WWD Digital Daily
El Palacio de Hierro CEO On Future of Dept. Stores
● Mexico’s most upscale retailer continues to innovate its department stores and has a plan to double its volume.
There’s a future for department stores and it’s being told in Veracruz, Mexico.
That’s where El Palacio de Hierro, Mexico’s most upscale retailer, opened an elegant 170,000-square-foot, two-level department store by the sea, filled with Deco and aquatic-inspired decorative and architectural elements and artwork. Rippled glass ceilings above the beauty floor mimic wavelets. Earth-toned tiling suggests the dry and wet sands along the Gulf of Mexico and stainless-steel seagulls and fish are suspended overhead.
“In Palacio Veracruz, the product, the decoration, the interior design — there is a lot that belongs to the ocean,” observed Juan Carlos Escribano, chief executive officer of El Palacio de Hierro.
“We have a family of stores each created within the Palacio framework but each is built a bit differently to accommodate
the community. Each store tells its own story,” said Escribano. It gives shoppers, regardless of social or financial status, a sense of belonging or, as Monica Elguea, store design director, observed, “The first thing they think is, ‘This is my store.’”
At Palacio’s 640,000-square-foot marbled flagship in the Polanco section of Mexico City, built at a cost of $300 million, “Luxury is the story, as if you were living on the Upper East Side of Manhattan,” said Escribano. “There’s all the luxury you can imagine. There is no brand that we don’t have.” The store is an homage to Mexico
City so the corridors reflect famous streets, such as the Paseo de la Reforma, a central passage and gathering place in the city, which is represented on the ground floor for cosmetics, perfumes and accessories.
At the Santa Fe store in Mexico City, a 20,000-square-foot wellness department opened in March 2018 showcasing food, beauty, luxury sneakers, bicycles, nutrition, an organic restaurant, as well as a gym with cycling and yoga classes.
At the Durango store, also in Mexico City, “Sustainability will be the theme in the store — in its personality, materials, fashion, how it connects with the community,” said Escribano. “We are working with two European engineering firms which we can’t confirm yet,” on projects such as capturing rain water for drinking.
The 350,000-square-foot store opening next year in the Mitica shopping center in Coyoacan will draw design and merchandising inspiration from renowned Mexicans. “Coyoacan is full of interesting writers, cinema people, painters and actors so we decided to call the personality of the store, ‘Interesting Lives,’” said Escribano. The beauty department will be dedicated to Dolores del Río, the actress. The second floor for women’s and children’s will be dedicated to Frida Kahlo. Salvador Novo, the writer, will inspire the electronics floor, and men’s will be dedicated to actor Emilio “El Indio” Fernández, who was the model for the Oscar statuette. “He was always the bad guy. Very masculine. We want to build a masculine floor with lots of personality,” said Escribano. The store will be adorned with furnishings from the celebrities’ houses, as well as large photos of them with QR codes to access their bios.
In Veracruz, Mexico’s largest port city, Palacio is situated in the Andamar lifestyle center in the upscale Boca del
Rio community, away from where there’s been some drug-related violence on the outskirts. “Veracruz is a wealthy place. Twenty percent of the population is A-plus,” said Escribano.
Veracruz Palacio and the other 13
Palacio department stores offer a true full-line assortment of hard and soft goods and services, from fashion, jewelry and food to technology, toys and tequila, along with beauty, appliances and services such as getting prescriptions, barber shops, gourmet food halls, even separate ice cream stands to encourage lingering after the main course.
“You can buy a sandwich that’s not very expensive and sit on the terrace by the water, or you can buy Gucci shoes that cost a hell of a lot of money. You can mix and match” designer styles with moderatepriced styles, Escribano said. “We have travel services so if you want to do a fantastic trip to wherever, we can arrange it for you,” Escribano said. “We have a service called Palacio Solutions. If you have a problem with your watch, your phone or computer or you want a solution for your house or your car, you go to Solutions.
“But because of our luxury brands, there has to be a luxury environment — the whole store. We consider Veracruz a small ‘c” store for us, but it reads more expensive for this city. We spent $ 40 million. It’s an incredible investment” for a place like Veracruz, which has a population of about 500,000. “It’s a complete department store,” said Escribano. “We have all the categories. Here, the luxury will be like 12 to 15 percent of our sales” whereas chainwide, luxury accounts for about 20 percent of sales.
“When we talk about luxury, we talk about quality. So quality is food. Quality is experiences. Quality is traveling. Fashion is central — it’s 40 percent of our business. But our concept of luxury is bigger than fashion. We run this luxury concept through all the categories and lifestyle divisions.”
Since joining Palacio four years ago, Escribano has developed a five-year growth strategy, in conjunction with Don Alberto Baillères, the billionaire owner of the Grupo Bal conglomerate which has interests in the mining, financial, Insurance, agribusiness, health and music sectors as well as retail.
“It’s a 3-D plan for differentiation, diversification and digitalization,” covering the 2019-to-2023 period, Escribano said. “We are a $1.7 billion company. Our aim is to double in size by 2023.”
Escribano thinks Palacio can ultimately operate up to 19 to 20 department stores. “We believe it’s better to open big stores in big cities and not so many. To be the best, you don’t have to be the biggest in number of stores, no?” ►
• Opening large new department stores in Coyoacan and Leon, Mexico, over the next few years. Palacio currently operates 13 department stores and only a couple need refurbishing, Escribano said.
• Renovating and doubling the size of the department store in the Durango section of Mexico City.
• Elevating e-commerce to 10 percent of the business. It’s currently around 3 to 4 percent.
• Doubling the specialty store count from the current 120 operating under such banners as Michael Kors, Samsung, Tory Burch and Mango. Palacio also operates two outlets.
• Doubling the private label, children’s and credit card businesses. Palacio has 600,000 active cardholders.
“We can do things in a way that other companies can’t,” said Escribano. “We devote resources and time to the products, to the experiences and to innovation. We just need running capital so we go to banks. In the United States, a lot of the companies have a huge amount of debt. They have been run by financial companies. Retail is very complicated for financial people. Beautiful places like Neiman Marcus and J. Crew have been loaded with debt, and this is not working.”
According to the ceo, over the last four years, Palacio’s comparable-store sales gains have averaged 7 percent, profits more than tripled, and debt is only
0.9 times earnings before interest, tax, depreciation and amortization. Year-todate, the company is tracking 5 percent ahead, slowing due to the election in
2018 of the new president in Mexico, Andrés Manuel López Obrador. Typically, business in Mexico slows for about a year after a president is elected. “People are waiting to see if taxes go up. After this year, we will be able to plan in a less confusing, clearer way. I don’t see it as so complicated. This story comes and goes. We don’t expect big change.”
Unlike many North American retailers, Palacio is a steady ship. Aside from its lack of debt, Palacio can afford to invest in new and existing stores because it isn’t over-stored, is backed by a big conglomerate with an owner that takes a strong interest in retail, and it has merchant ceo, not a financial executive, at the top. It’s clearly focused on luxury and upscale goods, a niche in Mexico where there’s virtually no competition, while selling moderate merchandise as well within sophisticated settings.
In the U.S., department stores have been losing shoppers amid the rise of Amazon and other e-commerce sites. But Mexicans still take pride in their department stores. Visiting them becomes a family outing. “Latin families like to go out a lot,” said Escribano. “They embrace the place where they can meet friends and family and walk around. They do not like to stay by themselves. We love to socialize. We love to hang out. We are very family-oriented. We hang out with our families every weekend. We fulfill that family experience.”
A day before the grand opening party for the Veracruz store, Escribano is seated inside “The Loft.” It’s a prototype, two-level, 5,300-square-foot concept within the store, for showrooming home products and electronics. It’s set up with furnished model rooms — a living room, a kid’s bedroom, a dining room with a table setting, a kitchen. There are roughly 500 stock-keeping units on display, though 25,000 sku’s in The Loft’s assortment can be viewed on a tall touchscreen “totem,” or kiosk, for ordering online and learning about products. With its own entrance and distinct environment, The Loft feels like a specialty store within a department store, and sends a strong signal about a Palacio priority. “Veracruz is our first hybrid store. We want to mix the digital buying with the real,” said Escribano.
“For me, the department store has to be more like entertainment, and a place where you really like to go because there is always something happening,” Escribano said. “In a specialty store, that it is difficult to achieve, because it’s one brand. Here, we have The Loft, we offer food, insurance, credit, a concierge, a barber shop, a spa, and we’re bringing in new things...When people started to say department stores were dead, I was thinking the opposite, that most department stores, if they believed in themselves, could be the winners of the future.”
After exploring The Loft, Escribano guides his guest through the beauty section, where the fragrance of vanilla, an important product in Veracruz, is evident. It immediately becomes apparent, that unlike the big, open floor plans of many department stores, the footprint is different.
“We’re not linear. We have an organic floor plan,” said Escribano. “You meander through. It works well for us. In the beginning you have to get used to it, but in the end there is a sense of discovery.”
Curvilinear shop facades add to the effect; metallic valances reminiscent of wavelets frame the shops; and some departments and shops are delineated by wooden archways and shutters, reflecting architecture found in historic downtown Veracruz.
There’s an abundance of “hard” designer shops including Salvatore Ferragamo, Louis Vuitton, Hermès and Gucci, among others. For many Mexicans, experiencing these luxury brands is new. “People want to see the brands are real,” store designer Elguea said. “The personality of brands can be very strong, with bigger signs and logos. They bring their own builders. But we still have to keep the personality of the
Palacio store and avoid being viewed as a house of hard shops.”
Palacio does have “soft” shops for such brands as Tommy Hilfiger and Nautica, where the company exerts greater control of the space though typically the fixtures and finishes belong to the brand, and “generic” areas selling several brands in more of a Nordstrom-like open floor plan.
Escribano credits Baillères with picking the right niche. “That is one of the great visions of the chairman. When he bought this company he was young, and his father asked him, ‘What the hell did you buy?’ So he want to the management team and asked, ‘What do we do with the company?’ And the management team told him, ‘We thought you we would tell us what to do.’ So Mr. Baillères decided to go around the world to visit stores and when he came back, he said ‘let’s go upscale. That’s the way to go, because if not, we would be staging promotions, promotions and promotions.’” ■