No tourists, no commuters, no customers: how retailers look beyond the shopping district Intelligence, BoF Professional
NEW YORK, United States Do you think shopping centers have problems? Take a walk along Fifth Avenue.
Shops in prime urban shopping districts have been open for weeks after local governments lifted closures designed to curb the spread of Covid-19. But most see far fewer customers walking through their doors. Unlike suburban shopping centers or predominantly shopping districts like SoHo, these urban shopping areas thrive on walk-ins of tourists and professionals commuting to nearby offices.
Both are scarce nowadays. According to an August report by the International Air Transport Association, air traffic is unlikely to recover to pre-pandemic levels until 2024, and large and small companies are already taking back office space: the U.S. office market saw a negative change in leasing activity the second quarter of 2020, marking the first net demand for commercial space in more than 10 years, several brokers reported last month.
Urban shopping areas “integrated with dense commercial office space,” such as Manhattan’s Fifth Avenue, “are the shopping areas that will suffer the most,” said Arun Sundararajan, a professor of technology, operations and statistics at New York University’s Stern School of Business.
As street traffic is unlikely to recover anytime soon, more retailers are beginning to ask, does it still make sense to exploit flagships in the heart of the world’s top cities?
Even before the pandemic, retailers began to question the value of these tent properties. In addition to being largely empty now, they were among the largest and most expensive locations for many brands. At its peak in 2017, the 11-block stretch of Fifth Avenue between 49th Street and 60th Street ordered north $ 3,000 per square foot per year, according to Cushman & Wakefield. Rents had fallen about 16 percent when the lockdown came into effect in March, and about one in five properties were vacant. Ralph Lauren closes its flagship between 55th and 56th street in 2018, and Tommy Hilfiger closed its 22,000-square-foot store at 681 Fifth Avenue last year.
If you’re a big New Yorker asked to pay high rents, you’d say, “Well, why would I want to be here?”
In June, Valentino has even filed a lawsuit against his landlord Savitt Partners to terminate the lease on Fifth Avenue, citing a retail landscape that is “drastically if not irreparably hampered”. Other retailers are negotiating lower rents or early termination of their leases and similarly claim that the street appeal isn’t the same without the crowds.
“With Covid and social unrest, if you’re a big New Yorker who has to pay high rents, you’d say, ‘Well, why would I want to be here?'” Said Alexander Goldfarb, analyst at Piper Sandler who malls covers.
Some brands look completely further than New York, London and other world cities. They are shifting resources to e-commerce activities and looking for leaner shopping networks. That could mean cutting the number of stores in New York in favor of new locations in fast-growing cities like Phoenix and Atlanta.
Fifth Avenue’s flagships are also being reassessed to increase their appeal to New Yorkers, with an emphasis on personalized service and shopping by appointment. For example, less busy store employees can use text and email to reach their local customers about new collection launches and virtual trunk shows.
“Fifth Avenue will always be an ambitious shopping street and brands will want to invest and put their best foot forward,” said Chris DeCrosta, founder of GoodSpace NYC, a real estate company that works with people like Glossier and Supreme. “But that doesn’t mean there should be five flagships in every city.”
The key, he said, is “to capture the customer where he is.”
Can’t blame Covid
In New York, problems for the downtown Fifth Avenue neighborhood began well before the global epidemic hit.
The problem, analysts say, is the oversupply of retail space in New York that was built in the recovery from the 2008 financial crisis. Fifth Avenue’s decades-old stores had to compete with the revitalized Meatpacking District and megamall Hudson Yards that last year was opened.
The street is still popular with luxury brands. Recent high-profile leases on Fifth Avenue include Dior’s massive new space in the General Motors building, as well as Chopard, whose flagship will move from Madison Avenue to Fifth Avenue’s Crown building, WWD reported last month. Saks Fifth Avenue is one of those that has doubled its namesake location in recent years, unveiling a $ 250 million makeover from the ground floor of the 650,000-square-foot flagship in the spring of 2019. This flagship location then generated at least $ 600 million a year in sales, according to Forbes – good for about 15 percent of the total turnover of the department stores.
But these new tenants can’t fill up all the empty space on Fifth Avenue today, especially as struggling mass-market brands are looking to downsize.
Bond Street and the Champs Élysées have had their own problems. The latter struggled for years as it was populated by fast food chains, and tourist saturation attracted pickpockets and heavy traffic. The Parisian destination has successfully attracted new tenants in recent years, including department store Galeries Lafayette and Nike. As in New York, shopping streets across London have been losing tenants for years because the city is too concerned with retail, although rents on Bond Street remain much more affordable than Fifth Avenue, according to Brandon Famous, CBRE’s Executive Director and Chairman of the Global Retail Occupier Executive Committee of brokerage.
Cheaper rent may justify lower sales per square meter, while retailers wait for tourist and commuter traffic to return. But retailers are also using the pandemic to evaluate whether they can justify such a large physical footprint at any cost.
“There is an immediate strategy for the retailers on Fifth Avenue, and that is really just a survival mode – to cancel their lease or get a lease reduction,” said retail consultant Robert Burke. “In the past, business was guaranteed by the large number of passers-by. That is clearly no longer the case. ‘
From New York to … Atlanta?
City Retail is faced with another mystery: Urbanites migrate out of the city. In New York, about 15 percent of the population fled the metropolis between March and May New York Times analysis found. According to a report by broker Douglas Elliman, vacancy in the rental market in New York had risen at its highest point in 14 years in June.
It is too early to say whether these movements will become permanent. Some companies have already asked employees to return to their Manhattan office.
Still, second-rate cities seem poised to see an influx of new residents leaving densely populated metropolises. A JLL report for the second quarter of 2020 shows that Atlanta, Phoenix, Seattle and Chicago are at the top of net office take-up, which measures supply and demand, while New York and San Francisco are among the top 54 last markets in the US.
Brands were already expanding into the pre-pandemic of these cities. In January, Gucci opened its first store in Nashville. Valentino expands its boutique in Dallas. Retailers should consider opening stores in these smaller cities, retail experts say, but they should only do so if they have data showing that their customers live there.
“I know of direct-to-consumer CEOs who can show me this kind of data in one go, but I’m not sure I could say the same about” some luxury brands, DeCrosta said.
The end result, according to DeCrosta, may be that there are fewer stores in the big cities and that capital is used to open smaller, more affordable locations in places like Austin and Pittsburgh. He calls it the ‘hub-and-spoke approach’, where traveling shoppers interact with a brand in a flagship store on Fifth Avenue or Via Monte Napoleone in Milan, where they receive exceptional customer service, engage in the latest collection and perhaps a purchase or two.
It’s all about the evolution of reaching and touching the customer wherever they are.
The key, however, is that these consumers have such a great experience at the flagship that when they go back home, they will continue to patronize the brand’s regional store or shop online as a lifetime customer.
“It’s all about the evolution of reaching and touching the customer wherever they are,” said Byron Carlock, head of PwC’s US real estate practice. And if a brand can save money by closing stores or renegotiating leases, they need to “turn that money into e-commerce and logistics and more efficient ways to reach customers,” he added.
Many luxury brands have already followed a version of this strategy in China. Chinese consumers make up about a third of total luxury sales in the world, much of which occurs during their travels abroad. In recent years, they have started to issue more domestically, and brands such as Burberry have opened dozens of stores in Chinese cities. With travel from China to the US limited during the pandemic, this trend will accelerate.
As for retailers stuck on empty roads around the world, there are tactics to bring in local customers and make personal shopping comfortable and even inviting. For example, encouraging personal service and shopping by appointment can help shoppers spend a lot of time in the store without worrying about contact with other people. Livestreamed store events with an influencer or celebrity in a store is another option to consider, Katrin said Zimmermann, managing director of the Americas at TLGG Consulting.
The outcome of numerous negotiations between landlords and retail tenants will also determine what Fifth Avenue and similar streets around the world will look like after the pandemic. Brands that can afford a few lean years may benefit from waiting it out instead of leaving the urban shopping districts, Zimmermann added.
Will the crisis change human behavior forever? There is little evidence for that prognosis, ”she said. “History shows that people enjoy density … In New York, museums and night clubs are not yet open and people long for experiences.”
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