Summary
The luxury retail industry continues to experience precipitous declines in sales and profits. There is a new reality where consumer demand will be dramatically different for the foreseeable future--and marginal companies, brands and locations will cease to exist. The landscape is about to change forever, with Barney's being the highest profile player to fall on the sword--thus far.
Analysis
Over the past couple of months, rumors about Barney's future have been rampant, primarily over fears that vendors would stop shipping goods due to liquidity concerns. Istithmar World, the Dubai-based private equity company that paid a whopping 13 times earnings to buy the company in 2007, had to kick-in more equity recently to keep the ship afloat. So today's Wall Street Journal article that Barney's was looking to get out of leases in two under-performing newer stores (reportedly Las Vegas and an unnamed second location--my guess would be Dallas) should come as no surprise.
But the underlying problems in the sector go much deeper and Barney's may well be the tip of the iceberg in what will be a wrenching consolidation as the industry comes to grip with the new reality of luxury retail.
By now, it's clear that the retail market in general--and the luxury sector in particular--is in crisis. In the immediate term, retailers need to become intensely promotional to convert their inventories to cash. The dismal performance of this past Fall will largely be repeated this Spring. By the Fall of this year, however, retailers' inventory levels will be much better aligned with lower consumer demand, which should improve year over year sales and margin performance significantly. However, the new reality is that the luxury retail market will be dramatically smaller than peak 2007 levels and is likely to stay that way for many years.
This new reality will have devastating impact for many players that assumed that luxury retail was largely recession proof and could grow at above average rates forever. Shifting consumer demand combined with an excess supply of luxury retail space are beginning to take their toll on marginal players, brands and locations. While we are seeing a large number of local, single location specialty boutiques close, Barney's is the first player on the national stage to appear to be in serious trouble. They won't be the last.
Barney's has a well deserved reputation for its distinctive merchandising point of view and edgy, contemporary marketing position---and by all accounts has two powerhouse locations in Manhattan and Beverly Hills. But Barney's is fundamentally a niche brand that was not showing signs of traveling well even before the current recession. Their expansion into the Boston, Dallas and San Francisco markets across the last few years has been met with disappointing results--and clearly their Las Vegas expansion has been a disaster. They recently moved into a larger more expensive location in Chicago and have plans to open a full-line store in Scottsdale (yes Scottsdale!) by the end of the year. So what we have is a company that has taken on increasing levels of fixed and debt expense while sales productivity (and margins) plummet. It's not likely to end happily.
But this story is about to be played out in other sectors of the luxury retail world. Saks has been saddled by a large number of under-performing locations for years--and one can only imagine how the recent downturn has affected those stores' four-wall profitability. Many fashion designers have also expanded their own stores, again assuming that the wealthy customers capacity to spend was infinite. High end contemporary specialty retailers such as Scoop and Intermix (and Barney's own free-standing Co-op stores and Neiman's new Cusp concept) have expanded into expensive real estate just as the market came to a crashing halt. It's very unlikely that all of them will be around a year from now. Even historically strong performers such as Coach and Nordstrom have announced plans to close under-performing stores and/or table some expansion plans in the wake of the industry downdraft.
Given the lack of clarity around the pace of an economic recovery and the quickening pace of consolidation it's hard to predict the extent of the changes, but they will be significant. For industry leaders with a clear and compelling customer value proposition, flawless execution and the financial wherewithal to muscle through the next few years, there will be unprecedented opportunities to gain market share and customer loyalty. For everyone else, look out.
