Brands re-evaluate flagship stores as trends shift

(1 Aug 2019) Flagship stores are facing a reckoning.

Once considered a retailer's much ballyhooed monument to its brand, the large-format stores are disappearing from high-profile shopping thoroughfares like Manhattan's Madison Avenue because of skyrocketing rents and changing shopping behavior that no longer make it feasible for companies to have such a presence.

Over the last year or so, big names including Gap, Tommy Hilfiger, Lord & Taylor and Polo Ralph Lauren have closed their flagships on Manhattan's Fifth Avenue.

Abercrombie's Hollister brand announced in May that it was closing three more of its big stores _ one each in Milan, Fukuoka, Japan and Manhattan's SoHo area. The announcement came after the teen retailer shut down flagship stores in Hong Kong and Copenhagen.

The latest flagship victim could be Barneys New York, which opened its 10-story Madison Avenue store in 1993 and became a cultural icon in luxury shopping but now risks closure.

High rents and a dramatic shift toward online shopping are pressuring the venerable department store to evaluate restructuring options, including possible bankruptcy, as it addresses some of its key leases in ritzy shopping corridors.

Joseph Aquino, who runs Joseph Aquino Commercial Real Estate Services, says the days of the shop-til-you drop mentality on Madison Avenue popularized by the HBO popular series of the 1990s "Sex in the City" are over.

"She was 45 and now she is 65. She isn't shopping like she was 45," Aquino said.

The concept of a flagship store is more than a century old and used to be limited to retailers' biggest store _ one in their first or most prominent location.

But in the last 20 years, a flagship store frenzy took hold and retailers looked at them as a must-have shrine to their brands. Companies were willing to pay exorbitant sums of money to showcase their merchandise in luxury corridors.

Rents have swelled so much, however, that many retailers can no longer justify the high price, especially as more shoppers shift their spending online and physical stores lose foot traffic.

As a result, rents on Madison Avenue and Fifth Avenue have taken a hit as demand for these locations have fallen.

Average annual asking rents for ground floor locations for the Fifth Avenue strip between 49th and 60th Street was $2,779 per square foot in the first quarter of 2019, down 12% from its peak of the second quarter of 2017, says commercial real estate broker Cushman & Wakefield.

But many analysts believe they haven't fallen far enough. In fact, commercial rents in 45 out of the 60 cities including New York, Los Angeles and Miami, are higher than in 2009 when the economy was in a recession, according to data from CBRE, a commercial real estate service firm. In the case of Barneys New York's Madison Avenue store, the landlord there reportedly raised its rent to $30 million from $16 million earlier this year.

Still, flagships aren't dead. Many retailers are embracing new versions that beckon shoppers with less merchandise and more high-tech experiences.

Nike opened a flagship store on Fifth Avenue late last year that doesn't have any cash registers and lets shoppers see details of items displayed on a mannequin by scanning the QR code and then having those items delivered to a fitting room or a designated pickup spot.

Jeans giant Levi Strauss & Co.'s new flagship store in Manhattan's Time Square features larger dressing rooms with call buttons for tailors who can add trims and patches to customer's jeans.



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