The Barneys New York bankruptcy earlier this month put the spotlight on the luxury sector. Will it survive? And maybe more importantly, what does the bankruptcy say about the luxury sector in general?
In another installment of a new financial Q&A series, Sourcing Journal caught up with Gary Wassner, chairman and chief executive officer of Hilldun Corp. and co-founder and chairman of InterLuxe, to get his view on the lending environment and what it means for luxury firms. Hilldun is a mid-size financing firm that handles factored accounts for luxury and contemporary brands. InterLuxe partners with growing fashion and luxury brands to help support their capital structure, and provide business resources and strategic guidance to accelerate growth.
Sourcing Journal: What’s the current lending environment looking like?
Gary Wassner: Right now, everything is business as usual. The stores seem to be doing well. There are exceptions, and we are working with them. There are small stores that do have some cash flow issues, but that’s nothing unusual, at least not in the designer contemporary and luxury sector.
From the majors–Saks, Neiman Marcus, Shopbop, Net-A-Porter–they are paying us promptly. We see no slowdown in payments, no excess returns, nothing unusual. The luxury category is doing better than others, although American luxury is struggling.
SJ: Why is American luxury struggling?
GW: The concept of a collection in the U.S. is different than in Europe. In Europe, the collection is the halo for everything else they sell, whether for fragrance, shoes, handbags or cosmetics. Smaller U.S. brands don’t have those extensions. The challenge for them is scaling up because they don’t have the funding either to scale up or expand. The ready-to-wear area of luxury has reached a saturation point. There’s so much choice in the market today that luxury is diluted.
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The [earnings] numbers from LVMH and for Kering show growth for their brands because they have significant dollars for marketing. They have significant brick and mortar of their own and, in many cases, leased departments at stores. They’re not subject to the ups and downs of their own store base. American brands don’t have that same access.
SJ: There’s been a growing customer base—particularly among the younger consumers—who are interested in resale and rental. How do luxury brands get shoppers to buy at full price?
GW: What’s happening is really a redefining of luxury for the consumer, making what was inaccessible now accessible. Committed luxury consumers will never be renters, and they will never care [as much] about price because it doesn’t affect them. Aspirational consumers are younger, and resale and renting are affecting their shopping habits and their pursuit of luxury.
SJ: So how do luxury brands adapt?
GW: The brands have to bring in designers to make the product appealing to the younger consumers. Virgil Abloh and LVMH are reinventing the more staid, conservative luxury brands. Is there a big audience among the younger consumers at full price? Does the younger consumer have the pocketbook to sustain these prices? That remains to be seen.
SJ: You talk to a lot of younger brands starting out, and advise many of them. What are the top three tips you can share?
GW: One, be an omnichannel brand. Have multiple points of distribution. Don’t rely only on your own branded shops, or just wholesale. Try to extent your reach in all categories. Reach out to the consumer when you need to, and take advantage of the free marketing from your wholesale accounts that the department stores make available to consumers when they walk through the store.
Two, don’t be too precious about your price point, your brand and your own sensibility of luxury. Make sure you are making product that you have an audience for because the consumer has changed, and lifestyles have changed.
Three, whether you are a luxury brand from day one, or contemporary, have the appropriate margin to deal with all channels of distribution. Dilution is going up and up. The consumer is trained to get freight shipping free in both directions. They know they can buy all and return all to test out. These are difficult habits for brands without the margin to sustain the costs in the direct-to-consumer channel. Companies need to make sure they have the appropriate margin to deal with all of the contingencies, and the evolution of the market.
SJ: You mentioned the free marketing that department stores provide for brands. How else can department stores help luxury brands?
GW: The environment has to be welcoming, and it can’t be over promotional, where the consumer can sit back and wait because they don’t take full price seriously. They also have to have product that’s timely–more product to appeal to consumers of the moment. That means adapting to more deliveries of product, and fewer stock-keeping units. Consumers want something new every day. If the store continues to buy seasonally, which means two drops a season, they are missing out.
SJ: What timing do you think makes sense?
GW: I think doing 10 drops, or small capsules. If a store continues to do that, it will be able to keep things fresh and exciting.
SJ: There’s now talk of a potential downturn, maybe 12 to 18 months out. What advice do you give to your clients on how to prepare for that?
GW: Never speculate on your inventory, unless you have a sure stream of revenue from your direct-to-consumer portion of the business that is proven and you can count on. Don’t build up your inventory unnecessarily. Make sure you have enough lead time, and don’t commit to product before you have orders in-house. We know what the value of designer product is after the season is over, and it’s not very much. Also, be careful about who you extend credit to today. You need support, but you also can’t assume. Losses for failure in payment not being made are very hard to absorb for small brands. You ship prepaid when you must, and you only ship on terms that you are comfortable with. You also make sure the policies at your company are strict [and adhered to]. Get good credit advice! Don’t rely upon your sales team to vet a retailer. Use a credit service, factor or credit insurance [provider], and listen to the advice they give.
SJ: Barneys New York recently filed for bankruptcy court protection. Is that a reflection of the state of luxury today?
GW: I don’t believe so. Barneys has always been such a unique department store. It’s circumstances are very different from those of other luxury department store chains. I consider it to be a specialty retailer, rather than a typical department store.
SJ: Barneys was a place where you go to discover new brands. Where do its shoppers go now, if not Barneys?
GW: There’s still a place for them at Barneys. If anything, Barneys will be more dependent on bringing in new brands and discovering talent. That’s what will continue to make them unique and differentiate them from their competitors. They’ll need more of that discovery factor, so I see them as continuing to sponsor and support young, creative brands.
SJ: Do you still see value in the Barneys name?
GW: Yes, I always have and will. They’ve built out and carved out a solid, very personal and unique area in the luxury retail space. They’re marked their territory quite vividly, and any brand that does that in so vivid a way, has value. The real value is in the Barneys New York trademark, and the aura that has been created around the brand. Any association with the Barney’s brand, despite all the company’s financial challenges, enhances the partner’s credibility.