According to my analysis, Deliberate Consumers are a powerful force under the New Normal for our downtowns (1). They, and the growing influence of e-commerce, have drastically changed our retail industry and the whole environment in which downtown merchants must operate. One of the hypotheses I derived from that analysis was that our very wealthiest consumers were the least likely to engage in more cautious and reduced retail spending both during and after the Great Recession. In turn, that should have resulted in downtown and neighborhood districts dominated by luxury retailers being little changed by that huge economic downturn and e-commerce. To get some insight into the viability of that hypothesis, I decided to look at the large cluster of luxury shops located along a 1.5 mile section of Madison Avenue in Manhattan, from 57th Street to 86th Street. It is North America’s largest luxury shopping district. This area is under the stewardship of the Madison Avenue BID.
It’s a Unique District
A Very Wealthy Neighborhood. While it is adjacent to Manhattan’s large and powerful Midtown CBD, it is not part of it. Nor is it a real CBD, as Matt Bauer, the president of the Madison Avenue BID, carefully pointed out in a recent conversation. Though the district does have some large office buildings on a few blocks near 57th Street, Matt emphatically notes that the real secret to the district’s success is its ability to serve the people who live in the neighborhood. Those neighborhood residents, of course, are among the most wealthy and influential people in America.
The data in the table above gives some strong indications about the wealth of the neighborhood in which the Madison Avenue District is inserted. The district covers the western parts of four zip code areas. The zip codes run about 600 feet to Fifth Avenue on the west and about a mile to the East on the East River. For Forbes, Altos Research analyzed 29,500 zip codes covering 95% of US population and ranked them according to the expensiveness of their home prices. The Madison Avenue District’s four zip codes ranked 2nd, 5th, 6th and 14th with median home prices ranging between $5.6 million and $7.8 million (2). All four zips have median household incomes above $111,000 and average household incomes above $203,000.
The large difference between median and average household incomes indicates that there are a lot of households in the neighborhood with incomes far above the median. Most likely those households are heavily clustered along 5th Avenue, just about 630 feet to the west of Madison Avenue, and on Park Avenue, only about 630 feet to the east. Moreover, on Madison Avenue, there are about 500 co-op and condo residential units.
More and more CBDs across the nation are attracting some of the wealthiest households in their regions and their retailers probably can learn a lot from those located in Madison Avenue’s luxury retail district.
Luxury Retailers to Match the Incomes of the Neighborhood’s Residents. As can be seen in the listing and photos below, the district has a very large number of luxury retailers. Many are world famous clothing designers. Many are from abroad. Until the 1990’s the district had independent merchants who would sell these designers’ apparel, but
since then, the designers have tended to lease and operate their own shops.
The top luxury shops are most concentrated between 57th and 72nd Streets, though a number are located between 72d and 79th Streets.
Historic, Small, Vertical. Most of the luxury retail district, from 62nd Street to 77th Street, is in the Upper East Side Historic District. This has definitely helped the commercial corridor to maintain its character and identity. Especially its scale and facade styles. There have not been the huge redevelopment projects found, it seems, almost everywhere else in Manhattan. One consequence is that, with some notable exceptions, the store sizes are relatively small and many retailers fully use their buildings’ upper stories. For instance, one operation has about 9,000 SF, but it is spread out on four stories.
According to Matt Bauer, the average store size ranges between 2,000 and 4,000 SF.
Not many have more than 15,000 SF. The largest is Barneys, with 230,000 SF spread over nine stories. Hermes’s shop on the east side of Madison at 62nd Street — its men’s shop is directly across Madison –has about 30,000 SF and the new Bottega Veneta flagship store will have 24,000 SF.
As a result, a number of retailers have more than one location in the district, e.g., Ralph Lauren, Hermes, Michael Kors, Dolce & Gabbana.
Luxury and Accessible Luxury. A number of the district’s retailers — e.g., Tory Burch, Kate Spade, Coach and Rebecca Taylor — are in the “accessible luxury” category. They target a larger market in terms of the number of potential customers and sell at price points that are more affordable than the regular luxury merchants. For example, the dresses on Rebecca Taylor’s website range from $295 to $795, while those on Valentino’s website range from $1,760 to $8,750. The accessible luxury retailers are perceived by shoppers to sell quality, upscale merchandise. These merchants are more often found in shopping malls and their products are more likely to be sold in department stores likes Macy’s, Lord & Taylor and Bloomingdales than are those of the luxury merchants whose wares are more likely to be found in chains such as Neiman Marcus, Saks Fifth Avenue, Nordstrom and Bergdorf Goodman. The accessible luxury merchants definitely appeal to a significant number of shoppers who live within the district’s four zip code areas — over half the households have annual incomes below $115,000. Most of them are relatively affluent, but they are not among the truly wealthy.
How the District Works
About 10 years ago, I was greatly surprised when my wife pointed out how large the “pamper niche” was in downtown Beverly Hills, since I had long wrongly bought into the position that hair and nail salons, gyms, spas, etc., were scourges to downtowns (3). My daughter, who had worked in the movie industry for years, found the size and prominence of that niche quite understandable, since it fit so well with the needs, attitudes and behaviors of those in the higher echelons of that industry. She pointed out that they liked to be recognized, served and pampered, while their privacy was maintained and the pamperers knew their place. I thought that was a very perceptive insight into the very rich and powerful.
That insight came to mind as I listened to Matt Bauer describe how his luxury district operates. Matt has been running the Madison Avenue BID since 1999 and knows it well. Before that he had managed another BID on Manhattan’s Lower East Side and served as a “circuit rider” for New York Main Street. Here are the key points of his analysis:
- It is a commercial district in a luxury residential neighborhood. Many stores have million dollar residential units above them
- The main customer market is the local Upper East Side walk-in market. According to store manager anecdotal reports, 60% of sales are local, 40% from “visitors”
- This local market is very loyal. They shop locally and they are frequent, repeat customers
- Pedestrian counts are significant, but not like in a CBD (more on that below)
- What is important is the percentage of pedestrians that enter the Avenue’s stores. It is high
- Luxury brands want to be close to other luxury brands. It’s easy to find such locations in his district (though availability is another issue)
- The store manager is a key to a store’s success. They are hired for their ability to interact and successfully cultivate the very affluent and influential local shoppers
- Charities have frequent events and everyone needs new clothes for them
- Guests in the district’s five upscale hotels tend to be repeat visitors at those hotels, and they usually have favorite stores to which they return. (The Four Seasons, The Sherry-Netherland and The Plaza are also within easy walking distance of the district)
- Hotel concierges also steer visitors to stores, often because they have relationships with store managers.
What struck me most in the picture Matt painted was the critical importance of personal relationships and interactions to how the retail in his district functioned. It is built on frequent repeat store visits by neighborhood residents and hotel guests, individual designer talents, savvy store managers and some of the best concierges in the business. This strong luxury market cannot be run on impersonal sales transactions, the type most shoppers now encounter in their visits to brick and mortar stores or on the Internet. While many Millennials prefer not having to shop in brick and mortar stores or want to have impersonal in-store electronic check outs via their smart phones, this type of retailing does not have the personal recognition and pampering factors that wealthy shoppers are used to and want.
This is not to say that the luxury retailers have rejected e-commerce. Far from it. Every one of them that I looked up on the Internet had well developed websites with e-stores. E- sales at Tory Burch, for example, reportedly generate more revenue than any of their stores (4).
Moda Operandi, may offer a strong glimpse into how the personal and the electronic will be used in the near future by luxury retailers (5). Certainly it suggests that personal interactions between salespersons and shoppers will remain very important in the luxury market. Moda started out as an online luxury fashion retailer, but recently has opened a brick and mortar location on 64th Street, just off of Madison Avenue. It is not a traditional store — it does not want to attract shoppers who are walking nearby. It is indifferent to pedestrian flows. It is an appointment showroom, where the retailer identifies the customers who will be asked if they want appointments. Those asked are filtered from Moda’s online customers who have made frequent and significant purchases. Moda knows from those purchases and their website navigation a lot about the customer’s preferences. On their appointments, Moda is able to show them a wide range of merchandise specifically selected to match their tastes. This all occurs in a very attractive, private, face-a-face setting. Moda probably sells a lot more merchandise, while the customer get loads of privacy, recognition and pampering as well as selections matching their preferences. Using e-commerce transactions to identify/qualify shoppers for personalized, pampering attention in brick and mortar stores may be one of tomorrow’s successful retail strategies. The brick and mortar store becomes the scene for the last stages of the selling process, similar in some important ways to the “click and pick up” strategy now being implemented by several mass market retailers, e.g., Walmart, Best Buy.
Matt’s point about relatively modest pedestrian flows is worth digging into a little more. Strong pedestrian traffic has become very highly valued among downtown managers and consultants — and rightly so. However, as with most good things, there are exceptions and they should be noted. First, a few statistics to quantify Matt’s point a bit. According to NYCDOT, in May of 2016, the pedestrian count:
- On 5th Avenue, between 54th Street and 55th Street midweek from 7:00 to 9:00 a.m. was 4,443; from 4:00 to 7:00 p.m. it was 22,351; on a Saturday from 12:00 p.m. to 2:00 p.m. it was 2,480
- On Madison Avenue, between 71st Street and 72nd Street from 7:00 to 9:00 a.m. was 718; from 4:00 to 7:00 p.m. it was 2,988; on a Saturday from 12:00 p.m. to 2:00 p.m. it was 7,465 (6).
My question is: would this luxury district still be as successful if it had much higher pedestrian traffic? The high pedestrian flows outside of Saks 5th Avenue, Cartier and Rockefeller Center in Midtown not withstanding, I think not. Crowded sidewalks would seem to me to conflict with most of the district’s scale and character. More importantly, I do not think the neighborhood’s residents would find such heightened pedestrian flows acceptable or their neighborhood shopping as enjoyable.
How It Is Dealing With the New Normal?
The Impact of the Recession. For many downtowns and commercial districts, it was the the Great Recession that brought the major aspects of their New Normal into view. Consequently, I asked Matt Bauer how his district had changed during his long tenure and especially how that critical economic downturn had affected his district. Matt responded that:
- The biggest change happened in the late 1990’s when independent merchants who sold many luxury brands were supplanted by the luxury brands that opened their own stores
- The Great Recession had some visible impact through vacancies, but a lot of that was because many important leases came due at that time
- By 2010, the district had rebounded from the recession
- Overall, the district has changed very little from the 1990’s, when he came on board.
That the district has been basically stable during Matt’s 18-year tenure fits with my own observations, drawn as I passed through the district over the years on many visits to museums, art galleries and medical offices in the area. It also is supported by other evidence and observers.
The table below, based on data gathered and published by the Real Estate Board of New York (REBNY), shows the asked for rents for 15 major retail corridors in Manhattan. It covers a number of years in the 2008-2016 period. 2008 was selected because market highs, lagging the recession’s impact, occurred in that year. According to REBNY’s 2009 report, rents surged 54 percent from fall 2001 to fall 2008. The recession’s negative
impact on retail asking rents became clearly apparent in 2009. In the Madison Avenue District, for properties between 57th Street and 72nd Street, they dropped -19.6% between 2008 and 2009. By 2010, they had rebounded somewhat, so that they were -9% below the 2008 asking rents and by 2012 they had completely regained any loss. In 2016, the asking rents were about 12% higher than those in 2008.
While Madison Avenue is definitely a world class luxury district, it does not have the highest asking rents — it was fourth highest of the 15 corridors in 2016 — nor the largest growth rate. The highest asking rents and growth rates are in the Times Square area and along or near Fifth Avenue. The character of these corridors is very different from Madison Avenue’s. They are much denser in terms of building heights and the amounts of leased spaces, have much higher pedestrian counts and have far, far fewer residential units. Madison Avenue has a residential neighborhood feel that the other corridors do not. Many of them also have seen very large redevelopment projects, while the redevelopment projects in the Madison Avenue district have been far more modest and governed by the rules of an historic district. New construction almost invariably means higher rents. Often that’s because of related costs, but sometimes it’s because of ignorance of what rents the retail market can really afford or simple greed.
The -19.6% drop in the district’s asking rents between 2008 and 2009 probably strongly reflect the -17.9% national decline in the sale of luxury goods between October 2007 and October 2008. According to SpendingPulse, double-digit declines continued through May 2009 (7). However, by the summer of 2011, luxury goods were flying off the shelves. As one reporter then noted: “Even with the economy in a funk and many Americans pulling back on spending, the rich are again buying designer clothing, luxury cars and about anything that catches their fancy” (8). The spending of the wealthy did not quite reach the pre-recession level, but was close to it.
Many observers believe that the spending pattern of the wealthy is tied closely to the stock market. The 2011 return to luxury spending correlated well with the market’s resurgence.
Observers of the luxury market have also noted that luxury shoppers have, to some extent, become “deliberate consumers.” As one noted in late 2013:“The crisis hasn’t killed the luxury market, but it has led buyers to become more discerning”(9). Others have noted that the shoppers least impacted by the recession are from the households with the very highest incomes, in the top 3% to 5%.
One fast growing part of the luxury market that does not appear in the district, probably because it is so antithetical to it, is the discounters. However, according to Bain: ” Today, discounted luxury goods represent more than 35 percent of the personal luxury goods market, versus full-price; off-price stores comprise more than 30 percent of the market. These numbers are expected to increase as consumers continue to push for value for money” (10).
A very large proportion of the luxury retailers in the Madison Avenue District are active in the international luxury market. Though it has slowed down since 2014, it had double-digit growth during and after the Great Recession (11). Bain expects it to grow by 3% to 4% in 2017, but “(l)uxury brands in the U.S. continue to struggle due to the decline of tourism as a result of a strong dollar and weak local spending.”
One might reasonably argue that retail in the Madison Avenue District is likely to be more stable than in districts dominated by retail firms dependent solely on the domestic market. Given the high growth internationally during and after the recession, those luxury firms were much better positioned to withstand short-term reductions in US consumer demand.
Luxury E-Commerce. As noted above, the luxury retail chains in the Madison Avenue District are heavily into e-commerce and trying to sort out strategies that can make them successful. The increasing importance of online revenues cannot be doubted. As Bain reported:
“E-commerce is the leading channel in terms of growth, reaching 7 percent penetration in 2016, which makes it the third largest luxury ‘market’ globally after the U.S. and Japan and a key driver in luxury’s digital revolution” (12).
Dealing with the e-commerce challenge is now pivotal to luxury retailers. According to Bain:
“… digital disruption, the pace of change and the need to reframe the relationship between technology and luxury are the most crucial issues in the coming year, no matter the geography or product focus” (13).
- The district has been relatively stable since the late 1990s and bounced back from the Great Recession more quickly than most other commercial districts
- This district’s retailers benefit enormously from having a large number of the nation’s wealthiest households with a three-minute walk
- Personal interactions and relationships are critical to their success
- Its retailers also benefit from their chains being in the larger international luxury market
- Luxury consumer spending has bounced back to almost pre-recession levels, but these shoppers have become more discerning and “continue to push for value for money.”
- E-commerce is the fastest growing luxury sales channel as is the case with the whole retail industry
- The major challenge is figuring out how to integrate digital activities into a sales process that is very personal because luxury customers demand a lot of recognition and attention.
2- See: http://www.forbes.com/sites/samanthasharf/2016/12/08/full-list-americas-most-expensive-zip-codes-2016/#4bdc1af91b63
3- See: Milder, N. David. Nail, Hair and Skin Salons: Bane or Boon? Downtown Idea Exchange. October 2005. https://www.ndavidmilder.com/downtown-revitalization/perspectives#g
4- Sanjana Chauhan, “Why Some Luxury Brands Thrived in the U.S. Despite the Recession,” Luxury Society, Feb 7, 2013.http://luxurysociety.com/en/articles/2013/02/why-some-luxury-brands-thrived-in-the-us-despite-the-recession/5-
5- Matthew Schneier, Moda Operandi: A Haven for the Haves,” New York Times, Sept. 9, 2016 See: https://www.nytimes.com/2016/09/11/fashion/moda-operandi-madison-private-store-shopping.html?_r=0
6- See: http://www.nyc.gov/html/dot/html/about/datafeeds.shtml#Pedestrians
7- Stephanie Clifford, “Even Marked Up, Luxury Goods Fly Off Shelves,” New York Times, Aug. 3, 2011 http://www.nytimes.com/2011/08/04/business/sales-of-luxury-goods-are-recovering-strongly.html?_r=1&hp
9- See endnote 4 above.
13- Vanessa Friedman, “What Lies Ahead for Luxury in 2017,” New York Times, Dec. 5, 2016, http://, http://nyti.ms/2gHYcvz