What does the challenging environment facing US department stores mean for luxury brands?
by Hannah Winter, Wealth-X Business Analyst
Department stores in the US have historically played an intrinsic role in exposing fashion brands to a wide demographic of shoppers. These brands sought to stock department stores with exclusive merchandise to ensure that there remained a distinction between these large-scale stores and their own boutiques. This relationship provided luxury brands with a high volume of foot traffic they would never see in their own stores, while the department stores could advertise exclusive items not available at their competitors’ stores.
In recent years, this once mutually beneficial relationship has suffered in the face of changes in retail, from e-commerce to the introduction of discount chains. In an attempt to keep up with an ever-growing variety of low-cost rivals, brands and retailers have become increasingly reliant on discounts. Although these discounts have temporarily stemmed the tide of losses for department stores, they come at the cost of diluting brand identities and cause customers to regularly expect special deals,[i] ultimately resulting in an increasingly tense relationship between department stores and apparel brands.
US department stores have struggled to adjust to competition from discount chains like Ross, T.J. Maxx and Marshalls, that sell items at substantially lower prices than department stores and employ an effective inventory management system.
Industry experts believe that there was a sharper distinction in the past between those who shopped at stores such as Nordstrom and those who frequented discount stores. According to Neil Saunders, a retail analyst for Conlumino, in 2005 5.1% of shoppers who regularly shopped at discount retailers also shopped at department stores for clothing. Last year, that figure stood at 12.9%.[ii] Moreover, there is less of a distinction nowadays between the products sold at department stores and those sold at discount chains. For example, high-end brands like Calvin Klein and Ralph Lauren were once associated with department stores like Macy’s and Nordstrom, and can now be found in most discount chain stores.
In addition to discount chains, e-commerce plays an increasingly dominant role in the overall retail landscape by creating digital department stores without borders. Amazon recorded a 31% year-on-year revenue increase in the second quarter of 2016, highlighting the growing increase in online shopping among consumers globally.[iii] While the growth of e-commerce is important, its threat to traditional brick and mortar should not be over-stated; while Amazon accounts for half of all e-commerce, most shopping in the US still takes place in person.
As retailers rely more heavily on promotions to drive traffic, Michael Kors Holdings Ltd. and Ralph Lauren Corp. have been two brands heavily impacted by the increasing prevalence of discounts to move merchandise. Michel Kors, which is positioned as an “accessible” luxury handbag and accessories brand, has long been the poster child for the rapid growth of luxury brands. Michael Kors CEO John Idol said that promotions stood at an all-time high last quarter, further stating that these promotions were causing problems in the brands’ own stores because managers felt pressured to match prices that shoppers were seeing elsewhere. He told investors that this is “creating confusion in the consumer’s mind relative to the value of the Michael Kors brand when it’s being seen so often on sale.”[iv] Michael Kors has responded by ending all promotional coupons and friends-and-family sales at department stores that carry the brand. The company has also scaled back the number of products it offers in department stores and plans to introduce a broader range of products as it aims to attract shoppers looking for products beyond its signature gold watches and leather bags.
Other high-end brands are taking a similar approach. Kate Spade & Co. has reduced promotional sale days and expanded its customer-reach through new product categories including homeware, swimwear and childrenswear. Meanwhile, Coach recently pulled its merchandise from 250 department stores where weak traffic has led to considerable discounts on their iconic accessories.[v]
Major department store chains have responded to this by introducing discount chains of their own. These include Nordstrom Rack, which has enjoyed considerable success. Similarly, Neiman Marcus has introduced its “Last Call Studios” and Sacks Fifth Avenue has its “Off Fifth Avenue” line of discount stores.
High-end brands would be well-advised to be more selective with the discounts they allow, and look to establish growth opportunities outside their traditional distribution channels, such as enhancing the shopping experience in retail stores to make them unique, immersive, and buzz worthy. These retailers should consider experimenting with their product lines, something which department stores have traditionally been fairly averse to given the inherent risk it entails. While department stores are unlikely to stock new products, their success being less-than guaranteed, brands can generally afford to take a more long-term view with growing new businesses. Moreover, opening their own stores has the added benefit of letting brands have complete control and stock a wider assortment of their merchandise, providing them the opportunity to expand to include aspirational products that will elevate their brand and counter balance the negative impact that discounting can have on products.
Expansion into discount stores has certainly changed brands which were once synonymous with luxury. As such, the move from luxury to more accessible mass market should perhaps act as a cautionary tale to other luxury brands.[vi] This year, Walmart incorporated products from luxury brands Prada and Cartier into their Black Friday sales promotions (albeit at a $18,000 price point). Will these brands see a similar impact through this partnership with a chain store notable for discount products?[vii]