Jones Lang LaSalle

Building Barney's for Blue Bloods & Penneys for the People
Abigail Marks, Economist
amarks@tortowheatonresearch.com

Trends in Beantown suggest that high-end department stores are the future and mid-priced department stores are part of the city's past. Is it the case that as goes Boston, so goes the nation?

For close to 100 years, Filene's has been located in Boston's Downtown Crossing. However, Filene's will not be around to celebrate a 100th birthday. Instead, the building will be vacant once the store merchandise is liquidated. This particular Filene's store is a landmark in Boston and there has been some controversy surrounding the selling of the Filene's building. It has not yet been determined what will occupy this vacant space. Interestingly, across town, a new luxury department store—Barney's New York—has just opened in the Copley Place Mall. One cannot help but wonder whether an important retail trend is beginning to emerge.

Let's first consider the differences between the two stores. Filene's at Downtown Crossing was a 660,000 square-foot department store, the flagship location for the Boston-based chain, carrying a gamut of goods from housewares to perfumes to electronics to—of course—apparel. Before it was purchased by Federated, the Filene's chain was owned by the May Department Stores company, which, at the end of 2004, owned 46 Filene's stores across the Northeast. Barney's at Copley Place Mall is a 45,000 square foot store, originally established in New York City, and was acquired in December 2004 by Jones Apparel Group. As a luxury department store, Barney's carries accessories and clothing from high-end designers such as Marc Jacobs and Prada in addition to its own Barney's brand.

How have these two stores fared over the past several years? The chart below shows year-over-year changes in annual sales for both Filene's and for Barney's, chain-wide. After a significant decline in sales after 9/11, sales growth for Barney's has remained positive while Filene's has not fared as well, with sales continuing to decline. By this one example, it would appear that luxury chains are faring better than the mid-scale department store chains. But this is just anecdotal evidence; let's look at a few more such observations.

Other luxury department stores, Nordstrom and Neiman Marcus for instance, have been enjoying impressive sales growth as well. Nordstrom recorded annual net sales growth of 8.5% and 10.6% in 2003 and 2004 respectively, while Neiman Marcus had growth of 6.4% and 14.4% over that same period. Some department stores comparable to Filene's—JCPenney and Gottschalks (a department store chain based in California), saw 0.9% and 3.6% and -0.8% and 0.2% in 2003 and 2004 respectively—clearly not keeping pace with their upscale competitors. It is quite apparent that over the past few years, luxury stores have been enjoying greater growth in sales than have mid-scale stores. So, can we expect a Barney's in every mall anytime soon?

TWR/Dodge Pipeline lets us see if luxury department stores (Barney's, Nordstrom, Neiman Marcus) are being built in greater numbers than mid-scale department stores (JCPenney, Gottschalks). After all, considering the disparate sales performances, one would expect such a trend. However, out of the 63 projects in the pipeline for the above department stores, only 9 projects are for luxury department stores. In comparison, there are 54 new JCPenney stores in the pipeline!

Given the discussion above concerning the relative performance of the two retail niches, it would seem rather foolish to build increasingly more mid-scale department stores. As with all things though, if one digs a bit deeper, the truth is there to be discovered. In fact, while the high-end retailers are enjoying strong gains, their good fortunes are contained mostly in well-heeled markets. Outside of those markets, demand is still focused toward less-pricey purveyors.

Let's compare median household incomes for the metro areas that are getting JCPenney stores with those getting luxury department stores. We see that, on average, the median household income for those markets with JCPenney construction is $49,377, while those markets that have luxury department store projects underway have a median income (on average) of $62,350. Boston's median household income is $70,049. Only one city will be receiving both a luxury and a mid-scale department store. Therefore, income seems to be a key deciding factor when it comes to the placement of department stores. Despite the good returns to luxury stores, their market is not one that exists everywhere.

So, back in Boston, demographics apparently say "out with Filene's!" and "in with Barney's New York!" and—wouldn't you know it—it won't be long before Boston sees other luxury department stores coming to the metro, as Nordstrom will be coming to the Boston area for the first time in 2006 when construction is completed at the Natick Mall site. Boston is not necessarily indicative of what is going on in the U.S. as a whole; rather, it shows a trend that is forming in the higher income metros, which will see their luxury department store stock increase over the next few years.