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Luxury’s Latest Battleground: Real Estate

Top luxury groups are buying real estate to secure landmark store locations with serious implications for second-tier players who are already struggling to stay on key luxury streets, writes Luca Solca.
Top luxury groups are buying real estate to secure landmark store locations, writes Luca Solca.
Top luxury groups are buying real estate to secure landmark store locations, writes Luca Solca. (Getty Images)

Luxury brands are locked in a retail arms race that favours players with the scale to keep up with ever-escalating costs and capital expenditure requirements.

In recent years, flagship stores have grown larger as well as more lavish, not to mention the new generation of VIP facilities. The toolbox of store animation activities has grown to encompass restaurants, bars, temporary exhibitions and other cultural events, as well as more frequent merchandise drops. Efforts to generate foot traffic have reached new heights, too.

Now, top luxury groups are opening a new front in the competition: buying real estate to secure landmark locations. And the implications for second-tier brands are serious.

Second-tier players with lower retail space productivity were already struggling to stay on key luxury streets — such as Fifth Avenue in New York, Avenue Montaigne in Paris and Canton Road in Hong Kong — as rents hit new highs. They certainly can’t keep up with top luxury groups offering hundreds of millions of euros to buy store locations outright.

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The strategy was pioneered by LVMH, which snapped up the Louis Vuitton store at 57th Street and Fifth Avenue in the early noughties. But the magnitude of today’s luxury real estate projects is unprecedented. Back in 2007, LVMH paid $60 million for the 57th Street store. That seemed like a lot at the time. (Centurion, the seller, had bought the same building for $28 million three years before), but it’s small change today.

LVMH is currently spending billions making real estate moves in Via Montenapoleone in Milan (at the corner of Corso Matteotti and in the former Via Bagutta Traversi Garage) and on the Champs Elysées in Paris ahead of the Olympics, and has major real estate plans in New York.

The group is forcing competitors that want to try and play in the same league to stretch their finances. Kering had countered the LVMH investment at the corner of Via Montenapoleone and Corso Matteotti, buying 8 Via Montenapoleone (reportedly for €1.35 billion). Prada recently invested $425 million to buy its store on Fifth Avenue in New York.

Given how much more cash LVMH generates than its smaller competitors, this once again looks like a David and Goliath kind of fight… but where is the slingshot?

Luca Solca is head of luxury goods research at Bernstein.

Disclosure: LVMH is part of a group of investors who, together, hold a minority interest in The Business of Fashion. All investors have signed shareholders’ documentation guaranteeing BoF’s complete editorial independence.

Further Reading

How LVMH Dominates the Luxury Business

Above all, the French conglomerate benefits from the sheer scale of its core megabrand Louis Vuitton, setting in motion a virtuous cycle that powers profit generation, writes Luca Solca.

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