North American trend: Concessions within department stores

Image: de Bijenkorf

By Steph Chiu

Burberry is the latest luxury brand to begin operating its Canadian shops-in-stores as leased concessions. For years, luxury brands have played key roles within upscale North American department stores, and this relationship is evolving towards the 'concession model'. We can expect to see a rising trend of more concessions within Canadian department stores, including Holt Renfrew, Saks Fifth Avenue and Nordstrom. 

Traditionally, a 'boutique' within a North American department store was simply a space dedicated to displaying a brand's merchandise. The department store operated the shop, including its staffing, merchandising and displays. The trend of the designer concessions is changing this, however. But what is a concession? A concession is essentially a miniature store operated by the brand, and located within a larger store. Under this model, brands occupy space within the host store/department store in return for paying a lease and/or a percentage of their sales to the larger store. This relationship provides luxury brands with a number of significant advantages including:

Store atmosphere and displays: Part of the experience of shopping for luxury goods is the store environment; an atmosphere of exclusivity and opulence surrounding the luxury products. While luxury brands are selective with which department stores may carry their products, the most refined experience is often delivered in a brand’s own store, where the brand can oversee every aspect of the environment. With dedicated concessions, luxury brands have more power to control their brand image, as well as adapt their displays and merchandising to highlight their products in the best possible way. 

Control over product pricing: Traditionally, department stores could decide how they wanted to price products sourced from various luxury brands. This became especially problematic when the recession hit in 2008 and department stores launched aggressive promotions and markdowns as a way to increase revenue and reduce stock. Unsurprisingly, these strategies were not well-received by many luxury brands, who felt that such sales and price reductions tarnished their high-end brand image. In moving towards concessions, luxury brands are given complete control over product pricing, which better allows them to protect the aura of luxury associated with their goods. 

Potentially better sales staff: A knowledgeable sales associate can make all the difference, especially when dealing with pricey luxury goods. In department stores, staff are often responsible for large sections of the floor where several brands are represented; training in the products and history of each brand may therefore be lacking. By operating concessions, brands are free to hire dedicated sales associates that may be better trained and groomed to suit the atmosphere that the brand wishes to create.

Increased profitability: Many concession owners are finding that they get a higher return on the products they sell through their concessions. As goods are not sold wholesale to the department store, profit margins can be kept by the concession (less any agreed-to commission to the host store). Department stores are also finding it more profitable to host concessions, as they no longer need to provide staff and merchandise to the concession's space. Rather, the larger store can collect rent and possibly a percentage of sales from the designer concession while letting the concession control its operations. In essence, the department store is acting like a 'mall'. 

Inspired by Coco Chanel and her famed Parisian apartment, Chanel’s flagship stores surround consumers in the ultimate luxe environment. A similar environment also exists within new Chanel concessions [Image Source]

Concessions are common in European department stores, especially chains like House of Fraser in Britain, which is substantially concession-operated: of the chain's 18,000 staff, 13,000 are employed in its in-store concessions. Some Japanese department stores have operated essentially as concession 'malls' for decades. Canada's best example of a concession-based store is Montreal's Ogilvy, which dedicates almost 80% of its space to concessions. Ogilvy's concession ratio will be reduced, however, when it becomes a merged Ogilvy/Holt Renfrew store in 2017. 

While the relationship dynamic between brands and host retailers is changing, it's important to note that the intention of concessions isn’t to cut out the department store entirely. As mentioned, luxury retailers and department stores have been operating together for decades, and luxury brands have been afforded many benefits as a result of this relationship. In many cases, being located in accessible, high-traffic department stores is how luxury brands were first introduced to consumers. Department stores help drive traffic to flagship stores, but also serve to attract shoppers who may not visit a brand's flagship store. Building upon this established relationship over the years has allowed brands to establish prestige, power, and a strong clientele. In addition, department stores often provide significant financial and marketing resources to luxury brands. The concession model allows brands to marry the relationship benefits of being hosted by a desirable retailer, while controlling its brand message and potentially enjoying increased profitability. 

The double helix-like structure pictured above houses a glass elevator that spans the three levels of Louis Vuitton’s concession in its London Selfridges location [Image Source]

A study on concessions would not be complete without mentioning Louis Vuitton, who trail-blazed the concept. Concessions have been a central component of Louis Vuitton’s business model for decades. The brand continues to improve upon its concessions by incorporating innovative, ground-breaking design elements to showcase its mastery of the concept, such as in its new three-level, 10,000 square foot 'towhouse' concession at Selfridge's in London. 

Driven by the many advantages of the concession model, other luxury brands have followed in Louis Vuitton’s footsteps by opening concessions of their own in department stores like Saks Fifth Avenue and Neiman Marcus. Most recently, both Gucci and Prada converted to operating concessions at Holt Renfrew stores in Canada. Chanel and Dior concessions can also be found at Holt Renfrew and as mentioned above, Burberry is currently in the process of converting its shops to concessions within Holt's stores as well. 

Barneys New York said "no" to Prada concessions. In response, Prada stopped supplying to Barneys [Image Source]

With so many luxury brands taking advantage of the concession model as they develop their retail strategy for the future, it seems like it will only be a matter of time before concessions become the norm within North American department stores. But will all luxury retailers follow suit in converting to the concession model? The benefits of doing so certainly speak for themselves. On the other hand, some department stores may not be happy with this change, as was displayed when Barneys New York refused to let Prada convert its shops-in-stores to concessions within their stores. As a result, Prada pulled out of Barney's stores, leaving only their footwear. Neiman Marcus is also hesitant to accommodate concessions, though we've been told that this may be changing.

Knowing this, the question may not be whether the luxury brands chose to convert, but rather whether department stores are willing to grant permission to do so. However, if concessions are indeed the future of luxury retailing, any department store that refuses to allow concessions within its stores may well be left behind in the competitive world of retail.

Steph Chiu is an Honours Business Administration student, currently attending theIvey Business School at Western University.

Sources:

• Luxury Brands Stake Out New Department Store Turf
• Are direct-owned branded luxury shops crowding out department stores?
• Beginning of the End of Department Stores?
• Merchandising Techniques in Luxury Retail

Read more:

• Gucci’s Patrizio di Marco Outlines Plans for North America
• Prada Opens at Toronto’s Yorkdale Shopping Centre

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