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Is Luxury Retail in Trouble?

Ian Ritter
Ian Ritter
Freelance Writer, VTS

It wasn’t long ago that retail observers were lauding luxury stores’ resilience during and following the recession. As recent as 2012, many luxury stalwarts were posting very strong sales in the United States.

But there is fear the tide could be turning for luxury retailers.Some commercial real estate and retail experts predict there could be a slew of upscale store closings in the near future. Andy Grasier of A&G Realty Partners, a retail-disposition firm, said that the deep discounting advertised by some of the luxury players is a bad sign, and the shutting of locations is likely to follow.

What’s causing the demise?

There are a few reasons for the changing sentiment around luxury brands. One of the biggest problems is a deterioration of luxury customer service from years past. If one is going to drop thousands of dollars on an article of clothing or jewelry, they probably want a bit of pampering.

The ever-important millennial customers are reportedly also not big on luxury retail compared to past generations. This age group is more focused on spending its disposable income in experiential venues, such as restaurants and bars, cinemas, high-end grocers with cooking classes, and other businesses that transcend physical goods.

And like other types of retail, luxury stores are facing competition from online retailers. These upscale brands are said to have been late to the game in selling their wares on the internet, under the assumption that their products are immune to online purchasing. Chanel, for example, only just started selling on the Internet last year.

Plus, we are now in a world where people don’t just shop at one type of store. An upscale consumer is likely to split their time and dollars between, say, Burberry, Target and a fast-fashion store, such as Zara.

Many U.S.-based luxury retailers are having issues

Ironically, many of these luxury stores are being hurt by a strong dollar, as other international economies are waning. A big chunk of the sales that were collected by upscale stores in the United States in recent years were due to a weak dollar, and tourists from Europe and Asia would flock the New York City and other major metro areas to shop and take advantage of low prices.

Not anymore. As those economies have deflated, so has the number of tourists coming here who are spending money at high-end shops. Tiffany, for example, had underwhelming holiday sales. The jewelry retailer saw same-store sales drop eight percent over the same period in 2014.

Accessories retailer Coach has already closed dozens of U.S. stores as part of an ongoing restructuring. Coach’s most recent quarterly report showed a seven-percent sales slide at its North American stores, while same-store sales dropped four percent, over a 22-percent decline during the same year-ago period.

The big three luxury U.S. department-store companies, Neiman Marcus, Nordstrom and Saks Inc., are all hanging in there compared to their lower-priced competitors, such as Macy’s. However, this isn’t due to strong performances at it their full-line stores, which have seen sales declines at all three chains in recent quarters.

However, all three have a strategy to combat lagging sales with their own off-price chains: Neiman’s Last Call, Nordstrom Rack and SaksOFF5th. All three are experiencing strong sales and expanding store counts. Nordstrom is especially ambitious, with plans to have 300 Nordstrom Racks by 2020 — the retailer now operates about 200.

A question some are asking, though, is: Are these upscale chains diluting their luxury reputations by opening discount stores?

Despite all of this, luxury is not dead. High-income consumers will always shop for the items that the Pradas and Tiffanys of the world sell. But these illustrious brands will have to adapt to a rapidly changing retail environment just like every other company in the industry.

Ian Ritter
Freelance Writer | VTS
Ian Ritter
Ian Ritter is a veteran business journalist who has covered the retail and commercial real estate industries for more than a decade. He has held high-level editorial positions at GlobeSt.com and was formerly an editor at the International Council of Shopping Centers magazine SCT. He is a regular contributor to VTS' blog and is also online content manager for the engineering firm GRS Group's blog. Over his career, Ritter has written for several publications and holds a Master's degree in Journalism from Columbia University.
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