Fashion Retail’s Bad Problem With Good Math
Prime real estate and overspending have been trademark drains on fashion retail brands for decades. And yet, when a new or resurgent fashion brand or clothing retailer finds success, their first instinct is to open more, and often larger branded store “experiences” for their customers. It’s often a path to disaster.
“Once upon a time, fashion retail shops played a role in sociocultural connection and expressing self-worth…”
A generation ago, we celebrated the concept of retail therapy in a specific manner, one driven by spending money on something we were utterly certain we deserved, and by the status accorded us as we spent the money, in public view. From our stroll into the store, receiving fawning or snooty service (something we’d b*tch-slap when we dropped some cash), to the “I deserve it” moment when we dropped a cool $1,500.00 on some new clothes, to the branded shopping bags we carry, or had carried for us, exiting the store, the shopping trip was informed by validation, and knowing other people saw and perhaps envied us spending the money.
What’s happening now
Fashion retail has suffered greatly the past 6 months, partially because we couldn’t shop in stores and then realized we didn’t really need to. But well before Covid, the business model for fashion retail in the US was already crumbling. It was held together by an old-school duct tape formed by the agendas of overpaid executives, the notion that certain stores were “institutions” that shoppers needed (essentially, every argument made about the existence of Bergdorf Goodman — admittedly one of my favorite stores), by corporate indecision about cutting hard losses for a “luxury” retail brand with marquee real estate, and of course, the industry’s spotty embrace of e-commerce.
The hard truth is that people do not shop the way they used to. The fashion retail experience now is driven more by efficiency than theatricality and the social status of being seen, shopping. The biggest clothing retail spenders, never see the inside of a store. And these are just two factors reducing daily foot traffic in retail shops.
The List No Fashion Brand Wants To Be On
This summer saw the creation of a new who’s who list. On it, some of the most familiar names in fashion retail declaring bankruptcy, restructuring, or closing for good. J. Crew (in May, but apparently emerging from Chapter 11 soon), Neiman Marcus (also May, but mired in legal issues), John Varvatos (again… May), Jeffrey, the last of the well-curated boutique shopping experiences (in May too… see a theme?). In late May, Victoria’s Secret announced it would shutter 250 stores this year. Brooks Brothers joined this parade in July, declaring bankruptcy. Also in July, The New York Times exposed, with deserved dignity, the financial hardships of one of fashion’s greatest success stories, Diane Von Furstenberg, a brand you might assume was in decent financial health because of the icon status, thoughtful leadership and benevolence of its founder. Not even close.
Lord & Taylor joined the party on August 3. Also in August, Ralph Lauren announced its quarterly sales dropped 57 percent. And very recently, discount designer clothing retailer Century 21 announced it would close its doors, for good. Tarnished luxury retailer Barneys, for two generations a singular arbiter of style, is not amongst this 2020 list. Thankfully for Barneys, the chain collapsed last fall, pre-Covid.
While the above brands’ offerings are varied, there is a common denominator behind their failings: significant, prime real estate and the inevitably crippling impact of that on their businesses. Consider J. Crew, which has two prime locations on Manhattan’s Fifth Avenue (midtown and downtown, naturally). Or John Varvatos, which had stores in New York’s Soho, Miami’s South Beach, Los Angeles’ WeHo and Boston’s Copley Place. And of course, there’s Barneys’ Madison Avenue location, the rent for which, if the pioneering retailer had managed to survive 2019 and collapse in good company during Covid, would have risen to $30 million annually in 2019 for that single retail location (not including property taxes that would have driven the annual rental tab to $44 million per year).
Insisting on a large amount of prime real estate for a fashion brand is typically dubbed a “strategic, brand-building initiative.” And it’s married to a treadmill mandating ridiculously higher-than-average sales volume per store. Whether you plan to generate that the traditional way (ever-higher dollars generated per square foot of the store), are banking on a free-spending, HNWI private client network to close the sales gap, or worse, believe in on some misguided revenue model that involves renting out the store for special events or as a location/set for film or television, the math rarely works in the brand’s favor when the lease rate is simply too high.
A dissection of just two of American fashion’s blue chip brands, and their inability to meet sales projections to match their leases, says it all.
Bad math, lesson #1: Ralph Lauren Fifth Avenue, Midtown
Three years before Covid in 2017, Ralph Lauren closed its “other flagship” location on Fifth Avenue and 55th Street in New York. Mind you, the brand already have one of the chicest and most beautifully designed flagship locations at the Rhinelander Mansion on Madison Avenue, just one mile away. But hey, more is more, right? The rent for that second flagship location on Fifth Avenue: a staggering $25 million per year, or $2,083,333 per month. It was, for that location, a financial model that could never withstand even three quarters of weaker sales, let alone Covid.
Knowing that midtown Fifth Avenue has been a tourist trap for decades, let’s work backwards on the math for this lease, assuming Ralph Lauren’s global appeal means most visitors will buy some piece of merchandise as a token, or status symbol, of their visit to the store or to Manhattan in general.
To cover just the rent on this space and for perspective, this store would have had to sell 879 units of its iconic polo shirt (at an estimated price of $79.00 per knit shirt)… every day… of every month… for the duration of the lease. Note that the average fashion retail store over 15,000 square feet in size is lucky to conduct 200 sales transactions a day.
Yes, one can argue the holiday months are busier and generate significantly greater sales. You can conjecture that Ralph Lauren’s more expensive merchandise (say $2,500.00 for a men’s suit or a woman’s gown) might offset this. But consider that the former is a dependence on seasonal sales and lower profits for marked-down merchandise, and that the latter is for merchandise that people buy and replace less frequently.
Now and in 2017, the fundamentals of a strong retail business remain the same: The average store must be able to pay for its core expense of rent based on typical foot traffic, twice a year markdowns and private client sales.
In the July 22, 2020 article cited above (truly a great read), Ms. Von Furstenberg realized she’d made a grave mistake on retail expansion — in 2016 — four years before Covid and a year before Ralph Lauren’s Fifth Avenue shuttering. It’s also important to note her brand’s stores, while in prime locations, were never huge.
Bad math, lesson #2: Victoria’s Secret in Herald Square
If you think the prior example is unusual, let’s look at lingerie icon and feminist punching bag Victoria’s Secret. Their 60,000 square foot flagship store in Herald Square had a monthly rental tab of $937,000.00 — a “bargain” compared to Ralph Lauren’s Fifth Avenue location. But that’s still a lot of undies and ancillary beauty and bath products to sell… items women buy with regularity, but not intense frequency.
I’ll break down that math again, tied to the brand’s signature bras, based on an average price of $38.00. To meet that $11 million annual rent, Victoria’s Secret would have to sell 821 of these bras a day. Which of course begs the question: how many bras do Manhattan women or women visiting Manhattan, need? On average, women and men buy new underwear, every 6–12 months. During or because of Covid, and working from home, that figure may be far less.
History will repeat itself
Yet despite the irrefutable logic of these numbers, brands are still interested in opening stores in prime locations. Consider Zappos, born of and profitable through e-commerce, which reportedly leased 16,000 square feet (the same amount of space as the Ralph Lauren Rhinelander Mansion, below) in Manhattan’s Union Square area in August 2020.
As more retail space for hopefully less astronomical rents becomes available for retailers in major cities, more brands will follow Zappos’ path. The lure is simply too strong: prime real estate and plenty of it, likely discounted from ridiculous highs but not necessarily supportive of profitability.
And these brands will likely fall into the same marketing mindset that humbled the brands I’ve already mention: the belief that in order to fully realize a brand’s lifestyle vision, the brand must create a large-scale physical environment, fully under the control of the brand, for the consumers “to experience” and experience elevated self-worth.
If you need proof of this, look no farther than the rise and fall of Delia’s. The “juniors” (to use a classic department store term) clothing brand was quirky, had a clear, connective point of view, and was a pioneer in direct-to-consumer (catalog) sales. Eventually, Delia’s migrated to e-comm and into limited physical retail (90+ locations), and then filed for bankruptcy twice by 2014, before briefly resurrecting itself in 2018, and becoming a non-factor today.
Think about the genesis of that business. Delia’s started a successful brand in the 1990s doing what all the experts are telling brands to do today— migrate to D2C and e-commerce. Then, buoyed by that success, they decided people “needed” a Delia’s store, to “bring the brand to life.” Did they really? No. The issue with immersive brand environments is they will become suffocating, and kill a consumers relationship with the brand if mismanaged or overdone.
More recently, Outdoor Voices, once dubbed “the next Lululemon,” collapsed, prominently. Outdoor Voices leaves us with a legacy of canned upbeat messaging (the phrase “Doing Things” — whatever that means — marked the entrance to the brand’s offices), amorphous cotton clothing, nine retail locations and delayed openings in other locations, $50+ million in funding, and a 2019 valuation of $40 million chopped by $70 million, likely triggered by a 12-month burn rate of $19 million in 2018. More… bad… math.
Do the right math, and pace growth without greed
The bottom line: Fashion brands need to reevaluate their motives and realistically review their profitability models when increasing their physical retail presence. They should consider keeping the growth model smart and focused (like the early Bonobos store locations, which were essentially cost-effective hybrid “showroom-fitting rooms” that directed you to then make the purchase online).
A fish climbing a tree
Even as I finished writing this, I read that Brooks Brothers found fire sale buyers, money men intent on saving “legacy” brands. Past the buyers’ goal of restoring the brand to just enough financial health to unload it to another buyer for a tidy profit, the big question is why we even need to save a brand like Brooks Brothers, or many of the others that collapsed this year. And I understand there are livelihoods at stake, including manufacturing jobs (and the US is an economy built on manufacturing).
But long before Covid, Brooks Brothers was a fish climbing a tree (a favorite saying of a friend of mine). It’s a non sequitur that applies to so many fashion retail brands. Brooks Brothers didn’t know how to capitalize on the rise in workplace casual dress, and suffered greatly because it nurtured too formal and dated a style that not even a heavy injection of cool (via the Thom Browne design partnership that started in 2007 and ended in 2015) was ever going to fix. Simply put, the brand couldn’t connect to younger shoppers or adapt to evolving sentiments about its core product: suiting.
David Wolfe, a retail and trend forecaster renowned for his cutting and profound insights, said it best when he commented on the decline of the Marc Jacobs brand (remember when Marc Jacobs mattered in fashion?) in 2015. Wolfe’s point: that in fashion and clothing, when young people no longer covet your fashion label, “… that’s really what’s wrong, and it cannot be repaired.”
Few consumers “covet” Brooks Brothers. And yes, Brooks Brothers has — you guessed it — plenty of real estate to deal with. But the truth is that, like marketers perception of how shoppers see the retail experience, Brooks Brothers never truly evolved.
If 2020 is truly a year of deep introspection and reevaluation for American — really global— business, let’s learn from the past when it comes to fashion retail stores. We simply don’t need them or care about them the way we used to. And some brands simply are not worth saving despite their legacies, and we’re even worth saving, before Covid.
