How Big Is Luxury’s Opportunity Outside of Capital Cities? | BoF Professional, News & Analysis

Bond Street, Avenue Montaigne, Via Monte Napoleone — most luxury retailers eyeing a new market dream of opening a store in such tony locations in fashion’s capitals, a few doors away from the likes of Chanel, Prada, Balenciaga and Louis Vuitton.

British luxury store Flannels, however, is pinning its growth ambitions on less established markets. The multi-brand retail chain owned by billionaire Mike Ashley’s Frasers Group is pouring millions into expanding its regional store network across the UK with plans for a string of flashy megastores outside the UK’s capital in cities like Liverpool and Sheffield.

It’s a contrarian move at a time when brick-and-mortar stores are facing intense pressure and the luxury market is in retrenchment. But as the pandemic radically shifts how and where consumers spend, doubling down on more local offerings in under-served regional markets could be a way to bolster sales even as traditional luxury hubs in capital cities continue to suffer from a dearth of tourist spending and diminished commuter footfall.

“[Now is an] opportunity to focus on your local customer and your domestic marketplace again,” Selfridges boss Ann Pitcher told BoF in a previous interview. “That’s why I would point to recovery being stronger outside capital cities … There is a huge opportunity to continue to build domestic business.”

[Now is an] opportunity to focus on your local customer and your domestic marketplace again.

In China, smaller regional cities are already a focus for luxury names looking for new growth avenues in the market. Over 50 percent of luxury consumers are already located in second-or-lower tier cities, according to a report by Boston Consulting Group and Tencent. Morgan Stanley expects consumption across these cities could hit $6.9 trillion in 2030, more than triple 2017 levels, thanks to population growth, lower living costs and a strong appetite to spend. The household income gap between luxury’s traditional hubs and more regional locations is also narrowing, according to the firm.

Last year Gucci-parent Kering signed an agreement with Hang Lung Properties, one of China’s largest real estate developers, to open 14 stores for five of its brands across regional cities including Dalian, Kunming and Wuhan.

In the West, however, the opportunity was less clear, particularly in a dismal retail market and uncertain economy. Pre-crisis, it wasn’t uncommon in markets like France and the UK for 75 percent of luxury transactions to take place in the capital city, said Joelle de Montgolfier, executive vice president of Consumer Products, Retail and Luxury at Bain & Co.

While upmarket department stores like Selfridges and Harvey Nichols already operate a limited number of regional locations in cities like Manchester and Birmingham in the UK and others like Galeries Lafayette operate a network across France, before the pandemic, their most recent big investments went to flagships in London and Paris in a bid to lure high-spending tourists.

In a post-Covid 19 world, though, luxury brick-and-mortar players can no longer count on a steady stream of tourism to buoy sales. Indeed, they have never faced a tougher trading environment, with much of Europe imposing stricter lockdowns and luxury e-commerce sites stealing market share as the pandemic supercharged the volume of sales happening online. In the UK, retailers are also grappling with the repercussions of a last-minute Brexit deal and the end of tax-free shopping for non-EU tourists.

Multi-brand retailers in particular are under strain, as mega-brands like Gucci and Prada, which many retailers rely on to attract shoppers, are shrinking wholesale distribution in favour of direct-to-consumer operations. Department stores and speciality retailers are the ones set to lose out, with Bain & Co. forecasting that by 2025 they’ll capture just nine to 11 percent and 10 to 12 percent of personal luxury good spending respectively, down from 18 and 20 percent in 2019.

In this context, looking to the regional market with brick-and-mortar locations is a risky but interesting bet.

“There is a luxury goods demand reservoir outside of the capital cities,” said Sanford C. Bernstein analyst Luca Solca, adding brands have been reluctant to open their own outlets in regional cities, leaving an opening for multi-brand stores. The current retail downturn also means there’s opportunity for real estate bargains.

“They could do it profitably if they manage to get very good deals from landlords,” said Solca. “Given the retail desertification we are seeing in most high streets, this may be possible. So [it’s] maybe less of a crazy idea than it would seem at first sight.”

We don’t know how long the Covid crisis is going to last, so you have to turn on other engines … almost like a diversification strategy.

Flannels is betting it’s well-placed to take advantage of the gap in the market. The retailer, which was taken over by Sports Direct-owner Frasers Group in 2017, already operates a chain of around 40 luxury boutiques across the UK, with locations skewed towards the north of England. Now it’s doubling down on its regional footprint by pouring tens of millions into giant, experience-led flagships, starting with a 120,000 square foot location in Liverpool set over seven floors with a rooftop restaurant, fitness studio and a beauty hall.

Similar stores in Sheffield and Leicester will follow, with plans to open 15 more of these department store-scale locations in regional areas over the next five years. Eventually, it wants to replicate the model across Europe.

“A lot of people obsess over the London consumers. But it’s only eight million people in London. We have got 65 million people across the country and we’re catering for those people outside of London,” said Michael Murray, head of elevation at parent Frasers Group, who is spearheading the chain’s retail strategy.

Investing in stores that are “experiential and brand-building in nature” and complement an e-commerce business makes sense, said Guy Elliott, senior vice president of retail at Publicis Sapient. However, retailers must also be wary of overexposure. “Stores are still critical in the retail experience,” he said. “The question is how far you can scale that proposition.”

In the long run, the luxury landscape is expected to gravitate back toward a market anchored in capital cities, said Bain’s de Montgolfier. But it’s unclear how long that might take. Companies that test less saturated markets now may reap rewards in the near-term.

“We don’t know how long the Covid crisis is going to last, so you have to turn on other engines … almost like a diversification strategy,” said De Montgolfier.

“It is also helpful to anchor you domestically with new generations,” she added. “You can’t just be focused on the very specific customer segments that live in capital cities, you have to be tuned into other pools of possible customers.”

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