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The Business of Saving Barneys

Reviving the upscale department store chain will take more than a Kith-like remake.
Barneys New York | Source: Shutterstock
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NEW YORK, United States — The fate of Barneys New York will soon be revealed: October 22nd is the last day for potential acquirers to submit formal bids for the troubled department store, followed by an auction on October 24. Failure to secure a buyer would mean liquidation for Barneys, which filed for bankruptcy protection in August. But a consortium of retail executives, led by Sam Ben-Avraham, founder of the once-hot, now-shuttered Atrium and the successful streetwear mecca Kith's earliest investor, is currently in discussions to acquire the New York-based chain for $220 million, The Wall Street Journal reported last week.

Ben-Avraham partnered with Co-Founder Ronnie Fieg in 2011 to open the first two Kith outposts inside Atrium’s New York stores, and the investor’s understanding of Kith’s more curated approach makes him uniquely positioned to revamp Barneys. After all, it was more niche shops like Kith that put pressure on Barneys in the first place. Yet the ailing chain — which has also come under attack from online competitors and seen years of falling profits — will need more than a Kith-like remake to survive.

Here’s what Barneys’ new buyer — whoever it may ultimately be — needs to consider.

Renegotiate its Madison Avenue lease

The primary driver of Barneys’ bankruptcy is the 72 percent rent hike at its nine-story Madison Avenue store, from $16.2 million annually to $27.9 million, which went into effect in January. This was the result of an arbitration ruling after the store and its landlord, Ben Ashkenazy, failed to agree to the terms of a new lease. As part of bankruptcy protection, however, Barneys has the opportunity to reject an existing lease or renegotiate. Before developing any long-term strategy, Barneys’ new buyer must bring Ashkenazy to the table and strike a better deal. With plenty of vacant spaces in the surrounding neighbourhood and Ashkenazy's own interest in keeping at least the ground floor retail, this should be highly do-able. The retailer may also need to downsize its footprint. Does Barneys really need 275,000-square-feet of space? As retailers grow more nimble with inventory management, the answer is surely no.

Expand ‘The Drop’

Last year, Barneys partnered with Highsnobiety on “The Drop,” an event where shoppers had access to over 90 exclusive product drops, performances and installations throughout the New York and Beverly Hills stores. The Beverly Hills store generated $1.2 million in the span of a weekend and 18 percent of attendees were first-time customers, according to a July 2018 board meeting report. The success of the event suggests that Barneys has untapped potential to lean further into streetwear’s tried-and-true model of regularly “dropping” small collections on a regular basis in collaboration with different labels — something Ben-Avraham surely knows a thing or two about. The approach has worked for one-offs; now, it’s a matter of planning an entire strategy around regular product drops to continue driving younger shoppers into stores.

Rebuild relationships with young designers

Once upon a time, Barneys was known for its sharp edit of emerging labels, selling the likes of Alexander Wang and Proenza Schouler before they became staples in American fashion. Back then, a rack at Barneys meant future fame and popularity. Today, the chain isn’t as appealing for young designers, who would rather partner with e-commerce players like Net-a-Porter and MatchesFashion. But Barneys must do what it can to re-cultivate meaningful relationships with emerging labels, even if it means more lenient contract terms and guaranteed marketing support.

Invest in digital

Barneys leaned into its brick-and-mortar presence when many of its peers doubled down on digital platforms. That was a big mistake. New ownership will be an opportunity for Barneys to start catching up in e-commerce with savvier online marketing and more convenient omnichannel options, such as in-store pickup. Investing in digital capabilities will also allow Barneys to organise virtual events, including collaborations that involve products dropping exclusively online. These collaborations also serve as a means of building a virtual community among its shoppers — something that streetwear brands like Kith excel in.

Lean into Asia

Chinese consumers make up more than a third of all luxury fashion sales. With tourism from China down in the US, domestic luxury spending is already suffering. Currently in Asia, Barneys has a presence in Japan through a franchising agreement. The retailer could pursue a similar setup in China. According to the 2018 board meeting report, Barneys had initiatives to work with the “main players of this market,” naming TMall, JD.com, VIP.com and Kaola.com. While setting up a base in China is no easy feat, the return on investment could certainly be worth it.

THE NEWS IN BRIEF

FASHION, BUSINESS AND THE ECONOMY

The Burberry Monogram Collection | Source: Courtesy

Burberry partners with The RealReal to tap fast-growing resale market. The British brand is the largest luxury player yet to explore new ways to tap into the fast-growing resale market, partnering with The RealReal to offer special perks that would entice resellers back into its stores. Burberry announced a pilot programme offering people who sell its pieces on the consignment site an exclusive personal shopping experience at select US stores. The move bolsters The RealReal's position in a competitive market, and marks the latest step by the luxury sector to slowly embrace resale.

LVMH unscathed by Hong Kong as growth sets high bar for luxury. The luxury group's sales of fashion and leather goods rose 19 percent, with "remarkable" performance at Louis Vuitton and Christian Dior, and total group sales rose 11 percent. The strong performance allays some concerns about the effects of the Hong Kong disruptions, which have curbed travel by mainland Chinese consumers and hit sales of Swiss watches. This week also saw LVMH invest in Gen Z streetwear brand Madhappy, with its investment arm leading a $1.8 million seed round that also included designer Tommy Hilfiger, Norwegian DJ Kygo and the founders of salad chain Sweetgreen.

Levi's hit by weakness in US wholesale. The denim brand reported a 4 percent drop in third-quarter profit, the first fall since the 165-year-old company went public in March. While revenue from the direct-to-consumer business in the US rose 7 percent in the quarter that ended August 25, driven by the strength of Levi's flagship brand, revenue from wholesale declined. The deteriorating retail landscape has forced longstanding brick-and-mortar chains, including JC Penney, to explore options, as they struggle to boost their e-commerce business to compete with the likes of Amazon.

Selfridges sees slowing growth amid heavy investment. The company's investment in experiential and digital offerings has boosted sales but also hit operating profit at the UK retailer. While high streets and department stores on both sides of the Atlantic have struggled in the "retail apocalypse," Selfridges has benefited from an emphasis on bolstering shoppers' retail experience with restaurants and beauty services among other things. Selfridges has posted full-year results ended February 2019, with the luxury department store delivering £1.85 billion ($2.25 billion) in sales, up 6 percent from the previous year.

Japan's Fast Retailing likely hit by South Korea boycott. A diplomatic spat between the two countries has caused sales in South Korea to fall 40 percent year-on-year in July and more in August. JP Morgan analyst Dairo Murata recently lowered his Fast Retailing earnings forecast for the current year by 4.6 percent and cut his price target on the shares to 68,000 yen from 70,000 yen. By contrast, Uniqlo's sister brand GU is experiencing significant growth with 75 percent profit gains. GU's success is built on Fast Retailing's existing strengths, like its expansive supply network and scale.

De Beers to sell lab-grown diamonds in stores. The mining giant once opposed marketing synthetic stones to consumers but started selling them online last year under a new brand, Lightbox. This month, De Beers is doubling down on its investment by partnering with Bloomingdale's and Reeds Jewellers to showcase its products in stores for the first time. The partnerships serve as a "brick-and-mortar trial" for the mining empire, which is grappling with a glut of natural stones that are hurting sales of "rough" mined diamonds.

Jewellery-maker Links of London enters administration, putting 350 jobs at risk. The unisex jewellery company's latest move adds to the list of high-profile retailers running into trouble on Britain's high street. Britain's retail sector is still reeling from the collapse of well known names such as Debenhams, music store HMV and department store House of Fraser. Deloitte, Links of London's newly-appointed administrator, said it will continue to run the jewellery company and will explore options for a sale.

New study shows female British consumers are not as 'woke' as their US counterparts. Responses to offensive product launches are gender and market-specific, with more women than men expecting immediate action in both the US and UK, according to a recent survey from First Insight. The importance of brands failing to respect inclusive values has been seen to have a quantifiable impact. Gucci's "blackface" balaclava was released by the brand in February, for example, and led to a 2 percent drop in second-quarter US sales, compared to a year earlier.

THE BUSINESS OF BEAUTY

Source: Drunk Elephant

Shiseido inks $845 million deal for Drunk Elephant. The Japanese beauty company's latest venture is indicative of its attempts to bolster its presence among younger shoppers. The world's largest cosmetics companies have been rapidly acquiring upstart brands in recent years as they search for the next big hit. The Drunk Elephant deal will add to Shiseido's "prestige" skincare portfolio, which has been a key source of growth for the company in recent years as consumers show a willingness to spend on higher-priced beauty products.

Cult Beauty founders explore sale options. The online beauty business has hired JP Morgan to advise on a possible sale that would launch founders Alexia Inge and Jessica DeLuca into the ranks of the super-rich. Cult Beauty stocks brands including Drunk Elephant, Goop and Charlotte Tilbury and is the UK's fastest-growing online beauty business

Unilever, parent company of Dove, vows to reduce plastic use. The multinational company says it plans to cut its use of plastic in half by 2025, relying more on recycled plastic, refillable products and less outer packaging. If the company meets its goal, it will use no more than 350,000 tonnes (386,000 tons) of new plastic each year from 2025, down from around 700,000 tonnes (772,000 tons) in 2018.

PEOPLE

Drew Elliott | Source: BoF

Drew Elliott named global creative director of MAC Cosmetics. The Paper magazine editor-in-chief will leave his role to join the Estée Lauder-owned beauty brand, effective October 28. Elliott was behind the Kim Kardashian's "Break the Internet" Paper cover in 2014, which did just that. Drew Elliott confirmed the news of his move on his Instagram page.

Stella McCartney names CEO. The label has found and hired a new chief executive in Gabriele Maggio, the former general manager of Moschino. The appointment is effective October 21, 2019 and Maggio replaces Frederick Lukoff, who left the company to become chief executive of Scotch & Soda.

MEDIA AND TECHNOLOGY

Rent the Runway says it's open again after supply chain crisis. The fashion-rental company is trying limit the damage after subscribers last month said that outfits they ordered for special events didn't arrive on time or were cancelled without warning. Chief Executive Jennifer Hyman said operations are back to normal as of Tuesday morning, "a few days ahead of schedule." The company had previously said it was gearing for October 15. Services were halted for 11 days, with new subscriptions and individual orders frozen during the downtime, causing a short-term revenue hit.

US Supreme Court rejects Amazon appeal and e-commerce gains in India. The court declined to hear Amazon's bid to avoid a lawsuit seeking to ensure warehouse workers are paid for the time it takes them to go through workplace security screenings. The workers sought compensation for what they called mandatory "post-9/11 type of airport security" screenings, aimed at preventing employee theft, which take around 25 minutes to complete. Meanwhile, Amazon and rival Walmart reported record revenue for their six-day India sales festivals as e-commerce catches on with buyers and sellers in smaller Indian towns, moving beyond the country's urban, English-speaking population.

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