• Americas

Retail Newsline: The Race to the Bottom Dilemma for Upscale Brands

By Garrick Brown, Vice President of Retail Research, Americas

First off, if you want to check out the webinar I gave a couple of weeks ago on the current wave of closures that has hung a black cloud over the entire sector, you can check it out by clicking here.

That said, one of the articles I thought of great import this week was something the Robin Report ran with yesterday… it is their interview with Neiman Marcus CEO Karen Katz on the future of luxury retail.  In it she talks about many of the topics we kick around here… experiential retail, for example.  But she also talks about “casual luxury” or athleisure as a driver.  I agree with that take but I also find it interesting how in recent weeks, new Macy’s CEO Jeff Gennette has also chimed in on the future ahead for his department store chain where the more mid-market giant is looking to take on the off-price world head-on by expanding Macy’s Backstage.

Now both are obviously coming from different places in the department store sector, but one thing I find interesting that not a lot of people are talking about is the future of brands within department stores.  No doubt, JC Penney launching in-store Sephora shops is one of the great turnaround stories of our challenging age. But this is almost a no brainer.  The cosmetics and beauty category is on fire with Sephora and ULTA both in aggressive growth mode and nailing it when it comes to generating sales, foot traffic and connecting with consumers.

There remains a lot of speculation about what mid-priced players in the department store world can do in terms of other store within store concepts, particularly when it comes to apparel brands with high levels of consumer appeal. Of course, one of the brands that had employed a strategy of relying heavily on sales via department stores has been Kate Spade.  That reliance had not been serving them all that well over the last couple of years and is likely one of the factors behind their sale this week for $2.4 billion to Coach.

Whether or not the Kate Spade brand continues to rely heavily on placement in department stores and other outlets under Coach ownership going forward remains a big question mark, but it does beg a deeper question and that is whether or not higher end or luxury brands are going to continue to benefit from such partnerships going forward.

Certainly much of this is going to depend on the individual brands themselves and their partnerships with specific retailers, but there is a real problem here for upscale brands.  That problem is that throughout the apparel and department store world mid-price point retailers have this huge conundrum.  The only way to compete with pure play eCommerce players in terms of sheer convenience is through building and improving upon one’s own newCommerce capabilities.  That’s just a fact…the good news is players like Kohl’s, Macy’s and JC Penney are sinking much of the savings they will realize by closing underperforming bricks and mortar stores into building and improving upon their infrastructure for eCommerce fulfillment.  They may be slightly behind the curve, but they are heading in the right direction.  Still, it’s not enough to prevent Amazon from surpassing Macy’s this year as the nation’s largest apparel retailer.

But these players are also being assailed by the off-price players and the discounters.  In terms of sheer pricing, it is a monumental challenge for many of the concepts in the middle (particularly the smaller chains with less buying power) to compete in this arena.  Clearly, Macy’s is looking to try… but it begs the question as to their future when it comes to full-price apparel.

This leaves the only place for these retailers to compete as being in the experiential space.  Which some will manage to do and many others simply won’t.  The sad reality is there is no room for mediocrity in retail anymore, whether we are talking about retailers, concepts or properties.  You simply have to give a real reason for consumers to come into your stores today and it starts with engaging them.  But we are dealing with a large and bloated middle where many concepts have expanded into this space over the last 25 years where many chains simply have not been able to clearly define themselves or separate themselves from the competition.

Meanwhile, this onslaught from the off-price giants like TJ Maxx, Burlington, Ross, Marshall’s, et al, continues unabated.  The race to the bottom with discounting still shows no signs of going away. It may have begun in the aftermath of the 2008 Recession, but the fact is that American consumers went frugal and they didn’t come back.  We now have the lowest unemployment in a decade, real upward wage pressures across the board (going on two years in a row), consumers with less much less debt than what they had at the peak of the last cycle, more cash on hand thanks to cheaper gas and even the strongest consumer confidence ratings of the past ten years.  But outside of the pure luxury shopper, they simply are not spending for full price.

There are obvious exceptions… mostly among what I call the tenant elite… Nike, Apple, Eataly I see as the trifecta in this category with a few other very strong performers behind them. I see a number of athleisure players creeping into this territory as well.  Certainly lululemon remains a strong player as well as its clicks-to-bricks competitor Kate Hudson’s Fabletics. And then there are the luxury giants, from Louis Vuitton and Ferragamo to Michael Kors and a slew of others.

Nearly all of these brands have a strong following and while the pool of aspirational shoppers in the middle may have declined over the past few years, these concepts still nail it with their core luxury consumer. But in addition to their own direct-to-consumer retail stores, nearly all of these players has either heavily relied on wholesale divisions to place goods in department stores or other boutiques as part of their overall strategy or they have relied on a heavy outlet store presence to grow their brands over the past few years.

The question comes down to this, if most of the market is going to remain in race to the bottom discounting mode, will upscale brands increasingly risk hurting their own cache by operating in this space. This is a serious challenge for everyone operating in this space.  Certainly you can generate a whole lot of sales if you are willing to have a few of your lines ready for discount pricing whether we are talking about wholesaling to other retailers, store-within-store concepts or even opening more of your own branded outlet stores.  But at what point are you simply training your core consumers to never pay full price again.

Certainly what happens with Kate Spade may be a bellwether of what is to come. One could argue that Coach has endured its share of challenges with this issue as the chain has added more and more outlet stores over the years. The same could be said of Guess, Ralph Lauren and more than a dozen other retailers.  One could make the argument that this is where that middle class aspirational shopper went and they would largely be right… but is there a point where it will make sense for some iconic brands to simply leave this business on the table to protect the value of the brand itself?  I don’t have an answer to that one yet, though I am trying to figure one out.

There will no doubt be a lot of experimentation ahead as iconic brands look to protect the value of those brands while trying not to leave too much business on the table from the discount world if they can avoid it. But these moves are going to have serious consequences for retail real estate.  Could it mean greater challenges for the department stores? Perhaps, or maybe this is where we see upscale and luxury players experimenting (and possibly finding the answer) via tiered product lines and pricing?  Could this mean that suddenly a lot of brands back out of a lot of wholesaling deals and suddenly use current real estate conditions that favor them to expand their direct-to consumer approach (IE their own stores where they exclusively control the price, the brand image and building on the experience)?  Could be?  Or maybe not.  Regardless, look for a whole lot of changes in this space ahead.

By the way, here are some links you might find useful…

Cushman & Wakefield’s Q1 2017 USA National Shopping Center Report.

Cushman & Wakefield’s Global Q1 2017 MarketBeat Reports can be accessed by clicking here.

Our Chief Economist and Director of Global Research, Kevin Thorpe, just released an extremely insightful look at Trump: The First 100 Days. This piece looks at different policy proposals from the new administration and their potential impact on commercial real estate.

Our Bricks vs. Clicks Webcast Series Part I and II explores the impact of the 2016 holiday shopping season and eCommerce on supply chain and bricks-and-mortar retail. Bricks vs. Clicks reviews and further analyzes relevant data points, shopping trends and effects on the industry and its consumers in 2017.

Our Main Streets across the World Report tracks high street retail around the world and breaks out the globe’s premier shopping districts by continent and average asking rent.

2016 North American Retailer and Restaurant Expansion Guide

Cool Streets of North America Report and accompanying video series.

 

This post is commentary from the latest weekly edition of our Cushman & Wakefield Retail Newsline, which you can subscribe to for free by e-mailing garrick.brown@cushwake.com.

garrick-brownGarrick serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.

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