By Rachel Dodes and Christina Passariello
As the luxury market rebounds, powerful global brands including Gucci, Prada and Dior are starting to press for more control over the way their products are presented and sold in U.S. department stores.
The goal is to chip away at the old sales model used for decades by American department stores and instead operate a store-within-a-store, known as a "concession." Rather than simply sell their products to retailers, which then resell them to shoppers, more design houses want to rent space in the department store and operate relatively independently. They hire their own staffers, call the shots on what to carry and, critically, determine the depth and timing of markdowns.
Indeed, markdowns are one of the reasons design houses prefer to operate concessions. Several brands were furious at American retailers for being quick to slash prices during the recession. In 2008, some retailers cut prices by 70% even before Thanksgiving, discounts so deep that brands feared they would cause consumers to question the value of pricey luxury goods.
High-end labels are finding new leverage at the stores now, thanks to a rebound in luxury-goods sales. Luxury spending, which in 2010 had recovered to prerecession levels, is expected to rise 8% this year to €185 billion ($274 billion), according to Bain & Co.
Saks Inc. broke the ice with Prada SpA last year by allowing the Italian label to open and operate a bag store on the ground floor of its New York flagship. Saks is also testing concessions with Prada and other brands in several of the chain's 46 stores, although the majority of Saks's Prada sales still come through the traditional wholesale-to-retail model.
Saks also has some concession arrangements with Dior and Fendi, both units of LVMH Moët Hennessy Louis Vuitton SA, as well as Gucci, a unit of PPR SA, Saks Chief Executive Stephen Sadove says. Dior, Fendi and Gucci declined to comment.
"It's very selective," Mr. Sadove says. "We're not doing this broad scale. We do this where we believe it can be a win-win."
Concession agreements vary by brand and location, he said, but could involve extras such as giving the retailer exclusive rights to carry a particular brand in a certain market.
Under the concession approach—de rigeur in European department stores but still rare in the U.S.— brands assume more of the risk if products don't sell, but it also promises a bigger cut of sales.
Typically, department stores buy inventory and mark it up for retail sale. If the goods don't sell, the retailers and vendors split the cost of markdowns according to formulas that vary depending on a brand's clout.
By contrast, a concession will provide a steady source of revenue for the retailer, but at a lower level. The amount brands pay for concession space varies, but it is typically around 20% to 30% of sales, according to two people familiar with the matter.
LVMH's popular Louis Vuitton brand is the granddaddy of the concession model, as it has insisted on operating concessions at U.S. stores from the get-go., making the accessories line an exception to the rule in the States.
Prada, meanwhile, is making concession inroads around the country. A few Bloomingdale's locations have since signed on for Prada concession shops.Macy's Inc.'s Bloomingdale's confirmed that it has a Prada handbag concession in its flagship store in Manhattan.
Neiman Marcus now rents out space to Prada in its Las Vegas store. A spokeswoman for Neiman Marcus, which has 41 stores in the U.S., declined to comment.
U.S. chains have been "understandably reluctant" to go along with the shift, given the economics of concession deals and a sense that they better understand how goods sell, says Arnold Aronson, managing director of retail strategies at retail consultancy Kurt Salmon Associates.
Still, the aggressive expansion of freestanding designer boutiques is shifting the balance of power from high-end retailers to the large, powerful brands that such stores helped build. Luxury brands continued to open stores even during the depths of the recession, giving them the confidence to make decisions on inventory and selection that are traditionally the province of department store buyers.
Prada has been perhaps the most outspoken about its displeasure with its American retail partners following the crisis.
"We can't control what department stores do to wholesale merchandise," says Sebastian Suhl, Prada's chief operating officer. The financial crisis "wasn't a catalyst, but it reinforces our strategic drive to do this," he said of the shift to concessions.
Prada cut its presence at Barneys New York this year after the retailer resisted its efforts to build concession shops within its walls. Although Prada still sells shoes and menswear at Barneys, the large area devoted to women's clothing on the second floor of the New York flagship is now occupied by another expensive brand, Azzedine Alaia.
Barneys Chief Executive Mark Lee said in February that the decision not to grant Prada a concession was made before he joined the company, but that he agreed with the move. He declined to comment further. Prada declined to comment.
Barneys has resisted similar efforts by other luxury brands.
Not all elite brands are pushing for concessions. Chanel has for years worked with the same retailers, which take suggestions regarding how to present it. "Our partners understand the value of the brand and work with us well on service models, sales associate training, and store space and design and location," said Chanel USA President John Galantic.
