MILAN — Facing saturation in international markets as well as a slowdown in China, large brands have few opportunities for pushing new geographic frontiers to find growth.
But while the overall picture is challenging, emerging luxury brands and the Americas represent a couple of bright spots for retail sales growth, according to recently published research by Bernstein and the Boston Consulting Group.
In “Luxury Goods ‘Store Wars’ 2016 — A Shift in Focus From Expansion to Profitability,” the authors point out how “emerging brands” — such as Fendi, Céline, YSL and Balenciaga, among others – “are still underpenetrated and have opportunities for profitable growth through new space.” Unlike what the authors call “megabrands” — the likes of Louis Vuitton, Gucci, Hermès, Burberry and Prada, for example — whose retail expansion has slowed and in some cases reversed, emerging brands “still have opportunity to grow store count,” according to the joint research, whose findings are based on a database updated annually (most recently in July 2016) that indexes some 7,000 stores across 36 luxury brands.
Related Articles
Retail’s prospects, however, remain rough: “What we’re seeing is that retail — which is the largest sales channel for the large luxury goods maisons — is losing steam after 10 years of solid growth, especially because of the slowdown in China,” Federico Bonelli, a principal at BCG in Milan, said. “We are in a phase of portfolio rationalization: over the past three years we have gone from a situation where for every two new stores opened one was closed to a situation where we are almost one for one: for every 10 stores opened, nine are closed. In more mature markets we are looking at a situation of net closings.”
You May Also Like
From a geographic perspective, this phenomenon is especially true in the more mature markets of Western Europe and Japan. And while Americas was the only region in 2016 to have store count growth greater than one percent — with a three percent increase in the number of stores year-over-year — the situation is not rosy: the “Store Wars” authors note that a downturn in tourist spending is expected to dampen luxury brands’ retail expansion plans as well as sales growth this year.
In light of portfolio rationalization, brands can take a number of actions to boost the performance of their existing networks. Renewing their stores’ looks, aligning them better with their customers’ perceptions of the brand, is one key measure, Bonelli tells WWD. Citing BCG research on 15 big French and Italian luxury goods makers, Bonelli says that brands have gone from renewing store concepts every four to five years to renewing them every seven to eight. “With markets slowing, brands are reducing capex, extending the average life of their investments. This is leading to a luxury footprint which is rather old.” Of the 15 brands analyzed, only 40 percent of their stores have an average age of five years or less. Another 40 percent of stores are on average five to 10 years old and the remaining 20 percent is more than 10 years old. “Over the coming years, a large part of retail networks need to be renewed.” Making the box look pretty is crucial, for the majority of sales growth in the foreseeable future is going to come from like-for-like, so unless stores attract buyers, sales (and store profitability) will suffer. Here geography is telling: according to Bonelli, the largest share of the oldest 20 percent of stores is in Japan (some 25 percent of the total), followed by Western Europe (20 percent) and the U.S. (about 10-12 percent).
Face lifts can do wonders to brands’ shops: by way of example, Bonelli cites a luxury brand whose Japanese stores were doing badly until they refurbished their Tokyo flagship: “Store traffic doubled and conversion increased by five percent,” Bonelli explains, adding that the brand, which has some 50 stores in Japan, is now rolling out the new concept to high potential stores throughout the country.
Meanwhile, the “Store Wars” research offers another pointer to brands looking to keep stores profitable: moving them to less expensive — but equally attractive — locations in cities where they already have shops.
Citing Cushman and Wakefield data on rents at top high street locations, the report points out that in cities like New York and Milan there are significant differences in rental costs between the costliest and the second- and third-costliest street locations. Brands could move, for example, from New York’s Upper Fifth Avenue to Lower Fifth Avenue (where the rents are 70 percent lower) or from Milan’s Via Montenapoleone to nearby Corso Vittorio Emanuele (where rents are 45 percent cheaper). This strategy, the authors write, represents “a significant opportunity to improve profits.”
There are also alternative locations that can become “luxury hubs” in their own right, as is the case with South Audley Street and Mount Street in London — which house brands including Balmain, Christian Louboutin, Balenciaga and Marni, among others — and New York’s SoHo district, where rents can be as much as 77 percent lower than on the Upper East Side and which hosts recent openings by brands including Christian Dior, Brunello Cucinelli, Vera Wang, Moncler and Prada. However, the authors warn: there is “significant first mover risk in developing a luxury store in a location without a history of being a luxury hub…There are few large brands that are able to anchor such new locations.” Here the opportunity is more for up-and-coming brands “with very good momentum [that] can also draw enough favor for a location for ‘niche’ luxury.”