Luxury Retail 'Is Not Immune' To The Storm Raging In The Retail Industry

For years, luxury retail has been considered immune to the highs and lows of the economy. That is no longer the case. 

High-end brands have always had a touch of the experiential — making shoppers feel special to be there — and now luxury retailers are figuring out how to translate that online, while cutting costs in-store to compensate for the price of expanding logistics.

"[Customers are] moving away from materialism into experiences and events, and luxury is not immune from that," said CBRE's Richard Hodos, vice chairman of the New York-Tri State region's retail services team. 

For high-end retailers, creating an in-store experience that reflects their brand and makes customers feel special is key. For this reason, luxury brands are increasingly pulling their product out of department stores.

"The problem some luxury brands are having with department stores is [employees] know nothing about the merchandise — that hurts the brand," JLL executive managing director of retail tenant services Michael Hirschfeld said. "For luxury retailers maybe more than other brick-and-mortar this is essential."

Hirschfeld has noticed a trend developing where wealthy shoppers will try on shoes and clothes in-store and then turn around and shop around online for the best deals, so luxury retailers are growing increasingly innovative in their push to make customers' online experience as exclusive as in stores. 

"They all have an online strategy and they have to, whether it is informational or on social media to keep enhancing the brand," Hirschfeld said. "[But] the reality of online is: It's additive to the overall retail market, but still under 8% of luxury shopping."

Consolidating Back-Of-House Operations

Some luxury retailers are consolidating back-of-house operations to cut down on costs and expedite the blending of online and in-store sales.

Los Angeles fashion powerhouse Dutch LLC, which owns premium contemporary fashion brands JOIE, Equipment and Current/Elliott, has consolidated the three store's supply chain operations. Hodos said the three brands have their own separate storefronts side-by-side in Los Angeles, and they share a back room where inventory is managed. 

Hodos thinks Coach and Kate Spade may do something similar post-merger.

Earlier this month, the two high-end handbag makers announced a $2.4B merger that is still pending shareholder approval. Coach CEO Victor Luis said the move will unlock Kate Spade’s global growth potential.

"Over the coming months we will launch an integration team focused on bringing our two great companies together and setting all our brands up for long-term growth," a Coach spokeswoman told Bisnow. "Until the transaction is closed, however, it would be premature to comment on any specific decisions that have not yet been made."

Though the spokeswoman said it is too early for the company to divulge how this deal could impact future real estate strategy — such as whether the two brands will close or consolidate stores — Hodos said it is unlikely both brands will be sold under the same roof. 

"Coach has been reinventing itself for the past year, and it has done an excellent job repositioning itself from a handbag manufacturer to a lifestyle brand," he said. "Coach is very good at cultivating and maintaining the quality of its own brand, so I don't see them mixing brands. They might be side by side in a mall [or on the] street but will have separate storefronts."

Logistics Gains Importance

Adjusting to the supply chain and logistics needs for e-commerce has been among the sector's largest challenges, Hodos said. Logistics concerns outweigh real estate selection right now. 

"The most efficient channel for most of these retailers that started out as brick-and-mortar is still the store — selling and accepting returns in-store," Hodos said. "The part they haven't figured out is how to fulfill orders placed online and accept returns in-store, and what that does [to] inventory. There are all kinds of logistical pieces."

Luxury players across the board — from Hermes and LVHM to Prada and Fendi — are working to accommodate online shoppers without allowing free shipping and returns to eat into profits.

"Everyone can't offer free shipping and free returns, and when merchandise comes back a lot of it can't be resold," Hirschfeld said. "So the cost of the online part of the business is sometimes higher than selling a product in-store."