New kids on the block

The fashionistas will have to wait. Well-known upmarket department stores are not planning an expansion in the region anytime soon. There is, however, also some good news

Mladen Petrov

Rachel, the popular character from US sitcom ‘Friends’, loves to go on shopping sprees at Bloomingdale’s in New York. While Carrie Bradshaw, the main character in ‘Sex and the city’, firmly believes in the power of shopping therapy at Barneys. And Karen Walker, the New York City socialite in ‘Will and Grace’, has a soft spot for Bergdorf Goodman. All in all, every woman, and every fashion-conscious man, has his or her favourite high-end department store – not only in the sitcoms, but in real life too.

The Lehman effect

At the beginning of the recession, department store owners believed that they were well positioned to weather the storm. After all, they had everything to make them recession-proof: an appealing mix of top-shelf brands, a large variety of products and – last, but not least – the key ingredient, a core of loyal, well-off customers. As it turned out, the sales figures show that they were wrong. According to the consultancy firm Bain & Co, which has been monitoring the luxury goods market since 1990, this year sales are to contract by 7 pct, the first decline in 19 years. Japan, one of the world’s largest luxury good markets, is officially in a “luxury recession”, while major department store chains in the US, such as Saks Fifth Avenue, Neiman Marcus and Nordstrom, have reported significant, often double-digit, declines in sales in 2008, also attributed to the so called “Lehman effect”.

In the first half of 2009, luxury retailer LVMH posted a 20 pct drop in revenue from Japan. Retailers such as Hermes, Cartier, Chloe and the Gucci Group reported increasing sales in Asia, with growth coming mainly from mainland China, Hong Kong and Taiwan. The upcoming Christmas holidays are traditionally the busiest period of the year for retailers, but not this year. Research institutions confirm that this year’s holiday season will be marked by a further slip in holiday sales of possibly 1 pct or more. Department stores in the US are getting ready for a 5-6 pct slide in sales in the second half of the year.

The financial crisis has only worsened the condition of iconic department stores, which were struggling for survival even before customers switched into saving mode. Sarah Jessica Parker’s favourite Barneys is on the troubled players’ list. Barneys, operating 13 outlets, 19 lower-priced CO-OP stores and nine department stores across America, is USD 660 mln in debt, according to data compiled by Bloomberg. This July, Moody’s Investors Service downgraded Barneys as fears grew over its liquidity.

Where is my department store?

You get the picture. The times are not particularly favourable for the international expansion of top-end department store chains, even to locations that were once certainties, such as Moscow and Tokyo. And what about the CEE retail market? More patience is required for more upmarket stores to enter these markets. When we were working on this story, several UK and American-based stores made no comment, with the explanation that “the CEE region is not a market we are looking at”. Does this mean that the region is not yet ready for such a format? Yes and no. While market analysts agree that it is still a bit early for high-end department stores to make an appearance, the department store format as such is well-known thanks to retailers such as Peek & Cloppenburg, Van Graaf and Marks & Spencer, who are continuing their expansion in the region.

These stores, however, are not traditional department stores as usually conceived, as they are focused mainly on selling clothes. How do we differentiate a multi-brand store from a department store? As Jim Sluzewski, senior vice president of corporate communications and external affairs of Macy’s Inc, the operator of 810 Macy’s stores and 40 Bloomingdale’s stores across America, explains: “A department store is a side-by-side grouping of products across various merchandise categories that is operated by the same company, under the same roof and under the same brand name. Most stores contain apparel and accessories for the whole family, as well as a wide range of goods for the home. Some larger Macy’s stores have coffee shops and/or restaurants.”

Starting from this year, as a way to revitalize some of its stores, Tesco is introducing the department store concept to the Czech Republic and Slovakia. My, Tesco’s department store brand, is bringing for the first time to these markets brands such as French Connection and also introducing some local designers, including Hana Havelková Jozef Sloboda and Martina Nevařilová. So far Tesco has opened a flagship store in Prague (Národní street, 12,000 sqm) and another one in Liberec (Forum Liberec shopping centre, 7,500 sqm), with another flagship store scheduled to open in Bratislava in 2010 (Kamenné námestie square, 12,500 sqm). Marcus Chipchase, managing director of department stores for Tesco, while not disclosing the investment value of each of these stores, adds that: “The store in Liberec is the only one which has been built from scratch. The other stores are being reconstructed. The business in Liberec is going very well. Customers appreciate a wide range of goods and brands. That is the key. A department store should offer goods for everybody – from price sensitive people to customers looking for premium brands.”

Falling short of the real thing

Nevertheless, at this point the department store culture in the CEE region remains less popular and restricted to a few major cities. In Hungary, the department store segment is still in its infancy and circumstances indicate that this niche has little potential for the retail market looking ahead, with Budapest being the only destination for retailers. Recently, Italy’s Gruppo Coin opened its first department store, with an area of 1,500 sqm, on Dorottya street in the centre of Budapest. The company has also kept open the option of setting up another store sometime in the future. Another long-awaited project, the Paris Department Store (PDS) is also very close to its grand opening. Just last month Orco Property Group, the developer of the project, successfully renegotiated financing terms with UniCredit Bank for both the Váci1 and Paris Department Store projects. According to the contract, the bank is to cover 75 pct of the two projects’ investment costs. The 10,000 sqm Váci1 retail project, located in central Budapest, is expected to be completed in 2011.

The company is optimistic about its Hungarian ventures. “PDS is already fully occupied and we have also secured the future of Váci1,” says András Kovács, regional leasing director of the firm. Asked whether Orco might be considering selling some of its Budapest projects, Mr Kovács said the matter is not on the agenda for the time being, but adds that this solution might be necessary in the future if circumstances require it. The matter is more clear-cut in the case of Váci1. “This is a flagship project for Orco, not only in Hungary but for the group in general,” reveals country manager Kornél Kalapács. “We are going to finish building it, operate it and hold on to it no matter what,” he stresses.

But as is often the case, what comes to Hungary and the rest of the region falls short of the real thing. “These shop units are not the ‘proper’ size for department stores in the traditional sense,” argues Erika Pál, head of retail at property consultant Jones Lang LaSalle in Budapest. “The Coin store is smaller than what you would expect from a traditional department store, covering areas of 5,000 sqm up to 10,000-15,000 sqm, while the tenant mix in PDS features a large Alexandra book store, which also goes against the traditional composition. In Western Europe, a shopping centre is designed and built from the very start with at least one department store as a tenant in mind, which becomes a major anchor,” continues Ms Pál.

The big secret

A recent example comes from Warsaw, where the construction work on Wolf Bracka, a retail project by Polish-based Wolf Immobilien Poland, is in progress on ul. Bracka. According to some market rumours, the facility was originally to have been leased by a department store, but no further information on what stage the negotiations are at has yet been revealed. Who might be that future tenant? Macy’s is also looking to expand abroad with the first Bloomingdale’s store overseas scheduled to open under a license agreement in 2010. The opening, however, is not taking place anywhere near the CEE region, but in Dubai. “We have no specific plans for Macy’s or Bloomingdale’s stores internationally,” reveals Jim Sluzewski. The retail analysts ‘Eurobuild CEE’ talked to frequently mentioned UK-based Debenhams as an upcoming player. The company, present in the Czech Republic, Romania and Moldova, has been looking at the rest of the region, but the crisis has left its mark on its expansion strategy.

“Chains such as Debenhams are looking to expand through franchising, which under current conditions is extremely hard to accomplish. One considerable challenge is to find a local partner with enough capital and experience to open up and operate a 4,000-5,000 sqm store. German retailers, such as Peek & Cloppenburg, operate their own stores and therefore are in a different position that favours faster expansion. The lack of foreign department stores, generally speaking, is not a bad sign for the market. Players such as House of Fraser, John Lewis, Galeries Lafayette and El Corte Ingles, are focusing on their core home markets for the moment; but as spending power grows, Western European department stores might look more favourably on Central European markets in the future,” claims Beatrice Mouton, CEE head of retail at Jones Lang LaSalle in Prague.

Despite the crisis, Debenhams – also reluctant to provide comment for ‘Eurobuild CEE’ – is continuing its growth in the region. The first Debenhams store in Bratislava is to open in Pribina Galleria, part of the Ballymore Group’s mixed-use Eurovea project, due to open in spring 2010. Other retailers, such as Marks & Spencer and Peek 
& Cloppenburg, have also chosen Pribina Galleria as a location for their flagship stores.

Location, location, location

Is the shopping centre a better choice of location than the high street? JLL’s Beatrice Mouton explains that malls, due to their flexibility, are able to meet tenants’ requirements such as ceiling heights, for example. In addition, they offer more affordable rents compared to those on high streets, which tends to be the main factor for those retailers who are not so interested in attracting the most demanding customers.

In Budapest the interest of any high street retailer is still focused on the old section of Váci street, a popular tourist destination. However, this area suffers from a lack of related amenities, which encourages locals to go to other locations to do their shopping. “Parking is very difficult and the brands you find on Váci street are also present in shopping centres. These days, when convenience is everything, there is simply no motivation for shoppers to make the effort when they can get everything under one roof if they go to a mall,” JLL’s Erika Pál adds. Another district of Budapest that has long been considered a potential location for high street retailers is Andrássy avenue; but despite the arrival of top-end brands, such as Louis Vuitton, the area has yet to pick up any steam. With the two new Orco projects now set to appear on the market, analysts believe that it is unlikely that the floodgates will open. Besides access issues in central Budapest, there is also apparently a lack of buildings suitable to accommodate department stores. “We have looked at many possible locations and most often we found that it is impossible to make the changes necessary to create a proper store layout,” Ms Pál comments.

This is not the only issue. Katarzyna Michnikowska, senior analyst at Cushman & Wakefield in Poland, explains why customers are still having to wait for the first “real” department store: “These stores have their roots in much more developed markets, serving more affluent customers. The purchasing power required for department stores is not yet here. The times and consumer patterns have changed and much a faster rotation of merchandise is required. When it comes to fashion stores, H&M and C&A can respond much faster to the market’s needs.” Ms Michnikowska adds that the original department store concept remains somewhat unknown in Poland. “We are going to see big retailers coming, TK Maxx to name but one, but the current times are not favourable for the expansion of more upmarket brands,” she claims. TK Maxx, the discounted clothes retailer, has already announced the opening of its first stores in Poland. Eventually, the company is looking to operate as many as 30 stores across the country.

This is also good news – at least for all the Central European Carrie Bradshaws on a budget. ν

With a contribution by Gergo Racz from Budapest