FINANCIAL TIMES | ELIZABETH PATON
Flagship stores have long been lossleaders for the luxury industry. Brands’ retail investment has soared in recent years, with projects becoming increasingly elaborate and expensive in the quest for patrons and profits – but entailing costs that are rarely recouped by sales.
Yet, from a state of unanimity, debate has ignited as to how necessary flagships will be to brands in the future. Now that more than 50 per cent of luxury purchases are made by tourists visiting the west, brands could scale down their rollout of supersized stores once consumer visits level off in emerging markets.
“Who needs aggressive store expansion when customers are happy to jump on a flight to London, Paris or New York?” says Aaron Fischer, head of consumer research at Asian brokerage CLSA, noting that the luxury sector’s capital expenditure to sales ratio has slipped from 7 to 5 per cent since 2009.
Others are not so sure. Burberry, Prada and Louis Vuitton, respectively UK, Italian and French fashion labels, have led an explosion in international flagship openings over the past year, still clearly convinced of their long-term financial dividends.
IWC opened a 3,000 sq ft store on Madison Avenue in New York last month, its first US flagship. The Swiss watch brand spent years searching for the perfect location, staff and aesthetic. Each timepiece collection has its own themed sector, where books, boats, an aquarium and even an in-flight simulator surround products.
“Opening a US flagship was the obvious next step in our expansion strategy,” says Georges Kern, chief executive of IWC. “Inevitably, costs are high, but it’s only a decision we would take [having considered] the maturity of the company and whether we could afford it. It’s an important way of gaining brand equity and consolidating positioning in a core market. I would never open a flagship unless I was convinced of its profitability.”
The store’s experiential, interactive quality has buoyed sales. The longer a customer stays on-site engaging with a brand, the more likely they are to spend, which explains the art exhibitions, film screenings and cafés often found in luxury flagships.
“We use flagships to showcase our evolution into a multifaceted lifestyle brand, bringing our universe to life while placing products in an explanatory context,” says Fabio Mancone, director of licensing and communications at Giorgio Armani, the Italian fashion group.
“In an age where online shopping is becoming dominant, a flagship store is a perfect example of how the theatre of the physical, rather than virtual shopping, can still excite a crowd.”
Armani says that profitable impact goes beyond business-to-consumer marketing and education. Wholesalers in new regions see the investment as a sign of confidence in the brand’s appeal, resulting in notable order boosts following flagship openings.
Peter Marino, a New York-based architect, has designed dozens of flagships for LVMH and Chanel, the French luxury groups. He is convinced the boom in tourist traffic from countries such as China and Russia has reinforced the need for luxury brands to up the stakes in their retail strategies.
“The more mobile the customer base, the shorter the lifespan of a flagship,” he says. “Once, a store could have remained unchanged for a decade; now they look dated faster. The Asian customer in particular is extremely savvy, with incredibly high expectations. Everything must be bigger, newer, lighter and brighter.”
Mr Marino says the lasting impact of a flagship visit can be far stronger than advertising campaign exposure, making it worth the millions spent.
Furthermore, given that flagships are often operated directly by the luxury company itself, they are an easier means of brand control, while still making a statement and gaining traction in a new environment. Still, due diligence remains vital.
Robert Burke, founder of Robert Burke Associates, a luxury brands consultancy, says: “Many brands have been burnt financially by initially underestimating the complexities of foreign markets, be it through picking the wrong local partners, heavy taxation or investing too much too soon in ambitious retail strategies.”
Large-scale operations in India have stung several luxury labels in recent years. Overhasty investment after flagship successes in China has produced heavy losses, followed by a quiet downsizing of operations. Meanwhile, the dismal results reported by Abercrombie & Fitch, the US retailer, this month were attributed primarily to spending too much too soon on weak European flagships.
Inevitably, the size of the luxury group dictates the impact of the successes and failures of a flagship on its books. For smaller brands, flagships run the risk of becoming white elephants, unable to cover rent, staff and construction costs should customers’ minds – and wallets – wander.
Antoine Belge, luxury analyst at HSBC, the bank, says: “Big brands are more secure. Most have had flagship chains for some time, so gradual openings won’t significantly affect financials.
“However, they tend to be less profitable than regular stores, taking two to three years to break even, versus the average of one year. Still, this can be compensated for in other ways, such as building long-term engagement with a customer base.”
Armani’s Mr Mancone agrees companies must be open-minded when quantifying return on investment, arguing it is one of the luxury world’s defining idiosyncrasies.
“Building a successful fashion brand requires acceptance that one will not always get immediate returns from investment – just look at the example of fashion shows. Measurement must go beyond sales and encapsulate value gained from the lasting impact of a meaningful connection with luxury’s 21st century customer.”