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Department Stores Battle for Manhattan

America’s luxury department stores are betting big on the buoyancy of the New York market. But is there space for everyone?
Manhattan | Source: Shutterstock
By
  • Lauren Sherman

NEW YORK, United States — Two down, two to go.

In February 2016, Barneys New York opened its 58,000-square-foot Chelsea flagship in the hopes of wooing the city's tech elite working just blocks away at companies like Google and IAC/InterActiveCorp. This past week, Saks Fifth Avenue made an even more aggressive move, cutting the ribbon on an 86,000-square-foot flagship in Brookfield Place, an upscale mall near the financial district. These two stalwarts of American luxury retail have also made significant upgrades to their existing New York locations, with Saks continuing its Fifth Avenue refresh through 2019. Bergdorf Goodman, too, opened its renovated main floor to the public on September 6, marking the latest step in a five-year overhaul.

But it's the coming of Neiman Marcus and Nordstrom — slated to open their first New York locations in 2018 and 2019, respectively — that will truly kick off a multi-sided battle for Manhattan. The Dallas-based Neiman Marcus will be joining the West Side's $20-billion-plus development Hudson Yards, where it will occupy more than 240,000 square feet of the 750,000 square feet of retail space plotted. Seattle's Nordstrom is heading to Midtown, where it will operate two locations: A $102.5 million, 285,000-square-foot store at 225 West 57th Street, as well as a 43,000-square-foot space located at 3 Columbus Circle.

Of course, all these new stores need shoppers. Is the New York opportunity big enough for the Big Five? And who — if anyone — will emerge victorious?

As consumers shift their spend away from department stores, these longstanding American institutions see the New York market as a welcome anomaly. “They’re looking for opportunities for expansion, and those have become a lot more limited across the country as a whole, as many of the traditional destinations have become a bit more patchy in terms of growth,” explains Neil Saunders, managing director at retail research firm Conlumino. “Somewhere like Manhattan is the exception rather than the rule. It has a great footfall and a very, very high spending level. And you can’t really call yourself a national department store without being present in New York.”

Tourism, foot traffic and local demand for luxury goods all contribute to the city’s status as a retail mecca. Households in the New York metropolitan area spend an average of $2,338 on apparel and services each year, significantly more than the national average of $1,673, according to the Bureau of Labor Statistics. (Their incomes are also higher, averaging $82,749 per household compared to $65,339 nationally.) What’s more, 56.5 million people (12 percent from abroad) visited New York City in 2014, contributing $41 billion to the local economy. Exposure to that many people offers unique marketing opportunity.

There is also a strong argument for having two significant locations here, as both high-net-worth residents and tourists inch further away from the Upper East Side and Fifth Avenue towards a resurgent downtown. "Barneys doesn't belong everywhere. It belongs in urban, sophisticated markets," Barneys New York chief executive Mark Lee told BoF in February, on the eve of the store's Chelsea opening. Out of the three New York City zip codes that appear on real-estate listings site Property Shark's 2016 ranking of the most expensive zip codes in the country, two are in Tribeca and one is in Battery Park City, the same neighborhood as Brookfield Place and, now, Saks. The median selling price for a home in Battery Park City's 10282 zip code is $2.3 million. Tribeca's 10007 clocks in at $2.8 million; nearby 10013 ranks highest in the city at $3.4 million.

"At this point, Manhattan is essentially two cities," says Mortimer Singer, chief executive of Marvin Traub Associates, a business development and strategy consultancy firm. "The stores need to be where the wealthy are living."

But while Manhattan remains immune to many of the problems plaguing traditional mall locations, there are other market headwinds that luxury retail players can't easily escape. "We don't travel to stores, we travel on the Internet," says fashion retail consultant Julie Gilhart. Visiting department stores was once the most convenient way to shop, allowing consumers to buy everything they needed under one roof. Today, nothing is more convenient than e-commerce, which enables consumers to instantly compare prices, place orders and have items speedily delivered to their homes from a wide range of sites, offering a large selection of inventory that challenges the power of the traditional department store bundle.

Retail veteran Andrea Weiss, founder of the consulting firm the O Alliance, offered a personal anecdote to illustrate the shift. After spying a pair of Stella McCartney jeans at Saks Fifth Avenue's midtown flagship during a walk-through with a client, she visited Saks.com to purchase them. They weren't listed on the site, so she made a special trip back to Saks a few days later, even though she had already found the jeans on luxury marketplace site Farfetch. By that time, the jeans had been pulled from the store. "The sales associate told me that they must have been returned to the vendor because they weren't selling well," Weiss says. "I told her, 'Okay, I'll just go on Farfetch.' She didn't blink an eye."

Weiss bought the $465 pair of jeans from a Spanish boutique that's part of Farfetch’s network of partners. Because it was her first purchase from the site, she received a 10 percent discount and free shipping. “Saks did me a huge favour by not being able to accommodate me, and Farfetch just found a new customer," she says.

To be fair, Saks Fifth Avenue and its competitors are continuously rolling out new initiatives in order to solve "connectivity" problems, as Weiss calls them. For one, Saks has implemented a programme whereby in-store associates take questions and requests from online shoppers, bridging the gap between physical and digital channels. "The customer starts shopping at Saks.com, but we don't want that shopping experience to finish when she turns her phone off," Saks Fifth Avenue president Marc Metrick told BoF in a recent interview. "We want to change that shopping experience when she enters the store. We're trying to break down the walls."

“If they do that, then they really have a shot,” Weiss says. “The luxury consumer has always been the most demanding, the least patient and arguably the most digitally savvy.”

As competition amongst department stores in Manhattan continues to grow, retailers are ramping up on exclusives on everything from colourways of specific products to entire collections. But while the most enticing exclusives have proven to work on customers, Saunders believes retailers — which must amplify their own brands in order to differentiate themselves — should put more effort into their private-label collections, which offer high margins. After all, as more brands decide to exit the wholesale market or at least dial back, these retailers may need to supplant the missing product. “American department stores are very bad at their own products, and okay at curating other people’s products,” he says. “They rely too much on third-party brands. In the old days, that worked because [department stores] were convenient. But that convenience has been undermined, and they haven’t really moved on.”

Another critical weapon in the arsenal, of course, is so-called retail entertainment. This is where Manhattan's well-funded department stores can easily excel, especially when it comes to dining. There's a reason that the restaurants at Barneys New York and Bergdorf Goodman are high performers, and that Saks Fifth Avenue has signed a deal to bring famed Parisian restaurant L'Avenue to its midtown location. "As retailing changes and the customer is often online, we want to build the dream at 58th and 5th," Bergdorf Goodman president Joshua Schulman told BoF in January. Saks at Brookfield Place is surrounded by dozens of upscale-casual restaurants like Blue Smoke and Blue Ribbon Sushi, and Neiman Marcus will share Hudson Yards with establishments from star chefs like Thomas Keller, José Andrés and Costas Spiliadis. "Retail theatre isn't a new concept," Singer says. "It's just been ignored for the past decade."

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