Deluxe: How Luxury Lost Its Luster (29 page)

The luxury brand outlet stores are often done up to look like their regular full-price boutiques, with blond wood floors, chrome-trimmed sales counters, and glass display cases. The salesclerks wear the same uniforms, and hip music is piped in. The stock usually comes from flagship stores around the region—Beverly Hills, Las Vegas, South Coast Plaza in Orange Country, California—but it can come from as far away as Hawaii, Hong Kong, or Japan. It can be one month, one season, or a year or two year behind. Sometimes the items have a slight flaw or a hem is ripped out or buttons are missing; shoppers must be diligent. “I once got home from the Ferragamo outlet only to find two mismatched silk evening pumps among my purchases,” wrote reporter Laura Landrop in the
Wall Street Journal
. But, says Linda Humphers, editor in chief of
Value Retail News,
a monthly trade publication that covers the outlet business, “you will not see any fuchsia sweaters with three arms…because today outlet chains understand that is not good business. It’s not the quality customers expect. And image is one of the reasons for opening an outlet, so excess goods don’t end up [at a discounter] where goods are jammed together.”

As a result, the array of goods at luxury brand outlets is choice. When I went into the Yves Saint Laurent shop in July
2005
, it was as if I had stepped into a Best of Tom Ford store. Suits, shirts, dresses, gowns, and shoes from all four of his Rive Gauche collections from
2002
to
2004
were on the racks, and Ford’s fashion shows played on a video screen, though he hadn’t been with the company for more than a year. “They do a lot of sales by phone,” Frederiksen tells me. “People call and then Saint Laurent ships it.” At the Versace boutique a woman picked up a black leather gown that an A-list actress had worn to the Oscars and returned to the company. Some brands use outlets as their primary sales venue for more middle-market areas. Burberry, for example, had a dozen outlets in the United States in
2005
, including a new one about forty miles outside Seattle. At the time, it was the only freestanding Burberry store in the entire state of Washington.

Desert Hills gets about
100
to
150
bus tours a month—
80
percent are Japanese, and
10
percent come from other Asian countries. Bus tours originate out of Los Angeles, arrive at
10
:
00
a.m. and depart at
3
:
00
p.m., giving the customers five hours of concentrated shopping. Desert Hills has a Japanese-speaking customer relations representative, and several of the stores have Japanese-speaking sales associates. There are Japanese restaurants at the mall, too. But the average outlet center customer in the United States, according to OutletBound.com, is a forty-three-year-old white female with an annual income of $
50
,
000
or more. The reason for this, Humphers told me, is a mix of culture and marketing. “Men in the U.S. don’t shop—
90
percent of men’s clothing is bought by women,” she said. Furthermore, “outlet prices, while bargains, are still higher than those found in discount and off-price stores,” she said, and that demographic is “the most targeted in marketing programs.”

Desert Hills visits increased with the opening of the Morongo Casino Resort and Spa down the road in late
2004
. Desert Hills does what it can to buff up the shopping experience: it has a VIP Shopper Club that allows shoppers to download exclusive savings offers from merchants, and in
2005
introduced Chop n’ Shop, a helicopter service from Los Angeles to Desert Hills, for $
770
per person. Each store has its perks too: good customers get e-mails and phone calls when new merchandise arrives, and customers can request to be notified when specific items come in. “The winning formula is to build a center big enough to keep out the competition, that’s close to a major metropolitan area so it attracts local shoppers ten times a year instead of the four or five times a year they used to,” said Humphers.

In the United States, luxury outlet malls are expanding. Las Vegas Premium Outlets is adding some
30
new stores to its
120
-tenant list. In the rest of the world, outlet shopping is just taking off. Former Washington, D.C., real estate developer J. W. Kaempfer brought the notion of outlet malls to Europe in the early
1990
s. Today his firm, McArthur-Glen, is the largest outlet mall developer there: its sixteen Designer Outlet malls, located in such former industrial towns as Troyes and Roubaix in France; Ashford, England; and just outside Florence, Italy, draw fifty million shoppers each year to such luxury brand outlets as Armani, Bulgari, Dolce & Gabbana, Hugo Boss, Prada, Roberto Cavalli, and Salvatore Ferragamo. Chelsea Premium Outlets has opened one mall in Mexico City and four in Japan. David Simon, CEO of Simon Property Group, the owners of Chelsea Premium Outlets, said in
2006
that it was building a premium outlets mall in Korea. And he added, “We believe in China.”

W
HILE MUCH
of luxury’s expansion to the middle market was created by the machinations of executives in corporate offices, the idea for luxury’s newest and most promising retail avenue was, like so many great inventions, discovered by accident by an outsider. In
1998
, freelance fashion editor Natalie Massenet told then–
Sunday Times Magazine
fashion director Isabella Blow that she wanted to produce an Edwardian-themed fashion shoot. The ever-creative Blow had one suggestion: “Think porcelain.” Massenet went home that evening, sat down at her husband’s computer, and for the first time surfed the Web, in search of Edwardian porcelain that might inspire her. Instead, she found something else: the endless possibilities of the Internet. “It was a mind explosion for me,” Massenet told me over breakfast at the Westin in Paris in
2006
.

How, she wondered, could she apply this to the world of luxury brands? Suddenly, the answer was obvious: online shopping, she said, was the “next logical step in the evolution” of luxury retailing. Before luxury e-tailing, she told me, “you had the whole media machine telling you what you needed to have, and then you had to travel to a city center to buy it. You had women in the Middle East who took shopping trips to London and Paris twice a year, women in the country going to the city.” Wouldn’t it be fantastic, Massenet thought, if they could order the luxury brand items they wanted from the comfort of their home and have them delivered in a matter of days? Wouldn’t that be a true luxury?

Massenet, a pretty brunette who could pass for Sandra Bullock, immediately got to work on a business plan. Her idea: to do an online fashion magazine where you could buy the items you read about with a click of the mouse. She called it Net-a-Porter.com and describes is as “merchantainment—the convergence of impulse and media.” Her plan was to hire buyers who would go to showrooms and order clothes at wholesale that she would sell for full-retail price online, just like a department store. To give the site more depth and hook interest, it would be set up like a Web magazine, with articles that “tell readers what makes the items for sale so special,” she said. “You have to keep the magic. If you reduce it to a garment, you are missing the point of what that garment is about. It becomes a generic item.”

Though new to the Internet, Massenet knew all about fashion and marketing. Born Natalie Rooney in L.A., the only child of a foreign correspondent-turned-film-flack and a Chanel showroom model, she was raised in Paris, studied English at UCLA, and worked as a film production assistant. In
1990
, at twenty-five, she landed her first fashion job, as a stylist for a friend’s fashion production company in Los Angeles. In
1993
, she joined
Women’s Wear Daily
as West Coast fashion editor, where she did styling and reporting, and covered events including the Academy Awards. In
1995
, she met Arnaud Massenet, an investment banker based in London. She left
Women’s Wear,
moved to London and married him, and became senior fashion editor for
Tatler,
a glossy women’s fashion magazine, where she says she “learned about the high-fashion consumer.” She went freelance in
1998
, and began to work with Isabella Blow at the
Times.

To get her Net-a-Porter idea going, Massenet called on designers she had worked with while at
Tatler
and the
Times
to ask if they’d participate. Among the first to sign on were London-based companies Jimmy Choo, Burberry, Matthew Williamson, and Anya Hindmarch. Once Massenet compiled a list of about thirty-five, she started looking for investors. It wasn’t easy. “We didn’t have a broad appeal to the investment community because we had a business plan that showed realistic sales projections and didn’t show a public listing in six months,” she told me.

Instead, she pulled together just over $
1
million in start-up capital from friends and family in three months and sublet a quaint artist’s studio in Chelsea, where the Chelsea Art School had been founded. “It had a beautiful studio room with a mezzanine where we kept the Jimmy Choo shoes and packaging, and one of the bedrooms was our stock room and the other the packing room,” she remembered. There were five on staff. “We were a lean machine,” she says.

Yet the luxury industry was averse to online retailing. Despite their rabid expansion in such middle-market retail spots as Las Vegas and far-flung outlet malls, luxury executives deemed Internet retail tacky. “The luxury industry couldn’t get their heads around the idea that a three-dimensional retail experience they had spent years perfecting could be reproduced in two dimensions, so instead they stuck their heads in the sand,” said Marc Cohen, director of Ledbury Research, a consulting firm that focuses on wealthy consumers.

And then there was the Boo.com fiasco. In the late
1990
s, a trio of Swedish entrepreneurs jumped into the Internet start-up frenzy with a trendy sportswear e-tailer they called Boo.com. Boo got loads of press in such influential business titles as
Forbes
and the
Financial Times
and had impressive backers, including Bernard Arnault. Surprisingly, Arnault is a bit of a computer nerd who reportedly spends much of his free time surfing the Web. In the late
1990
s, he put €
500
million of his own money in an investment fund called [email protected] that backed various start-ups, including the online auction house QXL, the French search engine Nomade, and the music e-tailer Peoplesound.com.

But Boo was a badly managed company. It ran a huge overhead—its plush offices in London, New York, and Paris held
420
employees, an enormous number for a start-up. The founders lived large, flying on private jets or on the Concorde, traveling by limo, staying at hip four-star hotels. They had a $
42
million marketing budget that they used on such follies as announcing their May
1999
, launch on billboards across Europe and Scandinavia and hiring award-winning video director Roman Coppola to make their television commercials. When they finally launched Boo.com, six months late and seven weeks before Christmas, it was a technical failure: fewer than
25
percent of attempts to access the site were successful. And it was a financial disaster: the company burned through an impressive $
7
million a month. At its best, Boo made $
1
.
1
million a month. Backers withdrew their support. There were layoffs, including the chief financial officer. Finally, in May
2000
—just six months after it launched—Boo.com shut down and was liquidated. The founders had gone through $
135
million in two years.

The Boo implosion didn’t drive Arnault away from Internet retailing or teach him what mistakes to avoid when launching a site.
Au contraire.
He poured more than $
100
million—from his personal [email protected] fund and LVMH—into eLuxury.com, a San Francisco–based Web site dedicated to showcasing and selling LVMH fashion brands. Arnault’s idea was to produce an online version of a luxury department store, with each floor devoted to a different brand. It would sell everything from $
20
Dior lipsticks to $
20
,
000
Vuitton trunks, all wrapped beautifully in hard boxes with tissue paper and shipped from a warehouse in Memphis, Tennessee, where FedEx’s worldwide distribution hub is located.

To get customers to return to the site regularly, Arnault and his team came up with the same idea as Massenet: an Internet fashion and lifestyle magazine that would be informative as well as highlight the brands available. Like the retail side, the webzine would be high-gloss—the online equivalent to
Vogue
. The eLuxury site hired top editors and journalists away from such prestigious titles as
Conde Nast Traveler, In Style,
and
Food & Wine
to create and write the content. No expense was spared. “We’d write articles like ‘Celebrity Beauty Secrets’ or ‘Hot Spas’ and to do it they’d send you some place for ten days, put you up at the best hotel, and pay for you to take in all the best restaurants, spas—everything,” remembers one of eLuxury’s original writers. “The amount of money they spent was dizzying.”

ELuxury launched in June
2000
—a month after the Boo.com flameout and about the same time as a handful of other sites, including LuxLook.com, LuxuryFinder.com, and Net-a-Porter. Compared to the others, eLuxury was a monolith. “ELuxury launched a week after we did and I thought at the time, ‘I have one week to make it, then this hugely funded machine will take over,’” Massenet remembers with a laugh.

Actually, it didn’t work out that way. Though luxury online shopping made perfect sense—it appealed to wealthy customers who knew the products and wanted the ease of ordering from home, and it attracted a new middle-market clientele that had coveted the items but either didn’t have access to or felt intimidated in the stores—it took a while to get going. “The market was nonexistent,” says Massenet. “We had to create it.” Not all the sites survived. Both LuxLook.com and LuxuryFinder.com went under in
2001
; eLuxury acquired their URLs and customer databases. And eLuxury had its problems, too. Like Boo before it, the company ran far too high an overhead and was hemorrhaging money. Soon it began to make substantial cuts in the luxury side of its offerings: the fancy packaging disappeared, customers had to pay for return shipping, the editorial content started to shrink. “I remember in
2001
every time I attended an editorial meeting, there’d be one less person,” one writer told me. In
2002
, the magazine was completely phased out and only the e-tailing remained.