LONDON, United Kingdom — From the mid-1990s and through the aughts, luxury brands opened an avalanche of new stores as fast as their cash flow would allow, as they raced to tap into the newly minted millionaires in emerging economies from India to Brazil. It was nothing short of a store-opening spree.
China, in particular, was the scene of a giant land grab, as the nation of over a billion people rapidly rose from a niche luxury market to become the world’s largest luxury consumer by 2012. It was a welcome driver of growth following the global financial crisis in 2008. Indeed, the pace of China openings was so aggressive that, in just eight months in 2010, 15 of the world’s top luxury brands, including Burberry, Louis Vuitton and Gucci opened over 80 stores. By 2015, the twenty largest luxury brands in China had 1,320 stores.
But the store opening spree couldn’t last. The thinking was “if one store is good, then six stores is better, but they found that isn’t the case,” Andrew Phipps, head of retail research at property consulting firm CBRE, tells BoF. “In Asian markets, in particular, luxury brands have been surprised by how the customer operates, especially in Hong Kong and China. You don’t need six or seven Armani stores, people will travel to get to luxury brands.” What’s more, starting in 2013, luxury sales growth began to slow. The personal luxury goods market — worth $293 billion — was flat last year, according to Bain & Company, which said this state of affairs represents "a new normal" of modest growth rates.
Now, for the first time ever, global net luxury store growth in the 12 months through July 2017 was negative with more closures than openings, according to newly released data from Bernstein, a research and brokerage firm, which based its assessment on an index of around 7000 stores across 36 major luxury brands.
China alone had 62 net closures. While there is no doubting the strength of the Chinese luxury consumer — the biggest luxury goods spenders globally who account for 30 percent of the market — they do a large portion of their shopping overseas, leaving some local stores underproductive. “There is a real passion and desire for Chinese consumers to spend on luxury near to the heritage of the brand. They would much rather buy a Prada bag in Milan, its part of the story of the brand, ‘I bought it on my trip to Europe rather than a mall in Shenzhen,’” Phipps says.
There is also the issue of price differential, with luxury goods still more expensive in China due to a mix of higher taxation and rents, as well as deliberate efforts to keep Chinese prices high. Chinese customers are also becoming more sophisticated, seeking out more niche brands over luxury megabrand stalwarts and increasingly shopping online.
But China isn’t the only country where brands are trimming their store networks. There are also declines in Europe, Asia-Pacific and the Rest of the world, as defined by Bernstein. Some luxury stores are being opened and refurbished but even more stores are being closed. While there was some “modest growth” in the Americas with 16 net openings, Bernstein doesn’t expect this to continue as President Trumps’ mooted tax cuts fail to materialise and currency volatility impacts tourist flows. Japan appears to be an exception: there was some growth focused in tourist cities driven in part by Chinese visitors, with 6 net openings.
While a global slowdown in the luxury market is a clear contributor to these shifts, another key factor is the global growth of online shopping. Bain says online luxury sales have grown nearly twentyfold since 2003, and now account for 8 percent share of the luxury market. That is predicted to reach 25 percent by 2025, Bain forecasts.
Luxury brands... will be more selective in store openings going forward.
“All the luxury brands are developing a multichannel approach,” says Mario Ortelli, the report’s author and head of the luxury good sector at Sanford C. Bernstein. “And I expect that they will be more selective in store openings going forward and they will continue closing marginal stores given the possibility to serve their clients also through their e-boutiques”.
“These store networks will have a mix of flagship stores, aimed also at promoting the image of the brand, and stores with high productivity in high traffic locations.” Other stores with lower productivity and less importance to brand image “will be progressively closed. In fact, the major part of the sales lost in those ‘marginal stores’ can be successfully recovered in other stores of the retail network or through the e-boutique, resulting also in an improvement of the profitability of the brand,” says Ortelli.
Another growth area is off-price, though that wasn’t included in Bernstein’s report. It represents 11 percent of the market for personal luxury goods, Bain estimates. That is almost double the value of three years earlier. The growth of Saks Off Fifth, Nordstrom Rack and Value Retail, the owner of 11 outlet malls including Bicester Village in the UK and Shanghai Village in China, are a testament to this.
Learning the Hard Way
One brand to learn the hard way was Dunhill, who went from 192 stores in 2016 to 99 stores a year later. The British men’s luxury goods label who started 125 years ago selling accessories for the newly launched motor car and now offers luxury pens, leather wallets and menswear like a Chesterfield cashmere double-breasted coat for $1,995, was one of the earlier luxury brands in China, but it over-expanded and ignored e-commerce. Last year the company admitted it was underperforming and launched a strategic review.
Dunhill was “becoming a highly embarrassing thing for me on a personal level,” Richemont chairman Johann Rupert conceded in May. “I’m being mocked at my board by a bunch of good friends of mine, who are explaining to me that, ‘When is this thing going to be fixed?’” he said. So the brand set about drastically cutting stores: 93 in total including concession spaces and its entire 42-franchise operation in China.
Today, Dunhill is limiting its store portfolio to standalones in major fashion capitals supported by an online offering and some concession space.
“The entire network is under review. A lot of our stores are too small so we’re upsizing and re-purposing them,” says Andrew Maag, Dunhill chief executive. While the brand was “overdone and overpenetrated” in China, Dunhill also closed stores in “non-important cities that weren’t relevant”, Maag says. Now while he would like the stores to be about 30 percent bigger in key capital cities and flagship markets where you have the right demographics like Shanghai, Beijing, London, Paris, “when you get to B cities and C cities that’s where the world stores [online] pick up that business.”
Dunhill isn’t the only one taking drastic action to its portfolio. LVMH, the luxury conglomerate, said last year was the first year in over a decade that the total store count of its largest fashion and leather goods division declined: from 1,566 in 2015 to 1,508 in 2016. It follows over a decade of steady store openings across its brands from Louis Vuitton to Fendi from 954 stores in 2006 to 1,246 five years later.
Exceptions to the Rule
There are exceptions. “Growing” brands like Yves Saint Laurent, Moncler, Céline, Gucci and Harry Winston are making selective openings in underpenetrated markets with few closures, according to Bernstein, “For emerging brands of smaller size, we believe that they are still able to grow through retail expansion as they expand into untapped territories,” Ortelli says.
For Italian luxury outerwear brand Moncler, with a store network of 195 and 14 consecutive quarters of double-digit sales growth, the brand still has “great potential” to expand, says Remo Ruffini, Moncler chief executive. As well as key international cities, Moncler also wants “brand presence in the most important luxury shopping destinations in urban international capitals, travel retail and ski resorts.”
Clearly there are exceptions, but the trend of negative store growth is certain. So what does that mean for the wider luxury industry? While in the five years to 2015, new space accounted for about one third of incremental revenue growth at luxury brands, in the following five years to 2020, Bernstein estimates it will only drive a minimal part of revenue growth. The emphasis on new stores is clearly coming down. Brands will have to work harder to drive sales density in existing stores, hence all the restructuring. They will also have to capitalise on e-commerce to drive growth.
Recalibrating Store Formats
How brands adapt to online and slower growth is being played out in the type of stores that are being opened and closed. Gone are the days of growth in malls and department store space. The only format to show a net gain is standalone stores, typically larger format spaces in luxury capitals, Bernstein research shows. The global store count for department stores declined by 1.2 percent as brands sought to increase control of their brand, particularly in the discount-heavy US department stores. Malls fell further, by 1.5 percent, driven in part by political instability in the Middle East. Standalones showed the only growth of 1.2 percent.
Burberry is a case in point. It has been slashing doors at department store concessions in the US to maintain brand exclusivity and keep its offering in line with the higher standards of its retail locations. Bernstein research shows a net decline of 22 stores at the UK’s largest luxury brand. That’s the number of store openings versus closures. Miu Miu, Louis Vuitton, Omega and Hermès are also in this category of “restructuring” where a “significant amount of relocations and closures” highlights a change in retail strategy, Ortelli says. Both Louis Vuitton and Omega have been closing in Asia.
Even Hermès is fine-tuning its store portfolio of over 300 outlets. “For the past five years the number of Hermès stores throughout the world has remained stable,” Florian Craen, executive vice president of sales and distribution, tells BoF. “However, this network constantly evolves through progressive renovations and extensions as well as selective openings and closures,” as it increases the average size of its stores, Craen said. In the first half of the year the brand extended and renovated the Athens, Seoul and Biarritz stores.
Bigger is better appears to the new mantra for standalones. “Luxury brands are really focusing on having bigger, better experience stores in fewer locations, so this drive for the numbers in terms of stores doesn’t seem to be important any more,” CBRE’s Phipps said.
Other brands to alter their network include those in the “refining category”, where there are just a small number of closures and openings due to high quality of the store network, according to Bernstein research. Here brands include Balenciaga, Prada and Fendi alongside jewellery brands Cartier and Bulgari, who have restructured more heavily in the past but may well ramp up openings as the hard-luxury market improves.
Travel retail is a common thread amongst luxury stores. While Bernstein says the pace of growth in this area has stagnated as new terminals slow and the Chinese crackdown on daigou shoppers continues, airport stores still account for 6 percent of the luxury market, according to Bain.
So what does an optimal store portfolio look like? It will depend on the life cycle and momentum of each brand alongside coming to terms with the new normal of slower growth, growing digital disruption and demand for experience-led destination stores.
“I believe that global soft luxury brands operating in several product categories will aim at having a retail network of about 300 to 400 stores in key locations across the world seamlessly integrated with their digital marketing e-commerce platform,” Ortelli says. “Those brands with a well-balanced geographic store network and a seamless omnichannel approach will have a competitive advantage.”