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LOCAL TALENT

Upscale independents give national chains a run for their money

By Maura K. Ammenheuser

Department stores occupy nearly every American mall, and plenty an urban street corner too. Of late, though, independent high-fashion merchants are waxing bolder than ever.

In August Dallas luxury bastion Stanley Korshak unveiled a 15,000-square-foot sportswear boutique called The Shak. The new concept carries edgier styles than Korshak, and at lower prices. Shak’s customers skew younger than Korshak’s, too, but the difference is characterized more by attitude than anything else, says Korshak owner Crawford Brock.

“Expanding Korshak is nearly impossible,” said Brock. “It’s too high-level a service.” Shak, however, could travel, he says. Brock plans to roll out more Shak units as freestanding stores, though he would not say how many or how soon. California and New York are expansion targets.

In June Fred Segal, legendary Los Angeles house of cutting-edge style and magnet for celebrities, announced plans to open in the W Las Vegas Hotel Casino & Residences, which is slated for unveiling in 2009.

The Mitchell family, which owns Mitchells, in Westport, Conn., and Richards, in Greenwich, Conn., bought Marshs, an 81-year-old menswear store in Huntington, N.Y., last year. The family invested some $3 million in a renovation and added women’s lines. Published reports say Bob Mitchell, now co-president of all three stores, anticipates that Marshs’ sales per square foot will hit $1,000 right off and then eventually exceed $1,500 per square foot. The three posted a combined $80 million in sales for 2005, those reports said.

In August Nordstrom said it had bought a majority stake in Jeffrey, which operates stores in Atlanta and New York City. Jeffrey founder Jeffrey Kalinsky is now director of design merchandising for Nordstrom.

Of course, there have been such team-ups before to open boutiques within department stores. But there is novelty in Nordstrom’s acquiring an independent and installing its founder as an in-house fashion guru, sources say.

“I’m not aware of anyone else doing it,” said Joseph French, a senior adviser at commercial real estate advisory firm Sperry Van Ness. Patricia Pao, founder of Pao Principle, a New York City-based market consulting firm, says the move sharpens Nordstrom’s fashion edge.

These private companies say little about their revenues, but Madison Riley, a retail strategist at Atlanta-based Kurt Salmon Associates, says luxury store sales can approach $1,000 per square foot.

None of the sources SCT interviewed for this article would disclose financing information, with the exception of Brock, who said only that Korshak developed Shak internally and that the company has someone lined up who expressed an interest in financing a rollout. Generally speaking, though, French says money is available now for retailers seeking loans or investment partners.

In any event, if independents are to thrive among corporate competitors, they will require a clear niche, sources say. “You need to identify something that makes you unique,” said Alan Au, client relations manager at Jimmy Au’s For Men 5’8” and Under, Beverly Hills, Calif. The store claims to be the only U.S. designer clothing option for short men, and Au says this is a niche no one else will touch, because it is too costly to develop.

A common complaint among observers is that department stores are too homogenous. Why are the independents making the moves they are? “Because they can, and because they know people are looking for something different,” said Robert K. Passikoff, president of Brand Keys, a New York City firm specializing in customer-loyalty consulting. Nordstrom is known for customer service, and Neiman Marcus tops the luxury hill, but few other names evoke any particular image, says Passikoff.

Pao says it is no longer the design houses that dictate fashion, but rather the customers trying new looks. Self-expression is the need of the day, says Pao, who points to online-video phenomenon YouTube as an example. “There’s been no one ‘it’ bag or ‘it’ shoe in the last three years,” said Pao. And this is because customers are following their own fashion instincts, she says. Riley agrees, noting the tendency for today’s shoppers to combine a pair of $20 pants from Target with a $600 designer bag.

“The reason Fred Segal and Jeffrey are as successful as they are is because they capitalize on customers’ need for scarcity and discovery,” said Pao.

This special spark that independents offer notwithstanding, one tenet of business demands risk for growth’s sake, while another warns against the peril of straying too far from the core mission. Like any retailer, the fashion boutique must find the middle ground.

Conventional chains are thus compelled to buy or create new boutiques, says French. “They don’t want to be perceived as old and stodgy.” Riley holds up the Nordstrom-Jeffrey deal as a particularly good example of a strategy that brings a mainstream retailer a unique asset to draw luxury shoppers. “These are strong and good strategic moves,” he said.

But of course, successful expansion also depends heavily on the choice of market. “Whenever you expand, you take your eye off the core business,” said Pao. “It’s a distraction.” But Fred Segal’s move to Vegas makes sense, she says, because that market is a natural extension of Segal’s audience, both geographically and culturally. Invading New York City, by contrast, would be a tough sell, Pao says. Similarly, an upstart in Westport, Conn., would probably not fare as well as Mitchells has there, says French, because Mitchells has built its business and reputation over time.

Riley insists that thriving independents are far from the exception today. For this, he credits two trends: remarkable performance by the luxury segment — even merchandise at Jimmy Au’s, whose niche is built around physical size rather than style, has grown more upscale, according to Au — and a return to small, independent retailers. “We’re seeing the head of the trend,” said Passikoff.

The luxury part is important, because it is the high-end independents that are thriving. The middle-market independents face vastly more competition from the Gaps, the Kohl’s, the Targets and the Wal-Marts, says Riley. Brock concurs: “If you’re in the middle, you’re in trouble.”

The owners of ‘A’ properties should take special note, says Riley, though this recent flurry of high-profile activity among independents is irrelevant for the lesser properties.

“These stores will never locate in a shopping center, because they can’t afford the rents,” said Pao. Besides, she says, they prefer street-front visibility. On that score, Au chimes in from the amen corner, calling the leases national chains demand of developers “insanely killer deals.” A department store can ban independent competitors from a center and gain rent discounts the boutiques cannot negotiate.

Jimmy Au’s closed four California shopping center stores to open a street front in Beverly Hills. They were the Beverly (Hills) Center; the Del Amo Fashion Center, in Torrance; Glendale (Calif.) Galleria; and Santa Anita Fashion Park, Arcadia. Au says it was not that the shops were doing poorly in those centers. “I sadly have to say [centers are] not very good about keeping independents,” he said.

On the other hand, some independents may not even want to be in a shopping center at all. Their customers prefer great service to a mall setting, says Brock. “Stand-alones are forced to create destination shopping,” he said. “They have to.” They cannot, for example, rely on a mall staff for marketing, he says. “It’s a completely different mindset. You attract [high-quality employees] and you pay [well], and, eventually, you begin to take root and it grows.”

Independents may lack the national profile of a Neiman Marcus, but the big chains ignore their smaller neighbors at their peril. “Any savvy merchant will pay attention to what’s going on in [independent] stores,” said Riley, who calls these boutiques a fashion bellwether. Independents’ smaller size allows them to respond speedily to trends, because they can test a new look without committing dozens or hundreds of stores to it.

For a department store buyer, the clothier around the block is also more accessible than some design house in Italy, says Riley, though he and others say department stores rely on many sources for fashion leads, big European shows topping the list.

Still, some independents enjoy considerable influence. “Fred Segal doesn’t affect the local market,” Au said. “Fred Segal affects nationwide.” This is because of the celebrity status of many of its customers, which translates to constant exposure for Fred Segal’s wares in the tabloids. “By putting Fred Segal in Vegas, every little fashion store is going to have to go to Vegas to have a peek.”

But Fred Segal is an anomaly, being a year ahead of everyone else and focusing on upcoming designers, Au says, while other luxury emporiums follow more-established designers and relatively conservative styles. “It varies by market, depending on who’s there,” said Brock. “In Dallas we’re being shopped all the time by everybody. And we look at everyone else.” Mitchells does not have Saks next door, of course, but all of New York City’s shopping is less than an hour away.

Au keeps tabs on what TV and film stylists seek out. He says the store enjoys great rapport with salespeople at Nordstrom and Saks, talking easily about what is selling.

A growth surge on the part of independents will increase the productivity of the department stores and can only help the giants as they expand in second-tier markets, says Pao. A Neiman Marcus checks out Fred Segal, Jeffrey and other sources and then adjusts merchandise accordingly — and this is good, says Pao. “It pushes the bar upward.”