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CHIC NON, CHEAP OUI

The hypermarket-obsessed French have never warmed to department stores

By Molly Knight

Tourists in Paris can no longer enjoy the sweeping views of the Eiffel Tower from the rooftop café of the La Samaritaine department store. Owner LVMH shut the 430,500-square-foot (40,000-square-meter) emporium in June for renovations that could last until 2011. Shoppers were at risk because the landmark building does not meet fire and safety standards, according to the company.

But this is much more than simply the story of one department store. Observers say the closing of the 132-year-old store marks the end of an era for France’s grands magasins. The French department store sector is in a protracted slump. And the three biggest players — Galeries Lafayette, LVMH and PPR Group — are pondering new strategies for their stores that could involve abandoning the established prototype altogether.

Of course, it is not just department stores that are hurting in France. The country’s economic growth rate, defined by the International Monetary Fund as the annual change in inflation-adjusted gross domestic product, is expected to grow 1.5 percent this year and 1.8 percent next year. By contrast, the U.S. rate is expected to hit 3.5 percent this year and 3.3 percent in 2006.

Although Parisian department stores such as Le Bon Marche, Galeries Lafayette and Le Printemps have become icons of French retailing, the country never embraced the concept as warmly as other nations. “France is not the home of the department store,” said Andrew Watson, director of Paris-based LaSalle Investment Management. “England is the home of the department store. France is the home of the hypermarket.”

Indeed, hypermarkets — which sell everything from groceries to electronics in stores measuring about 100,000 square feet on average — currently account for 20 percent of France’s retail consumption. Department stores are responsible for a mere 1.5 percent. About 1,000 hypermarkets currently operate in France, against only 112 department stores. Of the country’s 500 shopping centers, department stores anchor just six. Even at fashion centers, the anchoring is left to such stores as H&M and Zara.

Department stores offer no real competition to hypermarkets, says Michel Choukroun, a retail analysis consultant and professor at the University of Paris. “Hypermarkets sell everything, and they’re everywhere,” he said. “They have specialized services where they can offer technical support in every department — and at discount prices.”

And nowhere is this hypermarket domination felt more acutely than in suburbia. Of the 9 million square feet of department store space in France, 2.7 million square feet (roughly 30 percent) is located in Paris, leaving less than 6.5 million square feet spread throughout the rest of the country.

“The Paris stores aren’t hurting, because of all the tourist revenue, but they’re hurting everywhere else,” said Choukroun. “To compete across the board, each department store is having to go in an entirely different direction. And it will be a challenge.”

The country’s largest department store chain, Galeries Lafayette, is leading the charge toward change. The Paris-based company, which was owned by the Moulin and Meyer families for over a century, operates 77 stores and controls 68 percent of the country’s department store square footage.

Galeries Lafayette began large-scale renovation and a remerchandising at the beginning of the year, after the Meyers sold out to the Moulin family and French bank BNP Paribas. “When we see a change like that, we know strategy decisions are going to be very different,” said Choukroun.

Cosmetic updates were the first order of turning the business around, says Christian Dubois, a Paris-based partner specializing in retail at Cushman & Wakefield Healey & Baker. “The department stores were becoming old-fashioned and not very attractive,” Dubois said. “Their poor decoration was making them irrelevant to consumers. They had to do something to save themselves.”

Moulin has broken up the stores into specialized sections to maximize their appeal. Among the first to undergo major reorganization was the 600,000-square-foot flagship Galeries Lafayette, in Paris on the Boulevard Hausmann, which attracts 26 million visitors a year.

One section, called Lafayette Maison, boasts five levels of modern designs in home furnishings and cookware. Another, Version Originale, caters to the 14-to-25 crowd. Instead of a traditional paint job, the walls are covered in graffiti.

Beyond aesthetic changes, the department stores have shifted their strategy. They are now happy to leave bargain hunters to the hypermarkets, for instance. Paris-based PPR Group, for one, clearly recognizes that its strengths lie in the luxury merchandising business. The conglomerate operates 24 Printemps department stores in France and controls about 20 percent of the country’s department store real estate. It also owns such luxe brands as Gucci and Yves Saint Laurent.

Printemps decided that to be competitive it needed to offer the higher-end names noticeably absent from hypermarkets. “They went completely to the other side,” Choukroun said. “No discount stuff.”

Additionally, Printemps has sought to diversify by offering the biggest perfume department in Paris (43,000 square feet) and opening in-store Fnac boutiques. Fnac is a books, music and electronics chain that posted some €4 billion ($4.8 billion) in sales last year.

But business remains tough. “The problem is that in each market, you have three or five companies that have more than 60 percent of the market,” said Choukroun. “If you’re a department store and you’re selling furniture, your competitor is the biggest in furniture.”

There are rumors that PPR is unhappy with Printemps and may soon look to sell it. “[Printemps] used to have good profitability, but now there’s too much competition,” said Choukroun. “The turnover per square meter is €6,000 ($669 per square foot), and the net profit is only 1 percent.”

There is even talk that Galeries Lafayette may close its stores in the small provinces, says LaSalle’s Watson. If that happens, the spaces will probably be gobbled up by Gap, H&M or Zara, which he calls the usual suspects, pointing out that the candidates are relatively few. “The only recent example we have to go on is when Marks & Spencer pulled the plug on 18 or 19 stores,” he said. “But the buyer of that group was Galeries Lafayette, so I don’t know what’s going to happen. I doubt that many will close, though, should it come to that.”

So while La Samaritaine remains shut, retail specialists will be watching the effects on its two competitors. “When La Samaritaine closed down, it was a big bang for France,” said Choukroun. “But it actually might be very good for the other department stores, because if someone walks up and sees that it’s closed, they can walk across the street to Printemps.”

But it remains to be seen how much the change in strategy is helping department stores compete. “It’s difficult to tell if it’s working, because all the markets are suffering since the economy is not doing well,” said Dubois.

For his part, Choukroun remains optimistic. “We don’t know at this point what will happen, but we think we’ll see growth when the economy turns around.”

Watson agrees, saying he thinks the stores would be wise to stick to their current strategies. “There’s definitely a chance to improve, definitely a future there,” he said. “But not against hypermarkets. That’s like pushing water uphill.”

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