The Times Herald (Norristown, PA)
SINKING FLAGSHIPS
luxury shopping but now risks closure. High rents and a dramatic shift toward online shopping are pressuring it to evaluate restructuring options, including possible bankruptcy, according to a source close to the matter who asked to remain anonymous because the discussions are confidential.
Joseph Aquino, who runs his namesake real estate services firm, says the days of the shoptil-you drop mentality on Madison Avenue popularized by the HBO popular series of the 1990s “Sex in the City” are over.
“She was 45 and now she is
65... She isn’t shopping like she was 45,” Aquino said. “We are in the phase where a lot of younger shoppers don’t want to go the high street. They sit around and buy online and that’s what we are fighting against.”
The concept of a flagship store is more than a century old and used to be limited to retailers’ biggest store — one in their first or most prominent location. But in the last 20 years, a flagship store frenzy took hold and retailers from Gap to H&M looked at them as a must-have shrine to their brands, opening multiple flagships in multiple locations. Not only that but they were willing to pay exorbitant sums of money to showcase their merchandise in luxury corridors.
Rents have swelled so much, however, that many retailers can no longer justify the high price, especially as more shoppers shift their spending online and physical stores lose foot traffic.
CoStar Group, a real estate research firm, examined retail leasing at luxury corridors in seven cities: Miami’s Lincoln Road, Beverly Hills’ Golden Triangle, Chicago’s Magnificent Mile, Washington D.C.’s Georgetown district, Boston’s Newbury Street, Manhattan’s Fifth Avenue and San Francisco’s Union Square. It found the vacancy rate shot up to 7% last year from 3% in 2017 — greater than the 4% those areas saw in the Great Recession.
Last year, the net number of retail square footage lost in these corridors topped 353,000, surpassing the 214,000 loss of square feet seen in 2009. The loss was exaggerated by Macy’s selling of its I. Magnin portion of its flagship store at Union Square in San Francisco. But CoStar found that excluding even that move, every high-end shopping corridor it tracked saw a weakening trend.
As a result, rents on Madison Avenue and Fifth Avenue have taken a hit as demand for these locations have fallen. Average annual asking rents for ground floor locations for the Fifth Avenue strip between 49th and 60th Street was $2,779 per square feet in the first quarter of 2019, down 11% from its peak of the first quarter of 2017, says commercial real estate broker Cushman & Wakefield.
But many analysts believe they haven’t fallen far enough. In fact, commercial rents in 45 out of the 60 cities including New York, Los Angeles and Miami, are higher than in 2009 when the economy was in a recession, according to data from CBRE, a commercial real estate service firm. In the case of Barneys New York’s Madison Avenue store, the landlord there reportedly raised its rent to $30 million from $16 million earlier this year. A Barneys spokeswoman declined to comment.
Still, flagship stores aren’t dead. Many retailers like Nike and Levi are embracing new versions that beckon shoppers with less merchandise and more high-tech experiences.
“I don’t think you have a need for these massive stores,” Stacey Widlitz, president of SW Retail Advisors, said. “Shoppers are shopping completely differently. You don’t need a full assortment. They have to become an experience, letting customers get to know who you are versus selling stuff.”
A growing number of retailers are also thinking smaller. Hollister, for instance, is embracing shrunken stores that offer online services and serve both local and tourist customers.
“Our customers continue to want smaller, more intimate stores where they can interact with associates and our smaller prototypes have proven higher productivity,” said Abercrombie in an emailed statement.
Tommy Hilfiger, which also closed its other U.S. flagships on the swank Collins Avenue in Miami, will be testing smaller shops with online interaction in the U.S. that could be more like pop-ups.
Caroline Nash, 18 of Washington, D.C. says she finds massive stores too overwhelming, especially when she can get the merchandise online.
“I associate big stores with long fitting lines and big crowds,” Nash said. “Unless it is something that offers a different experience, I’m not interested.”