miniature shopping mall. A street over, on Milan's busy Via Monte Napoleone, Gucci Group NV has plunked down 77 million euros for a new storefront. In Manhattan, Prada Holding BV is building a 2,000-square meter store dubbed the "Prada Guggenheim," while French conglomerate LVMH Moet-Hennessy Louis Vuitton SA has shelled outan estimated $200 million (235 million euros) for an 11-story building at the corner of Fifth Avenue and 57th Street, where Tiffany, Bergdorf Goodman and Bulgari meet. Insiders say the building – which most recently housed a massive Warner Bros. Studio store – will be turned into a multi-level flagship for Louis Vuitton.
Does this make financial sense? Nobody knows for sure, partly because these companies decline to disclose details on how much they're paying for the extravaganza. But this much seems clear: Some luxury-goods makers may be setting themselves up for an eventual fall at a time when consumer spending appears to be cooling.
Consider the costs. With so much competition for the prime spots, retail rents have soared to record-breaking levels in major cities. On Bond Street in London, the Burberry unit of Great Universal Stores PLC is paying GBP 1.5 million (2.5 million euros) in annual rent for the four-story big box it opened last August to sell its signature plaid clothing. In New York, Hermes International SCA has traded the low-key snob appeal of a boutique on 57th Street for a showcase twice its size in a five-story landmark building on Madison Avenue that both Donna Karan International and Tommy Hilfiger Corp. had vied for. After a $20 million overhaul, Hermes rents the building for an estimated $3.5 million a year. Chanel, which has long plied its $3,000 suits and $1,000 handbags from a small store on 57th Street, has opened a much bigger store in trendy Soho, a neighborhood known more for quirky boutiques.
"Everybody is overpaying," says Faith Hope Consolo, a New York real-estate agent with Garrick-Aug Associates. She estimates that retail rents on Madison Avenue, Fifth Avenue and Soho have as much as tripled in the past couple of years – meaning that many shops are paying more than $1 million apiece in annual rent.
"Very few have the capability of doing this," says Arnold Aronson, retail strategist at Kurt Salmon Associates who ran department-store chain Saks Fifth Avenue in the early 1990s. He sees the current building boom as a victory of pride over pure economics. "They're opening square footage as a representation of dominance more for ego than logic," he says from his office in New York.
The megastore strategy depends on hot-selling accessories, the bread and butter of luxury-goods makers. At Gucci, a full 80% of the $1.5 billion in sales from the label's core brand comes from handbags, leather goods, shoes and watches. Louis Vuitton's leather goods prop up the entire LVMH empire, accounting for 46% of LVMH's operating profits.
Yet the arms race continues apace, following its own inexorable logic. "There's always somebody waiting in line to outbid and steal a prime a location away from one of its rivals," says Joel Isaacs, a New York real estate broker specializing in fashion companies.
Some brands have already gotten burned by building superstores. Last year, Tommy Hilfiger was forced to shutter two relatively new gigantic flagships, one in London and one on Rodeo Drive in Beverly Hills. The two stores together cost $30 million, but they couldn't be justified after the sportswear maker suffered a sharp drop in earnings in 1999.
When Donna Karan's three-story DKNY flagship – complete with juice bar – opened on Madison Avenue in 1999, sales started out "well above planned," the company said. But 12 months later, the company had to report that sales had slipped into a "single digit" decline. Undeterred, Donna Karan (now buoyed with LVMH backing), is sallying forth with two more big stores due to open in New York this August.