Luxury brands must rethink retail in saturated omnichannel world

By

Sandra Halliday

Published
Jan 24, 2017

High-end stores in the world’s key luxury tourist cities seem set fair for sales growth. But elsewhere the picture is not as rosy and luxury brands need to rethink their retail strategies, adapting to e-commerce, and being more flexible in where they open (and close) stores.

That is the conclusion of a new report from Boston Consulting Group and Bernstein (BCG/B). They said luxury brands need to act fast over their saturation of stores in Asian cities and consider opening more in the US and elsewhere.

The top six destination cities, New York, Paris, London, Tokyo, Los Angeles, and Hong Kong, are very likely to sustain their density of luxury stores, even though Tokyo and Hong Kong are already at saturation level.

And the rise of e-tail means brands must “urgently examine the efficiency of their existing store networks” beyond those hubs, BCG/B said.

The research draws from BCG's proprietary Metroluxe Index, which assesses opportunities for luxury sales by city, and the Bernstein Proprietary Luxury Store Database, which maps the global luxury retail environment by store and indexes 7,000 stores across 36 luxury brands.

Olivier Abtan, a partner and MD in BCG's Paris office and the global head of its luxury, fashion, and beauty topic area, said: "China, though it still offers growth, is no longer the El Dorado it once was. Also, the overall slowdown in the market means that savvy brands now prefer variable cost structures to expensive fixed-cost real estate. And e-commerce is becoming a force to be reckoned with in luxury markets.”

The research noted that physical stores continue to play very important roles in brand building for luxury firms. But after the abundant openings over the past decade, opportunities for store expansion are lower. The focus now is on initiatives such as moving to better locations, renegotiating rents, and revising store footprints in order to maximise revenue and improve sales density.

SATURATION AND OPPORTUNITY

The researchers said the ‘big six’ will continue to support multiple stores per brand, with the mix of flagships and smaller locations in these ‘global’ cities catering to large populations of local shoppers and to steady flows of tourists."

But BCB/G also said it is an unavoidable fact that many large Asian cities now have too many stores. Top-tier cities such as Tokyo, Seoul, Hong Kong, Shanghai, Beijing, Singapore, and Taipei appear saturated with luxury locations. That means brands with big footprints in those cities are unlikely to see a significant uplift in demand to support their fixed-cost investments in real estate.

With brands unable to rely on achieving the growth they need just from the six global hubs hubs and with Asia full to busting, is there still room for store expansion elsewhere? Yes, say the researchers, citing opportunity in many US cities.

BCG/B said brands still have room to open additional stores -- and crucially, to push for higher activity per store, on top of e-commerce development. Overall, the US remains a solid market for luxury brands, and many second-tier cities in the US are still under-penetrated. Even though they have less tourist traffic than hubs like New York or LA, they have strong, steady sales from their local populations.

But closing stores must also be an option as digital technology is shaking up the luxury sector -- in many cases, faster than expected. The effectiveness of e-commerce is encouraging leading brands to fast-track omnichannel initiatives and determine which mixes of channels are best suited to which markets. In particular, the growth in, and potential of, online sales mean less need for marginal stores.

And despite the remaining solid opportunity for new stores in select US cities, the nation's strong e-commerce environment will likely result in fewer stores per city, on average, than in other parts of the world.

"Brands must be aware of the digital wave's impact on store productivity everywhere," cautioned Abtan. "They have to anticipate footprint reductions in select areas -- especially in Asia -- and work on getting more sales per square foot in existing stores rather than reflexively opening new ones."