1

DRAFT ONLY

DEPARTMENT STORESURBAN DESTINATIONS OR RETAIL DINOSAURS?

April 2018

2

After half a century of decline, are department stores merely dinosaurs of a past retail era or are they the harbingers of future urban destinations? Despite large scale closures over the past decade, there have been a surprising number of new store openings. And many of the grand old flagship stores – celebrating well over a 100 years of trading – are performing rather well.

Increasingly the destinations of choice for affluent and sophisticated shoppers, many department stores are now offering authoritative omni-channel engagement, distinct brand characteristics and authentic urban experience. Operating from real landmark buildings, adorned with architectural conviction and redolent of historic layers, the survivors prosper at the heart of our metropolitan cities, testament to the fused digital and real worlds.

Yet hundreds of ersatz retail boxes still remain in forlorn off centre locations where their future is likely to abruptly end with residential led redevelopment. Do department stores have any future beyond the Harrods, Nordstrom's, Selfridges or Galerie Lafayette luxury formats?

Kohl’s, America’s 2nd largest store operator, is making impressive progress in ‘operational excellence’; improving margins from stores with declining revenues by rightsizing, local editing, faster proprietary brands and new retail partnerships.

And for the mid sized stores in the middle market, is there only space for the premium positioning with unique – and continually re-edited and refreshed – offers?

PALACES OF CONSUMPTION

As the dinosaurs of a past retail age, the remaining department store groups are frequently seen as failing shopping formats, buffeted by the winds of societal change; the ballooning digital challengers, the expanding discounters and rising specialists. Lumped into a single category and universally disfavoured, do ‘les grands magasins’ have a future – in North America or in Europe?

In many ways, their past might be a guide to their future. Most of them arose in the 1830-1870s before multiple retailers existed. These included David Jones (1835 Sydney), Frasers (1849 Glasgow), Macys (1852 New York), Marshall Fields (1858 Chicago), John Lewis (1864 London), Printemps (1865 Paris), Galerie Kauhof (1879 Stralsund) and Galeries Lafayette (1893 Paris). Founded slightly earlier, were Harrods (1824 London), Jollys (1823 Bath) and Harvey Nichols (1820 London) - the only store founded by a woman, Elizabeth Harvey.

With a huge city centre presence, large buying power, private label manufacturing, unfettered browsing and a vast ‘fixed price’ offer, the stores rapidly became the arbiters of taste, urban landmarks and cultural institutions for the burgeoning new middle classes.

In the UK, many stores had first started as small drapery stores: Debenhams (1778), Dickins & Jones (1790 – closed 2006) and Kendal Milne (1796 – Manchester, now House of Fraser and probably with the world’s first proper department store in 1836). Arguably the oldest two – and both still trading – are Fortnum & Mason (1707) which started as a 2nd hand candle shop and Bennett’s (1734) of Derby which started as an ironware store.

Most grew by steady accretion of adjoining sites with assembly of the old medieval strip titles being a laborious process – unlike Baron Haussmann’s grand rebuilding of Paris (1854-1870) which provided readymade blocks for Lafayette and Printemps or the Crown’s wholesale redevelopment of Regent Street (1904-1928) providing stores for the defunct Dickins & Jones and Swan & Edgar.

By the turn of the 19th century, many of these grand institutions were beginning to falter and were unprepared for the onslaught of Gordon Selfridge from Chicago who, aged 48 and then retired, saw the opportunity in London to promote shopping for pleasure rather than necessity at the unfashionable and cheaper end of Oxford Street.

“the whole art of merchandising consists of appealing to the

imagination”

“A store, which is used every day, should be as fine a thing and, in its own way, as ennobling a thing as a church

or a museum.”

“In trade, as in most other things, the mind is master”.

Gordon Selfridge (1858-1947)

Opening for business in 1909, the Selfridge’s store became a social phenomenon. The steel framed and stone clad store was a marvel of its day—five stories high with three basement levels, a roof-top garden for dances and more than 100 departments, including a beauty hall, tea room, quiet lounge, a barber shop, information bureau with translators, art gallery, a hair salon, a library, a post office, a rifle range, a nursing station and a concierge. The store’s 580,000 ft² of floor space had decorative grandeur, high ceilings, startlingly wide and open-plan floorplates, brilliant electric lighting, modern lifts and event spaces.

The new department stores at the heart of the great cities provided social experience, accessible retail, unique commodities, popular entertainment, consumer convenience and a clear brand promise to dense city populations. Most offered mail order catalogues, telephone purchasing and free home delivery as well as “phone & collect”.

With some exceptions like Debenhams who opened in Cheltenham (1823) and Harrogate (1843), it wasn’t until the 1920s that the UK’s grand stores embarked upon provincial expansion. Starting in 1926, Selfridge’s opened 16 provincial stores which were ultimately sold to John Lewis in 1940. Expansion was typically by merger or takeovers. John Lewis acquired 4 existing stores in 1933/34. Between 1936-1985, the House of Fraser acquired 70 department store companies, only expanding out of Scotland in the 1950s.

In Germany, then considered better as a collection of states rather than a country, Kauhof opened 13 stores between 1889-1905.

In France, provincial expansion was slow for today’s surviving brands. Printemps opened its first provincial store in 1912 and Galerie Lafayette opened its second store in 1969

3

RACE FOR THE SUBURBSIn 1939, London was the largest city on earth and at its population peak. By 1991, it had lost 25% of that population, twice as many as Detroit lost in the same period. London’s inner boroughs commonly lost half their communities as they decamped to the sprawling suburbs and beyond to the New Towns. The department stores followed the customers; John Lewis closed Peckham, Brixton, Finchley, Streatham and Holloway and opened in Brent Cross, Milton Keynes and Kingston.

America’s post war decentralisation even more markedly changed its retail landscape. Aided by subsidies and federal tax relief, the post war suburban population increased by 43% between 1947 and 1953 alone. Before the war, just 13% of Americans lived in the suburbs and by 2010 more than half did. And as shopping spend in the old metropolitan city centres fell off, the big department stores changed tack; they followed the post-war shift in population by opening branch stores.

It was JL Hudsons & Co of Detroit that Victor Gruen persuaded in 1948 to develop branch stores within their own shopping centres; with a ring of suburban centres surrounding Detroit. Northland (1954) was their first development and was followed by Eastland Center (1957), Westland Center(1965) and Southland Center (1970). Northland cost US$30 million to build but its anchor store took US$88 million sales in its first year making the development a highly profitable venture.

The new department stores, instead of being towering sky lit edifices of city centre grandeur, became squat windowless boxes of great mechanical efficiency serving suburban catchments. Frequently they diluted their identity, offered a reduced depth and, as Vicki Howard (‘From Main Street to Mall’ 2015) observed, became prime exemplars of the vapidness of suburbia.

By 1957, 940 shopping centres had opened across the USA. By 1960, the number had doubled and continued to do so each year until 1963. The old developers ‘rule of thumb’ was that 40-50% of the shopping centres retail space should be occupied by the department store anchors.

When the second rate shopping centres began to fail in the 1970s and 1980s, it was frequently as a consequence of their anchor store failure when the department store industry consolidated and merged.

Even with Grade A rated shopping centres, department stores no longer play the role they once did for major centre owners. Some 28% of Westfield’s revenues now comes from department stores, down from 42% a decade ago.

However, many of Westfield’s current major retail developments will rely on department store anchors - Bloomingdales (San Francisco Valley Fair), John Lewis (Westfield London), Nordstrom (LA Century City & San Diego UTC) and Galerie Lafayette (Westfield Milan) as the key traders.

Northland Center (1954) – 1.04 million ft² on 159 acres, anchored by a 475,000 ft² Hudsons store and served by 7,500 surface car spaces; now demolished

4

CONSOLIDATION & MERGERSurbanisation also drove organisational change. Between 1951 and 1965, the 20 largest USA department store companies had acquired 73 companies operating 168 stores.

By the 1970s, many of those department store companies were in serious trouble. Burdened by high overheads, supplied by low density catchments, trapped into bargain pricing and facing growing competition, they had substantially lost out to discount big box stores and retail specialist offers. Mergers, bankruptcies and takeovers further consolidated the industry but more pressure arrived with on-line retail.

By the time of the 2008 recession peak, the nine surviving USA major store chains announced intent to close a further 384 stores. At that time, North American had over half the total global department store floorspace and Europe, with 157.7 million ft², about 16%.

Pressure continued with growing online sales but earlier American consolidation had led to heavy debt gearing coupled with higher hedge fund returns. In addition, the recession recovery was metropolitan led and rising income inequalities meant that middle class customers in middle America were harder to find.

By 2017 the nine survivors, still operating 3,967 stores, announced a further 254 store closures.

Morgan Stanley reported last year that Amazon has become America’s 2nd largest clothing retailer. Department stores, they noted, continued to lose market share from 26% in 2005 to an estimated 8% by 2022 as the large mid-market store offers fail to compete on either price, speed, authority or fashion. Exceptionally Kohl’s are now beginning to make progress on securing greater returns out of lower mid market sales by greater efficiency and smaller stores.

Middle market department stores in suburban catchments that targeted a very broad demographic and offer little in-store differentiation lost a greater share – companies like JC Penney and Sears.

This environment was common to most mature retail markets; in Australia, the department stores face the same pressures.

“David Jones and Myer face similar circumstance where their product is easily purchased online and they have a proliferation of stores in a diminishing footfall environment …. it becomes a stalemate - the shareholders demanding returns, the landlords having leases and demanding continuation of leases, and the retailers requiring less space and the customers … going online. It's quite a storm to really play out in Australia.”

[Bernie Brooks, ex Myers CEO. February 2018]5

6

In some ways, Australia’s department store problem is unique. Some suggest they have more department stores per capita than anywhere else in the world; at 1 per 30,000 people as opposed to 1: 62,000 in the USA, 1: 283,000 in the UK (incl. Marks & Spencer), 1: 417,000 in Germany and 1: 780,000 in France. Actually, Sweden has been noted at 1: 22,000 (in 1975) after their KF Co-operative Society built 114 ‘cookie cutter’ Domusstores in 1950-60.

The key point in the U.S. and Europe comparison is the quantum of retail floorspace. Whilst the data is unreliable, the indications are that there is around 38 ft² of retail per head in the USA compared to 7.6 ft² per head in the U.K. and 6.69 ft² per head average in Western Europe.

The picture for purpose built centres is similar with around 23 ft² per head in the USA compared to 3.1 ft² per head in the U.K. and 2.39 ft² per head average in Germany, France, Spain and Italy with Sweden at 5.4 ft² per head.

Over the last 20 years, the number of USA shopping centres has grown by more than 23% and floor area by almost 30%, while the population has grown by less than 14%. More notably, whilst 46% of floorspace in larger American schemes (over 300,000 ft²) is occupied by department stores, the European equivalent figure is said to be 27%.

OVER MALLED & OVER STORED

“When you think about it, department stores are kind of like museums”.

Andy Warhol

“A great department store, easily reached, open at all hours, is more like a good

museum of art than any of the museums we have yet established”

John Cotton Dana

EUROPEAN MARKETSIn Europe, the traditional department store sector retains a more premium positioning than it does in the US and remains focused on metropolitan cities. Operators have not pushed on ‘off price formats’ with regular discounting and a coupon culture.

Nevertheless, a host of former landmark stores have disappeared from smaller cities and town centres as shopping expenditure increasing polarised towards the larger centres, as retail floorspace decentalised out of town and as specialist discounters grew.

France has a small but stable department store market that is luxury/premium positioned, tourist dependent and centered on Paris. The flagship stores of Galeries Lafayette, Printemps and Le Bon Marché in Paris are thought to represent more than half the total revenues. Market share is thought to be about 2% of total retail sales.

By contrast, Germany is dominated by Kauhof and Karstadt with 161 ‘free standing’ midmarket stores (average 193,000 ft²) – down a third since 2006. Of these, only 28% are considered to be prime (Stadt + Handel 2015). Market share is thought to be 3.5%. Unusually, their e commerce development has been slow at 2-3% of total revenue unlike Nordstroms 30% or John Lewis at 42%.

“We are not just a department store, we are a place that tells stories.“

Albert Baldan, CEO, La Rinascente

Spain’s sole survivor is El Corte Ingles (1934) which, with 92 stores in every major Spanish city, is Europe’s largest department store operator and Spain’s largest private sector employer. Its fortune reflects the national economy and ill considered store expansion before the recession left it badly exposed. It is suggested that only 15 of its stores are profitable and those support all the others.

The UK is a mature department store market with 285 stores operated by the chain stores (excl Marks & Spencer); over 60% are operated by Debenhams. Verdict previously reported that 36% of UK shoppers regularly used department stores.Market share is thought to be 9% - nearly twice the USA level.

Italy’s fragmented and regionalised retail market has two survivor store groups; Coin (1916) with 77 stores and La Rinascente (1865) with 11 stores. La Rinascente has been fairing better with its larger stores and premium positioning.

Rinascente was bought by Thailand’s CRC in 2011 who then went on to acquire Copenhagen’s Illum in 2013 and Germany’s KaDaWe in 2015.

European purchasing power 2016 (GfK)

7

NEW DEPARTMENT STORES

John Lewis added 1.185 M ft² of new store floorspace in the last five years with last year’s opening of their 50th store at Oxford Westgate. The expansion included the 10 smaller ‘At Home’ formats of circa 40,000 ft². This year’s opening of Westfield White City will give the company 5 major London stores.

“We have stopped purchasing space for new shops due to the large capital expenditure this requires and taken the decision to reduce debt and invest in our core business for our current customers” (John Lewis Annual Report April 2018).

Debenhams have continued infill expansion with stores like the new Stevenage fashion store; a cheaper and more flexible ‘fashion, home & beauty’ format.

Galerie Lafayette continued with international franchise expansion for its concession formats. La Rinascente opened their 2nd store in Rome – an extraordinary offer that took 10 years to deliver.

In the States, there will be two more flagship stores in New York including the first Neiman Marcus on the top levels of Hudsons Yard. Overall, New York will see an extra 650,000 ft² in five new stores by 2018.

Nordstrom opened the last of their six full line Canadian stores in Toronto last year; an expansion secured over 2014-2016.

NEW OPENINGS 2017 - 2019

OXFORD Westgate - John Lewis 2017 -120,000 ft²WOLVERHAMPTON Manders - Debenhams 2017 - 93,000 ft²STEVENAGE Roaring Meg - Debenhams 2017 - 80,000 ft²CHELTENHAM Beechwood - John Lewis 2018 -115,000 ft²LONDON White City - John Lewis 2018 -230,000 ft²BRACKNELL Lexicon - Fenwicks 2017 - 80,000 ft²WATFORD Charter – Debenhams 2018 - 113,000 ft²ISTANBUL Emaar Square - Galeries Lafayette 2017 - 100,000 ft²ABU DHABI Al Maryah – Macy’s 2018 - 205,000 ft²ABU DHABI Al Maryah – Bloomingdales 2018 - 230,000 ft²LUXEMBOURG Hamilius - Galeries Lafayette 2019 - 86,000 ft²ROME Tritone - La Rinascente 2017 - 151,000 ft²NEW YORK Hudsons Yards – Neiman Marcus 2019 - 190,000 ft² (levels 5,6&7)NEW YORK West 57th – Nordstrom 2019 -367,000 ft²TORONTO Sherway Gds – Nordstrom 2017 - 140,000 ft²

“the experience is often as important as the product, with people wanting to treasure memorable moments spent

with friends and families in their busy lives. To accommodate this growing thirst for new experiences,

our shops are now destinations for inspiration and enjoyment, as well as shopping”(John Lewis Annual Report 2017)

8

9

PERFORMANCE

Harrods & Selfridges have grown market share by 40% and will take 20% of this channel despite having only 5% of the floor space (ONS 2017)

Harrods – at 1,578,000 ft² (gross) - is Europe’s largest store. Europe’s other stores over 645,000 ft² include KaDeWe Berlin, Galerie Lafayette Paris and John Lewis Oxford St. New York alone has 4 stores over 645,000 ft² including Macy’s Herald Square with 1.1 m ft² of retail. Macy’s spent $400 M refurbishing the store in 2015. Its 650 store real estate is reputedly worth 2.5 times the company valuation.

Harrods reported 2017 sales at £2.16 billion, reflecting a 23% sales growth. Selfridges reported sales of £1.6 billion, a 16% sales increase, for their London, Manchester (2No) and Birmingham stores. Nordstrom and John Lewis reported 2017 sales growth at 2.6%.

Selfridges is part of the Whittington group which also holds Fortnum & Mason, Dublin’s Brown Thomas and Arnotts, the Canadian Holt Renfrew luxury chain, the premium de Bijenkorf chain in the Netherlands, Heals and Primark. Selfridges was a leader in using curated lifestyle collections rather than traditional categories of product offers. It remains innovative in offering a boxing gym, fragrance bar, art installations, indoor skate, film shows, silence room, etc.

The clear emerging pattern is that the iconic, large and city centre flagship stores with a premium / luxury offer serving major catchments with high tourist spends are the ones prospering.

CRG La Rinascente’s growth strategy is to only look at department stores that have a dominant position in cities popular with tourists; a focus on cities with 1.5-2 million inhabitants and with 5-6 million visitors per year.

9

10

NEW FORMATSThere are increasingly stores that represent destinations for shoppers – principally those at the premium/luxury end of the market. Those with fewer stores serving larger markets who have invested in giving customers an exceptional experience, personalised service, specialist services and bespoke or unique products. Those who offer consumers something they cannot get online and turn a large physical presence into a towering competitive advantage.

“Inspirational products will play a greater role across Waitrose and John Lewis. It supports our ambition for 50 per cent of our products to be own-brand or exclusive to John Lewis” [Annual Report April 2018]

The new 230,000 ft² John Lewis store that anchors the Westfield White City expansion exemplifies these trends. It has a 50,000 ft² two level Home with a Sofa Studio where customers can design their own; an Apple Smart Home with Europe’s first fully immersive smart home experience; a Demo Kitchen used for food demonstrations and cooking masterclasses; a Style Studio for personal styling, a beauty spa, two eateries (230 covers), a bespoke personal fashion styling service and a concierge ‘Experience Desk’ for booking events, craft classes or services.

With 500 staff, the store is expected to serve 7 million customers a year.

John Lewis are difficult to categorise with their ‘never knowingly undersold’, authentic, customer centric and employee ownership brand but their long standing focus on knowledgeable personal service is now playing well to Generation X and the aging Baby Boomers.

The Partnership was an early digital leader but it does also operate the Waitrose food store chain. Over half of John Lewis’ online orders are collected in stores, but more than three-quarters of these are collected in Waitrose outlets, rather than its department stores.

10

11

DOWN SIZINGSaks 5th (NYC) ‘Wellery’ – ‘Sweat with Saks’

Space ‘urban lifestyle’ supermarket in Rainbow store (30,000 ft²/2nd flr), Shennan

With some rare exceptions and new stores in emerging markets like GaleriaLafayette’s Beijing Xi’dan 506,000 ft² store (2013), operators commonly operate full line stores at 150-250,000 ft². With many legacy stores over 300,000 ft², finding viable alternative uses has become important; ideally to alternative uses, operated in house or licenced/let to 3rd parties, bringing both additional revenue and supplementary attractions to drive further footfall.

Many started with reviving the eateries they once had. Selfridges now have 16 different offers within the London store. Liberty's (80,000 ft² - 1875) recently opened the 100 cover ‘Arthurs’ restaurant; an Art Deco homage to its founder.

A number have, where it’s feasible, carved out frontage units for subletting to other retailers. Kohl's (1962), with 1,158 stores across America, recently announced it would bring discount grocer Aldi into as many as 10 of its stores in a pilot test. Karstadt has been leasing surplus space to grocery chains Edeka and Aldi, drugstore chain dm and the optician Apollo.

Others have extended internal concession grants for travel agencies, coffee shops, opticians and the like. Several operators have sought to sublet basements to food stores or gyms and sought office users for the top floors.

Department store Lord & Taylor (HBC) recently has sold its 5th Avenue store to WeWork/Rhone Capital and will reduce to about 150,000 ft², less than a quarter of the 676,000 ft² building. And at Lord & Taylor stores in Vancouver, Toronto, and Frankfurt, WeWork will take over the top two floors of those stores and pay rent. Recent reports suggest Debenhams are exploring the same with WeWork.

Liberty's new ‘Arthurs’

11

12

FOOD HALLSThe revival of Food Halls was also an early response. The famed Harrods Food Halls have been trading since 1902 and are listed. The 27,000 ft² Selfridges Food Hall was revived under Sears in the 1970s and renewed in 1989. Shortly after, Harvey Nichols introduced their food hall. John Lewis Oxford St opened their 17,000 ft² Waitrose Food Hall in 2007.

The Paris stores have long offered food with Bon Marche’s Le Grande Epicerie first established in 1923. The 37,000 ft² gourmet food hall was comprehensively refurbished in 2013 with a new 125 seat restaurant overlooking the shoppers. Galerie Lafayette opened their 39,000 ft² Gourmet in 2014 combining ‘food pavilions’ and a food hall. They also plan, as part of their BHV store in Marais, a three level 37,500 ft² Eataly with 7 restaurants.

KaDeWe opened in Berlin in 1907and remains one of the largest department stores in Europe with 645,834 ft² of sales floor. The post war period saw the1956 reinstatement of its famed 75,000 ft² Food Hall arranged on the top two floors with eateries in the wintergarten.

Gourmet supermarket Løgismose has recently opened a new three-in-one offer situated on top of Copenhagen department store, ILLUM, combining a gourmet grocery store, wine shop and eatery. Eateries increasingly blur the line between events and experiences.

In Japan, every department store of status has a ‘depachika’, a basement food hall offering an array of high-quality food products. These famed shrines to fresh consumption offer a cultural, eating and shopping experience all in one. Most offer ‘food to go’; ideal for the busy salaryman to take home late on the train.

3.

12

Printemps Du Gout 19,000 ft² new gourmet food hall (Jan 2018/ top 2 floors) , Printemps Paris Le Grande Epicerie 37,000 ft² gourmet food hall

After more than a decade of losses, Karstadt is back in the black. The German department store chain recently announced its first profit in 12 years. “We have a portfolio of interesting locations and it’s not a question of whether, but when and where to build new department stores“. (Stephan Fanderl, Karstadt CEO March 2018)

“Our customer strategy is centered on three strategic pillars: providing a differentiated product offering, delivering exceptional services and experiences, and leveraging the strength of our brand … Turning to our performance in 2017, we had record sales of approximately $15 billion. This represented annualized growth of 5 percent over the last five years, reflecting the investments we've made to expand our reach and improve the customer experience”. (Blake Nordstrom Co-President, Q4 2017 report)

“We are announcing today the closure of two stores, in Eltham and Farnborough, in line with our store review, which identified 10 stores at risk of becoming unprofitable over time. We have exited four franchise markets and plan to continue to exit low-profit, low growth franchise locations, whilst concentrating on those with scale opportunity and strong strategic partners” (Sergio Bucher, Debenhams CEO Oct 2017 results).

“Retail Week understands that, of House of Fraser’s 60 stores, around 20 turn a healthy profit” (RW May 2018)

RESULTS 2017

“Our department stores are great theme parks, places where you will find extraordinary quality, inspiration, pleasure,

styling, entertainment and outstanding service”.

André Maeder, CEO KaDeWe

MILLENNIALS

• are twice as likely to have a beauty treatment whilst shopping as more mature customers

• three times as likely to do another leisure activity such as bowling when out shopping

• twice as likely to use their mobile phones to compare prices

[JLP ‘How we shop’ Oct 2017]

13

INTERNATIONAL EXPANSION3.

Department stores are challenging concepts to translate internationally. Their formats need to be customised to meet national preferences, compete with local retailers and address expectations that vary hugely from country to country.

Galerie Lafayette has opened the 102,000 ft² three level store in the mixed use ‘urban lifestyle’ scheme by UAE’s Emaar Properties Turkey on the Asian side of Istanbul. Emaar acquired the 17 acre site in 2008 and announced, in 2011, the start of construction, the scheme financing and the prelet with Galerie Lafayette franchisee, Demsa Group. Demsa also operate the Harvey Nichols, Gucci, Longchamp and Karen Miller brands.

The 9 M ft² development incorporates 1,068 residential units (74% reported sold), 430,000 ft² of offices, a 183 bed 4* hotel and the retail offer; Emaar Square. The shopping centre includes a multiplex cinema, aquarium and 1.6 M ft² of retail, served by 6,500 car spaces arranged on 5 basement levels under the three retail levels.

The design, apparently “taking its inspiration from Dubai Mall”, is largely a conventional approach to a high density scheme.

Emaar’s Dubai Mall is a 3.72 M ft² retail offer with an 80 million pa footfall, anchored by Bloomingdales, Galerie Lafayette and Debenhams franchises, served by 14,000 car spaces.

Emerging markets have provided a key expansion area for some department stores. Galeries Lafayette’s first China store was a 506,000 ft² store in Beijing Xi’dan in 2013. Its second will be a 247,000 ft² store in Shanghai Lujiazui in 2018. Galerie Lafayette also opened a 129,000 ft² store in Jakarta’s Pacific Place in 2013.

Debenhams has 63 stores in 18 countries outside the UK and Ireland through regional franchises as well as the six Magasins du Nord stores it acquired in 2009. It added a 7th

store in 2016 to the Danish business. With overseas revenues up by 9.5%, the international side contributed over a third to Debenhams operating profit (y/e Sept 2017).

Macy’s will be opening their first international offer this year: a 205,000 ft² store in Abu Dhabi’s 2.3 M ft² Al Maryah centre– joined by a 230,000 ft² Bloomingdales, their 2nd

store in the Gulf.

The Middle East has been a key growth market. Lebanon’s Admic have operated the BHV/ Galerie Lafayette since 1998 with stores in Dubai and Beirut.Unlike the UAE, there is a cultural context to large department store offers in Beirut; a historical legacy of the French influence. The same is also true of Cairo. Before nationalisation in July 1961, down town Cairo had a number of largedepartment stores such as the Tiring, Les Grands Magasins, Cicurel, Shemel and Challons.

Istanbul Emaar Square (2017) – 102,000 ft² Galerie Lafayette store

14

ROME La Rinascente3.

It is probably the only department store in the world that can boast, within its structure, an archaeological site exposing the 2,000 year old Aqua Virgo – which was discovered during works and is still working to supply the main fountains of Rome. The aqueduct is now part of the basement exhibition and events space for La Rinascente’s new 151,000 ft² Via de Tritone store – its 2nd in the city.

The building was acquired in 2012 and the renewal reputedly cost €160 M by the 2017 opening.

Arranged on 8 levels, the building is lit by a new atria highlighting the five floors of luxury Italian products. The sixth and seventh floors are occupied by a gourmet food hall, lounge bar, open air terraces and a number of restaurants. Their CEO said of their customers:

“We want to fascinate them thanks to places that promote culture, art, the cities. Incentives that are able to attract both local visitors, who … represent 30% of the total, as well as non-resident Italians, who account for 20%, and even tourists and foreign business travellers who account for half”. Albert Baldan

La Rinascente’s flagship is their 570,000 ft² store in Duomo, Milan; voted the World’s Best Department Store in 2016 and achieving €2,137 psf sale densities in 2015. The group aim at opening similar stores to the Via de Tritone store in Florence and Venice - subject to regulatory approvals.

15

BRACKNELL Fenwicks3.

As part of the long awaited redevelopment of Bracknell’s town centre, the old store was demolished and the new three level 80,000 ft² Fenwick store opened in 2017 with a £20 million fit out.

The old store was originally a Bentalls, acquired by Fenwick in 2001. The new Fenwick was said to be the first new store opened by the family since Canterbury –similarly an old department store (Ricemans) acquired in 1986 and replaced by a new store in 2003 as part of the Whitefriars development.

Fenwick had opened its renewed and extended 88,000 ft² Colchester store in 2016: a former William & Griffin acquired in 2008.

At Bracknell, Fenwick has created a high-end shopping experience with fashion, beauty and accessory brands. Brands include international designers such as Coach, Kate Spade New York and Max Mara, luxury beauty brands La Mer, Narsand Jo Malone London and premium high street names including All Saints, Ted Baker and Jigsaw.

The top floor has Bed & Bath and a Cookshop together with the Mediterranean-inspired restaurant, Fuego, complete with private roof garden/terraces. Overall, a contemporary setting for a premium offer although at a smaller scale.

The company is now focussing resource on its on-line offer and refreshing its flagship Newcastle store.

16

VENICE Fondaco dei Tedeschi3.

2016 saw the opening of the first European ‘T Galleria’ store; run by the Duty Free Shopping (DFS) company owned by LVMH Group. The extraordinary new 86,400 ft² store is leased by DFS from the Benetton family who purchased Venice’s historic Fondaco dei Tedeschi building in 2008. Venice only has a core population of 55,000, but it does ‘enjoy’ 20 million visitors a year.

This ‘unconventional, multi-functional luxury store’ encompasses 300 brands, Italian gourmet food hall, authentic Venetian crafts and, in a glass pavilion on the fourth floor, a large exhibition and public events space. Arranged around the covered courtyard with stone colonnades, cardinal red escalators, terracotta partitions and gold metal finishes, the store “celebrates authentic Venetian culture and its richness, vastness, and dedication to luxury and commerce”.

“It’s hard to pigeonhole T Fondaco dei Tedeschi, a new retail destination in Venice. It’s certainly not your run of the mill department store, nor is it a boutique shopping experience. It’s more a combination of extraordinary architecture and cutting edge design, mixed up with a heavily curated edit of some of the world’s most desirable luxury goods, covetable Venetian souvenirs, a grocery store (more Fortnum’s than the Co-op), and a chic Philipe Starck-designed restaurant. Essentially, it has to be seen to be believed” (Liberty London Girl July 2017).

Luxury brands face the well highlighted issues of changing consumer drivers, growing digitisation, product personalisation, offer re-curation as well as planning how to delight local customers as well as tourists and travellers in mature markets.

Ostensibly, one in four Millennials would rather pay money for an experience rather than a product. They look for a tailored experience with live events and more experience based spending. And in doing so, they expect a frictionless consumer journey from getting the experience to sharing their pictures on social media. But in the spatial urban geography that real estate folk inhabit, there is more to this than just personalisation, digitalisation and socialisation.

At the heart of the ‘bricks & mortar’ offer in the omni-channel partnership is the quality and delight of the urban fabric; the authentic experience of the ‘real thing’. The strong spatial presence is the symbolic and authoritative presence of the flagship brand pavilion, acting as the material expression of the brand, showcasing the entire brand story under one physical roof.

The building and the texture of its urban environment provides the physical stage for the immersive experiential retail theatre; with its cast of actors, story, staging and direction.

17

TRADING FORMATSIt’s still common to find department stores offering more discounts on more of the same merchandise, with uninspired product presentation in the same old, tired and big boxes. The mix is dominated by clothes, handbags and shoes making up 75-80% of sales as opposed to the 50% common a few decades earlier.

Looking around the untidy piles crowded together on tired shop furniture under the neon glare, there’s little to delight the eye, excite interest or awake the mind.

The years of mergers and consolidation did create enterprises with organisational efficiencies, lower operating costs and greater purchasing power. Yet what was gained in scale was frequently lost in entrepreneurial agility and tailored local responses to specific communities. Scale often led to ‘spreadsheet management’ as power transferred from the buying merchants curating distinctive product offerings to company leaders more concerned with pleasing stock exchange annual expectations.

The centralised buying structures and the disappearance of brands proudly reflecting localities led to ubiquitous offers in studied beige. Management could now only look to compete on price against a nimbler and specialised competition.

Even if change has been thrust upon them, most the surviving operators are now investing in beauty and wellness, lifestyle boutiques, themed eateries, distinct products, gourmet food halls, unique assortments and ‘pop up’ experiences and events.

The common focus is now improving the quality of the customer experience and service proposition, extending the use of technology to intimately engage customers across all channels and building personalised consumer confidence in the brand, products and services.

In the competition against pure online and value discounting, the authoritive major store can control the experience, assortment and presentation in highly edited, constantly refreshed and curated fashion. However, it is also clear that demand for this format has shrunk in provincial markets and retreated back to the metropolitan centres. Quite a few stores now lie marooned in sparse catchments.

“As part of our plans to differentiate the John Lewis brand and to reinvent

the department store for the 21st century, our shops continue to be a place where customers come and

experience our brand – the physical manifestation of what we stand for”.

Paula Nickolds, MD John Lewis.

“In our full-price business, we have a high-quality portfolio of around 120 full-line stores in roughly 50 markets across the U.S. In these markets, the profit per customer is more than double that of markets without a Nordstrom store presence. This market-focused approach informs how we allocate capital” (Anne Bramman, CFO Nordstroms).

What also appears important is the strong spatial identity of the store. In the late 1990s, several store operators began to demand individual building identities for their stores which were part of retail developments. John Lewis commissioned separate architects for their new Cambridge (2007), Leicester (2008), Liverpool (2009)and Oxford (2017) stores.

Recent financial reports suggest that the most successful department stores are generally located in iconic downtown locations: Harrods in London, Galeries Lafayette in Paris, Isetan in Tokyo, Sogo in Hong Kong. Each major city has its landmark stores where the brand has been built over decades.

Part of that is being an integral part of the urban character and identity. There isn’t the need to stage entertainment to attract customers out to an off centre location;

“for us the performance is already there, around us: a stroll down Corso Vittorio Emanuele, a visit to the Cathedral rooftop, a trip to Prada’s store in the Galleria. The same is true of Rome, Copenhagen and our other stores. In these European cities, you are surrounded by living art and history” (Alberto Baldan, CEO La Rinascente)

To benefit from city vitality, the department store needs to be a recognisable and integral part of the urban fabric; ideally part of the collective memory of the city.

For investors, department stores let on long-term leases in prime locations are particularly interesting since they offer a stable rental yield and a high probability of capital preservation. Opportunistic investors and developers, on the other hand, are equally interested in large city blocks with short occupier lease terms and uncertain futures since this creates opportunities for re-positioning and the associated value-add potential.

Large historic buildings in metropolitan cities also offer the key opportunity to address creative occupiers looking for unique, accessible and characterful places.

18

FUTURE3.

The demise of the department store industry has been predicted practically every decade of the last century. Yet today, the flagship city centre department stores with luxury positioning and ever changing offers increasingly appear, in many ways, to still be the retail trail blazers that they originally were. Their innovations are closely studied and frequently copied. Their physical stature and presence grows in significance and the quality of their evolving internal environments ever more important, albeit at substantial periodic capital cost.

Smaller stores in major cities seem to be prospering with even more eclectic and specialised offers, particularly orientated to experience seeking city visitors. And the new or refreshed smaller stores in 2nd

rank cities and major town centres look to have a future: offering key concession brands that would otherwise not be available, incorporating a substantial beauty offer and providing a premium experience in a contemporary environment.

However, the market remains challenging. Stores that pick, pack, charge and deliver on-line orders for the same instore ticket price have a challenge – but when commonly a third of deliveries are being returned, that challenge is enormous. For standard stores in the UK, revenues have been falling but property taxes are increasing alongside staff and import costs.

It’s clear that many middle market stores in unfavourable places need to close. And productive alternative uses secured for some over sized stores. Yet still, across Europe, North America and the Middle East, the market continues investing in existing and future stores.

Department stores are reimagining their spaces into the ‘beyond shopping’ experience. And there is such to suggest that this is likely to be the future place for most retailers.

19

Mexico City Insurgentes (2010) – Extension to Liverpool store

Cologne Schildergasse (2006) – 247,500 ft² Peek & Cloppenburg storeLeicester Highcross (2008) – 140,000 ft² John Lewis store

KEY ATTRIBUTES

• LARGE CITY CENTRE MARKETS

• TOURIST DESTINATIONS

• LEISURE, EDUCATION & CULTURAL EXPERIENCE

• AUTHENTIC & UNIQUE RETAIL OFFERS

• HERITAGE & ICONIC BUILDINGS

• CONVENIENT & ACCESSIBLE PLACES

• CURATED & PERSONALISED URBAN OFFER

• BLURRED PHYSICAL & DIGITAL ENVIRONMENTS

“Online is for displaying a full assortment, mobile is for providing contextual information and retail is for creating shareable experiences.”Sebastian Kemmler, Kemmler Kemmler

“People don’t need anything from Neiman Marcus,’ right? It’s all about wants and desires and emotional resonance”. Karen Katz CEO Neiman Marcus Grp

20

ALISTAIR PARKERDevelopment & Place43 Portman Square. London W1A020 7152 5203 | 07764 398 203