Luxury, low-end flourish as mid-tier languishes

As the middle class shrinks, so too does the bottom line of moderately priced retailers

The Miami Design District is stacked with upscale brands like Hublot, Cartier and Céline.
The Miami Design District is stacked with upscale brands like Hublot, Cartier and Céline.

If art imitates life, retail isn’t far behind. As tourists and the well-to-do fuel luxury sales around the country, gains in employment and lower gas prices are helping more cash-strapped consumers load up on goods at dollar stores, outlets and off-price discounters.

So when it comes to determining which segments in the universe of retailers are benefiting from discretionary consumer spending, Nick Egelanian, president of retail real estate consultant SiteWorks, said, “The luxury part is winning and the value part of the bottom is winning.” But “everyone in the middle is losing.”

Indeed, many mid-priced retailers are facing challenges, squeezed by online sales, low-end retailers and the struggles of moderate-income consumers trying to make ends meet despite stagnant wages and underemployment. Stalwarts like Macy’s, Dillard’s and J.C. Penney are closing stores. Some retailers are opening and expanding lower-priced versions of their enterprises to stay relevant. The squeeze has left empty anchor spaces in some Class B and C malls and landlords searching for replacements and other attractions to drive traffic.

Nick Egelanian

Nick Egelanian

“Full-price retailers are getting killed and the biggest losers of all are the department stores,” Egelanian said. “The departments they rely on most, apparel and cosmetics, are absolutely under assault.” 

By contrast, the growing wealth of the nation’s 1 percenters and a steady influx of foreign money is driving luxury retail in the nation’s gateway cities. Along the West Coast, in Los Angeles, Chanel anted up $152 million in December to buy a store it had leased on Rodeo Drive. The purchase price per square foot, $13,217, set a record for Southern California and testified to the health of the pricey three-block stretch that houses Chanel and other high-end brands.

Farther north, in San Francisco, tech money is attracting premium retailers. Australian shopping-center company Westfield Corp. is expanding the “luxury collection” at its Valley Fair mall in San Jose, bringing new retailers next year to its upscale wing, which already features names like Prada, Balenciaga and Bottega Veneta.

The luxury collection at the Valley Fair mall grows.

The luxury collection at the Valley Fair mall grows.

In Miami, another gateway city that pulls in considerable amounts of foreign cash, the burgeoning Design District is stacked with upscale brands like Cartier, Céline, Piaget and Louis Vuitton. At 18 square blocks, the neighborhood now hosts more than 60 stores, including 10 launched in recent months, with Dior, Hermès and Tom Ford shops among them. Another six are on deck.

“Stores that have opened already are performing amazingly well,” said Michael Hirschfeld, co-head of JLL’s national retail tenant services group.   

Louis Vuitton has replaced a temporary store in the Design District with one more permanent.

Louis Vuitton has replaced a temporary store in the Design District with one more permanent.

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At the lower end of the market, retailers like Dollar General, Ross Stores and TJX Cos. are opening hundreds of stores. Dollar General (Dollar Tree’s chief rival) plans to add 900 stores in its current fiscal year. TJX introduced 69 new Marshalls and T.J. Maxx stores in its most recent fiscal year that ended January 30 and expects to launch another 60 in the upcoming year. Ross Stores, which promises customers 20 percent to 70 percent savings on department store prices, titled its annual report “It’s all about the bargains” after a net gain of 84 stores and nearly $900 million in sales in its latest fiscal year. 

Competition from discounters is contributing to the turmoil of traditional mid-priced retailers. Macy’s, whose net sales declined more than 3 percent in fiscal year 2015, is under pressure to monetize its vast real estate holdings; the company has announced the closing of 36 branches this year as it opens 16 venues for its off-price BackStage brand (with all but one to be inside an existing store).

J.C. Penney reduced its losses in fiscal 2015 and its sales (up 3 percent) rose slightly over the prior year. Another longtime middle-market player, Dillard’s, closed three stores while its net sales stayed essentially flat in the past fiscal year.

Bulgari's store adds to the Design District's luxe glow.

Bulgari’s store adds to the Design District’s luxe glow.

Meanwhile, as Sears, Macy’s and other retailers bow out of shopping centers, mall owners are searching for new formulas to draw in traffic. They are turning millions of square feet into “experiential” gathering places where consumers can shop, eat and find entertainment.

“B or C mall landlords” with struggling anchor stores “have a big redevelopment opportunity,” said Byron Carlock, a partner and real estate practice leader for PriceWaterhouseCoopers.

But even while the mid-priced contenders regroup and work to stay relevant, the retail players in luxury land are facing bumps in the road as stock market gyrations and the strong dollar discourage well-heeled consumers and tourists from spending.

“[I think] luxury is mixed,” said Howard Davidowitz, who heads the retail industry consultant Davidowitz & Associates. “It had been great for a period of years until eight months ago when there was all the volatility in the stock market. Luxury is directly related to the performance of capital markets.”

Some high-end retailers are hedging their bets. Nordstrom Rack, the off-price chain of upscale Nordstrom, is expanding faster and increasing sales at a greater clip than the company’s higher-priced stores. Last year Lord & Taylor launched an off-price sibling, Find@Lord & Taylor, with a store in Paramus, New Jersey.

Real estate veterans say that luxury shoppers are becoming more value oriented and shopping at outlets, off-price stores and other down-market retailers. According to Bain & Company’s Fall-Winter 2015 Luxury Goods Worldwide Market Study, luxury spending is increasingly dependent on tourists, many of whom are price conscious and seeking bargains. Bain also noted that the U.S. luxury market “did not deliver real growth” in 2015.

High-end retailers, according to Bain, face tough issues in the future, including coming up with the right pricing model and “rethinking their store footprints and the role of bricks and mortar in a world of growing digitization.”