Fifth Avenue is going out of style for luxury retailers, as coronavirus erodes sales
"It is not surprising to see a lot of luxury retailers say, ‘Do we really need to be here paying these incredibly high rents?’” said one expert.
High-end fashion stores on New York’s Fifth Avenue used to play the role of a showroom, where shoppers could browse through curated racks of clothes with a glass of champagne. However, with shopping at a near standstill and in-store sales hovering at zero, that prime real estate is becoming a drag on retailers’ balance sheets.
Italian fashion house Valentino sought court approval on Monday to immediately terminate its lease on its four-story New York Boutique on Fifth Avenue, saying its premium address had been "substantially hindered and rendered impractical, unfeasible and no longer workable," according to a complaint filed to the Supreme Court of the State of New York. Valentino blamed "COVID-19-related restrictions, social distancing measures, a lack of consumer confidence and a prevailing fear of patronizing, in-person, ‘non-essential’ luxury retail boutiques."
It is the latest luxury retailer scrambling to adapt to a new world order of contactless shopping and stalled international travel that could hasten the fall of some of the most iconic stores for the rich.
“Given a lot of the uncertainties, it is not surprising to see a lot of luxury retailers say, ‘Do we really need to be here paying these incredibly high rents?’” said Jonathan Woloshin, head of U.S. real estate for UBS Global Wealth Management's Chief Investment Office. “I don’t think this is going to be the last of what we’re seeing here."
The virus has wreaked havoc across the luxury industry. Neiman Marcus, the department store known for catering to the uber rich, filed for bankruptcy in May, citing “unprecedented disruption caused by the COVID-19 pandemic.” Famed jeweler Tiffany & Co. reported its same-store sales fell about 44 percent in the first quarter of this year, compared to the same time last year. Luxury icon LVMH Moët Hennessy - Louis Vuitton, which agreed to buy Tiffany in November, reported a 17 percent decline in sales during the same time. Nordstrom, the department store for society’s upper echelons, was dropped by the S&P 500 on Wednesday.
“Best-case scenario, where a vaccine becomes available or the economic ramifications of the pandemic are not too severe, people will resume shopping and traveling and give a boost to luxury goods sales,” said Sarah Willersdorf, partner and global luxury leader at Boston Consulting Group. “But in a worst-case scenario, where a vaccine takes longer to develop or the recession is more severe, companies will struggle to regain momentum and people’s ability and willingness to buy luxury goods will suffer.”
Luxury sales globally could fall anywhere between $85 and $120 billion in 2020, or by about 29 percent, according to estimates by the Boston Consulting Group published in May. The fashion and luxury sector as a whole could lose between $450 and $600 billion in sales as a result of the virus.
Heading into the pandemic, luxury retailers were buoyed by wealthy Chinese shoppers who traveled to New York’s swanky Fifth Avenue District for a Louis Vuitton clutch, Cartier bracelet or Burberry coat, according to Robert Samuels, a consumer analyst at UBS Global Wealth Management.
Chinese shoppers made up about one-third of luxury sales leading into the pandemic, he said. But with travelers from China restricted from entering the country to contain infection rates, the future of luxury’s dependence on Asian shoppers is unclear.
“We simply don’t have the same tourism that has been there,” Samuels said. “Until we get tourism to ramp up again in the U.S., luxury retailers will need to attract a different type of shopper — or they’ll continue to be at the mercy of when the Asian consumer comes back to the U.S. to shop.”
With online shopping becoming the new normal, luxury retailers are facing an uphill battle. This year, online shopping has only made up a fraction of total global luxury sales, according to UBS estimates. Roughly $40 billion in euros was expected to be spent online versus $300 billion offline, according to UBS.
Luxury’s competitive edge in the retail industry has always been its high-touch personal in-store experience. But in the time of curbside pickup and social distancing, that edge is dulled.
“The luxury brands don’t have the same e-commerce infrastructure online as they do in the store,” said Samuels. “Continued digital engagement is going to be crucial for these stores, especially as they remain closed.”
Ice'es Green, based in Newark, New Jersey, told NBC News that until the coronavirus shut down stores, she avoided shopping for luxury goods online since Chanel, Louis Vuitton, and Gucci — her most shopped brands — don’t carry their full collection on their websites, she said.
"I didn't like online shopping with luxury goods because I wanted to see it in person," she added.
Green said she is a member of several Facebook groups for luxury goods shoppers that have helped her connect with luxury brand sales associates to buy products that may not be available online. But she's eager to get back to store shopping.
"I still need the in-store experience," she said.
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