Why Retail Flagships Are Running Aground

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Credit: Hyesu Lee

It's no secret that retailers are spending less on advertising -- the statistics point to plunges in print, TV and online. But what you won't find on the charts is a form of retail advertising that's not just declining but dying: the iconic flagship store.

Impressive, sprawling flagships in high-profile locations have long served as status symbols for retailers, more important for their brand-wide promotional value than the profits they may or may not have generated on the premises. A tourist's visit to the Macy's on 34th Street in Manhattan was something to go home and tell friends about.

But contraction in retail is leading big chains to reconsider their biggest brand temples. The latest casualty is JC Penney's New York City flagship and sole Manhattan outpost, put up for rent last month less than a decade into a 20-year lease. JC Penney's decision to close the 150,000-square-foot store, centrally located in one of the top tourist destinations in the world, signifies a dire situation at the Plano, Texas-based retailer.

But it's not alone. Earlier this spring, Ralph Lauren closed its lavish Fifth Avenue Polo store, for which it brokered a $400 million, 16-year lease in 2013. Toys R Us and Aéropostale shuttered their Times Square stores last year, and FAO Schwarz in 2015 turned in the keys to its Fifth Avenue flagship, whose giant piano won't be enticing Tom Hanks wannabes anymore. And while its miraculous location on 34th Street remains open, even Macy's is rethinking its real estate.

Struggling retailers can no longer justify the expense, even as a marketing cost, as e-commerce and social media grow in importance with shoppers. In the digital age, ads made from bricks and mortar no longer work as well, or even send the right message.

Now some brands are transforming flagship locations into more experiential, showroom-type locations where consumers can look but not necessarily buy. Nearly all marketers are forgoing the big glitz and glamour of the old flagship for smaller locations in less expensive areas.

"When a brand starts hurting ... then management starts to turn more financially oriented than brand-oriented," said Lee Peterson, exec VP-brand strategy and design at retail consultancy WD Partners. "It's hard to justify having a giant flagship store."

Credit: Hyesu Lee

That's a far cry from the glory days of just eight years ago, when marketers like Aéropostale and Forever 21 were erecting multifloor behemoths in Times Square, where foot traffic from tourists and New Yorkers reached record levels. JC Penney's entry to the Big Apple was a huge turning point for the brand, which had finally made it into the big leagues with a store steps away from Macy's Herald Square location.

"The goal was brand status," said Peterson. "If you were from Nebraska and walking down Madison Avenue [in New York] and saw this glitzy, four-story store from, say, The Limited, you'd think, 'My God, it's a fantastic brand.' " Beyond the brand marketing, he noted, retailers often put higher-end, limited-edition merchandise in such stores to test
its appeal.

Now consumers don't need to physically discover such products; they can learn about them via their friends on Facebook or influencers on Instagram. "The physical store was the place to learn about products, inspect them—now we can learn about them on social media," said Anthony Dukes, associate professor of marketing at the University of Southern California's Marshall School of Business.

The days of bigger-is- better are also disappearing. Real estate brokers are seeing brands opt for smaller, more financially prudent locations. "Retailers are being more stringent ... taking only what they need, as opposed to in the past. If somebody wanted a Fifth Avenue store and it was substantially larger, they'd still take the space because they wanted the presence," said Andrew Goldberg, vice chairman at real estate services company CBRE Group.

The exception may be those brands pivoting to make flagships into venues for memorable experiences. Hershey will move to a larger location in New York City later this year. The National Football League and Cirque du Soleil are teaming up on a 40,000-square-foot interactive exhibit store opening in Times Square this fall. Last spring, Samsung opened the showroom-like Samsung 837, which functions more as "technology playground" than store, according to the company. Apple, too, is making more of its square footage by opening stores that double as community centers.

In fact, instead of flagship as marketing, brands may do well to market their flagships as brand experiences. In a recent International Council of Shopping Centers survey, roughly 80% of consumers said brick-and-mortar stores keep brands top of mind, and 56% of U.S. adults who buy online said a brand should also have a physical store. "You can't buy an experience online," said Goldberg. "The retailers are going to have to evolve and do a better job of making it worth the customer's effort to come to the store."

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