Wall Street Journal | Suzanne Kapner and Ryan Dezember
Lysa Heslov used to be a loyal Neiman Marcus shopper. Now, she buys most of her clothes, shoes and handbags at websites that carry the same designer brands, often at cheaper prices.
“I price compare now much more than I ever did before,” said Ms. Heslov, a 52-year-old documentary film director who lives in Los Angeles.
Neiman Marcus and other luxury retailers were long thought immune to the troubles of mass-market chains—falling foot traffic and the constant price wars that have triggered widespread closure of brick-and-mortar stores.
But high-end chains, which raised prices incessantly over the past decade, are learning the hard way that even wealthy customers are hunting for better deals and selection, whether online or at shops run by individual brands.
“Even a very rich person can say, ‘Enough is enough,’ when it comes to price,” said Matthew Singer, Neiman’s former men’s fashion director, now with his own clothing line.
Sales of personal luxury goods, such as designer apparel and handbags, fell 1% last year, the first decline since 2009, according to Bain & Co. The slowdown contrasts with 4% growth in the global luxury market, which reached $1.16 trillion when including expenditures on pricey cars, travel, restaurants and such.
“In the past, women had loyalty to a particular department store, and they would come in with a page torn from the retailer’s catalog and say, ‘I want that look,’ ” said Robert Burke, the former fashion director of Bergdorf Goodman who now runs his own consulting firm.
“Consumers no longer prefer a one-stop approach to shopping,” said Deborah Weinswig of Fung Global Retail & Technology, a think tank. “This coincides with the current sentiment that big is the opposite of cool, making it very difficult for major retailers and brands to maintain a high level of cachet.”
Few are feeling the heat as much as Neiman Marcus Group Ltd., which holds nearly $5 billion in debt that has grown through more than a decade of private-equity ownership. The company, which lost $406 million on sales of nearly $5 billion in the year that ended in July, recently abandoned plans to go public; credit-rating firms have warned there is a high risk it will default on its obligations.
With their equity practically wiped out, Neiman’s owners, Ares Management LP and the Canada Pension Plan Investment Board, are looking for an exit. They recently approached Saks Fifth Avenue parent Hudson’s Bay Co. , about buying the retailer, according to people familiar with the situation. The continuing talks, first reported by The Wall Street Journal, are aimed at combining Neiman with its chief rival to cut costs and boost clout with suppliers.
The company is “well-positioned to deal with both the secular and cyclical changes taking place in the luxury market,” said Neiman board member and Ares co-founder David Kaplan. “The brand remains a preferred destination for customers who value the expertise of the store associates and a differentiated product offering as well as for the design community.”
Once upon a time, all Neiman needed to do to lift profits was raise prices. That model has since fallen out of fashion.
Neiman Marcus opened its first store 110 years ago in Dallas, catering to those who made their wealth in Texas oil. One tycoon asked for all the items in a store window display delivered to his home for Christmas morning. Stanley Marcus, chief executive from 1950 to 1972, made it happen.
The company, which now includes two Bergdorf Goodman stores in Manhattan, opened outposts in Beverly Hills, Palm Beach, Fla., and other high-net ZIP Codes amenable to $5,000 gowns and $2,500 handbags. Its annual Christmas catalog displayed such gifts as a $1.5 million Valkyrie-X private plane. That kind of extravagance earned it the nickname Needless Markup.
“Our mantra had always been, ‘There is nothing too expensive for our customer,’ ” one former executive said.
Burt Tansky, chief executive for nine years until 2010, was fond of saying, “I’d rather have one customer spending $5 million, than five million customers spending $1,” other executives said. Mr. Tansky declined to comment.
The strategy allowed Neiman to increase average prices 7% to 9% annually until 2015, executives said. Some didn’t believe it was sustainable. “Every time Burt would say that I would cringe,” said Steven Dennis, who was Neiman’s senior vice president of strategy and marketing from 2004 to 2008.
Price-hike profits, though, were common among Neiman’s peers. A 2015 Bain study found the entire luxury industry benefited from “relentless price increases over the past five to 10 years.”
Consumers had little choice but to pay up because high-end brands tightly controlled distribution of their goods, usually keeping supplies limited to avoid end-of-season markdowns. And, until recently, few luxury goods were sold online, which gave brands a tighter rein on prices.
“One of the tricks to luxury is price discipline,” said Aaron Cheris, the head of Bain’s retail practice for the Americas. Shoppers pay full price, he said, when they can’t “get stuff for less.”
But competition from startups like Farfetch.com and Matchesfashion.com are forcing more discounts. Over a recent 24 hours, Farfetch’s prices averaged 2% lower and Matchesfashion’s 15% lower than Neimanmarcus.com’s prices on 32 identical items, according to price-tracking firm Market Track LLC.
A Neiman spokeswoman said the comparison didn’t take into account a promotion at the time that offered a gift card worth 25% off a purchase.
While brands still exert control, particularly over the newest and most popular items, it is harder for them to police prices that change rapidly across websites and fluctuate with shifting exchange rates, industry executives said.
The explosion of discount chains, led by T.J. Maxx , that sell designer brands at cut-rate prices also made consumers rethink the need to pay full price. To compete, high-end department stores rushed in with their own off-price chains—Neiman’s Last Call, Saks Off 5th and Nordstrom Rack.
Market forces have “started to commoditize products that were once extremely exclusive,” said Jenna Giannelli, a Citigroup Inc . analyst. About 37% of luxury goods sold at less than full price last year, Bain estimated, up from 32% two years ago.
Anais Assoun, a faithful Neiman customer, said she was never a sale shopper: “If I wanted something, I would buy it at full retail.”
These days, the Dallas resident shops sales, she said, because “regular retail doesn’t feel like a good value. You can easily spend $2,000 on shoes, which not that long ago would have been insane.”
Neiman’s Chief Executive Karen Katz has tried to make her stores more accessible to younger, less affluent consumers. “You have to constantly be looking for the next generation,” she said.
Ms. Katz championed a line of specialty stores called Cusp, which Neiman opened a decade ago, that feature lower-priced clothing and accessories. Neiman stores also have added relatively less expensive goods, such as $700 Prada handbags, about a quarter the price of the brand’s high-end satchels. In November, Neiman struck a deal with Rent the Runway, a startup that will rent expensive apparel at shops located in Neiman stores this year.
A year after becoming chief executive in 2010, Ms. Katz reduced snob appeal by allowing Neiman shoppers to use Visa and Mastercard . Previously, the stores only acceptedAmerican Express or Neiman credit cards.
Neiman has invested heavily in e-commerce, drawing roughly 31% of its sales from digital operations. That compares with an 8% online penetration for the luxury-goods market, according to Bain.
Not all the moves have worked. After building six Cusp stores, Neiman closed two and stopped development of the chain in 2012. “As we came through the recession, we had to re-prioritize,” Ms. Katz said. The experiment continues at Neiman stores, where departments that carry lower-priced items are called Cusp.
Neiman has suffered from the fall in energy prices that has sapped demand among wealthy Texan shoppers. And like other luxury retailers, it is grappling with a strong dollar that has chased off some foreign tourists.
The retailer appears to be drawing more youthful shoppers, with a bit more than half of its customers age 50 or younger as of last July, compared with slightly less than half a year earlier, according to securities filings.
Ms. Katz recently told analysts that Neiman is simply replacing aging baby boomers with “the next generation.”
While younger shoppers are important to help brands stay relevant, they aren’t buying luxury goods the way they once did.
“Back in 2007, there were young women who would skip meals to save money to buy the latest Marc Jacobs bag,” said Michael Crotty, a marketing executive who has worked at Nordstrom and Neiman Marcus. “Having the right bag, the right shoe, meant so much.”
To celebrate her 29th birthday last month, Veronica Kamenjarin, a Chicago attorney, splurged on a wine-tasting trip to Napa Valley, where she and her husband dined at the exclusive French Laundry. The last time she bought a designer handbag was four years ago.
Ms. Kamenjarin said she chose a classic Louis Vuitton style that wouldn’t go out of fashion: “I didn’t want to worry about having to buy the latest bag every year.”
Neiman has less of a cushion than rivals because of its debt, which dates to its 2005 sale to Warburg Pincus LLC and TPG for about $5.1 billion.
To boost returns, Warburg and TPG paid mostly with borrowed money. The owners, along with bankers at Credit Suisse Group AG , came up with a new type of debt—called pay-in-kind, or PIK, toggle bonds—to protect against a downturn. These instruments allow the issuer to make interest payments by issuing new bonds rather than paying in cash.
Investors were drawn by a better yield, and PIK toggle bonds became a feature of many of the era’s corporate buyouts. To celebrate their Neiman purchase, the buyout firms hung plaques fitted with replicas of old-fashioned factory switches.
When the financial crisis hit in 2008, and sales fell, Neiman’s owners didn’t want to spook suppliers by drawing on a credit line to make interest payments, said people familiar with the matter. Instead, they issued new debt to cover payments for nine months through October 2009. In Warburg’s New York offices, employees flipped the wall-mounted switches from “cash” to “bonds,” some of these people said.
When Neiman resumed cash payments in mid-2010, Warburg employees celebrated by switching the toggle back, they said.
By then, Neiman was generating enough cash to pay down debt, and the owners plotted their exit. They took nearly $450 million out of the company as a dividend a year before selling it for about $6 billion in 2013 to Ares and the CPPIB. The sellers more than doubled their cash investment in the deal.
The new owners, meanwhile, loaded Neiman with more debt. By 2014, Neiman owed $4.7 billion, up from $250 million in 2005.
Ms. Katz got this advice after the 2013 deal by one of the sellers: Pursue a public stock offering as soon as possible and use the proceeds to pay down debt, according to a person familiar with the matter.
The owners have largely eschewed debt reduction, instead spending more than $900 million to refurbish stores, open new ones and beef up Neiman’s online business, according to securities filings and a person familiar with the matter. The company had about $4.6 billion of debt as of January.
Neiman filed for an IPO in 2015, but withdrew the offering earlier this year as its business faltered.
With Neiman’s bonds trading at around 60 cents on the dollar, the company could have trouble accessing the capital markets to refinance notes coming due in 2020 and 2021, according to Ms. Giannelli, the Citi analyst, with investors skeptical it can repay the debt.
On Friday, Neiman’s owners once again chose to issue new debt to cover interest payments through October 14, according to a securities filing.
New management and cost cuts follow many corporate buyouts. But Neiman’s owners have left Ms. Katz and her team alone. “Each of them has allowed us to do what we’ve needed to do to grow the business,” she said.
Yet, it is hard to ignore the rationale for combining Neiman and Saks, said Stephen Sadove, former Saks chief executive. “It’s a tougher luxury environment,” he said, “and you need more scale.”