Luxury Brightens Dark Retail Landscape

For large retailers who serve the mid-range market, the news just keeps getting worse. Germany's general economic stagnation over the past several years has caused people to keep a tight hold on their wallets, a tendency that has hit most of the retail industry hard.

One of the country's biggest department store chains, KarstadtQuelle, lost more than 1.6 billion euros ($1.9 billion) last year and its emergency cost-cutting plan cost 5,500 jobs.

German brand names that have been fixtures of middle-class life, such as appliance makers AEG and Miele, are cutting thousands of jobs. Relief doesn't seem to be in sight. Germany's main retail association, HDE, forecasts the retail sector will see sales in 2005 decrease by between 0.5 and 0.75 percent over last year.

But there is a bright spot or two on the current dark and stormy retail landscape. In fact, it's often glittering, sometimes covered in gold, and almost always features a prominent logo -- it's the high-end, luxury sector, which is enjoying a renaissance.

"The mid-range is suffering, but luxury brands are in demand and people are spending a lot of money on them," said Ulrich Binnebössel, spokesman for the HDE retail association.

Luxury in style

While the Karstadts of the retail sector are closing underperforming stores, Berlin's Galeries Lafayette, the high-end French department store on one of the capital's luxury shopping streets, Friedrichstrasse, is adding another floor and plans on featuring more designer labels, which will cost a pretty penny.

"We're reacting to a brisk demand," Thierry Prevost, the store's director, said in an interview, adding that store sales had increased by 25 percent in both 2004 and 2005.

Other high-end retailers report similar developments. The exclusive Quartier 206, just down the street from Galeries Lafayette and housing names such as Comme des Garcons, Dolce & Gabbana (photo) and Prada, reports double-digit growth.

KaDeWe, the western Berlin shopping mecca and tourist magnet, is putting the emphasis on luxury, seeing it as a way out of the general retail malaise. The store has rebuilt its "luxury boulevard" on the ground floor, giving a more prominent place to designer names such as Louis Vuitton and Gucci.

"In general we have the feeling that high-end brands perform better than the broad mid-range," said Petra Fladenhofer, spokeswoman for KaDeWe. "The luxury boulevard has developed very successfully."

Tourists eager to buy

But it's not as if Berliners have suddenly developed a taste for the finer things in life. The German capital is traditionally a fairly working-class kind of town. With its high unemployment rate and serious economic enervation, the latest Hermès scarf or Helmut Lang shoes are not exactly near the top of most residents' shopping lists.

But Berlin's tourist industry is booming and visitors are the ones who make up a good portion of the luxury shoppers. At Galeries Lafayette, 40 percent of the customer base is made up of tourists.

The same applies to Quartier 206. The other 60 percent of their clientele, Germans, generally have made a special trip to Berlin to go shopping. At KaDeWe's luxury mile, a full half of those snapping up the one-of-a-kind, extremely pricey products were foreign tourists.

Most companies agree that the Russians are the nationality most represented among these image-conscious visitors. In fact, according to the Berlin's tourism office, the number of Russian tourists increased by 22 percent in the first four months of 2005. Many of them have money to burn and taste for the flashy.

"Most tourists come from eastern Europe, Russia and Poland, and when they spend money, wow!" said Angela Contzen, a spokeswoman for DepartmentStore in Quartier 206. Close on their heels are the Americans, she added.

Strong at both ends, weak in the middle

Binnebössel from HDE retail association says while the high-end is performing well, another sector is also booming: the discounters.

Grocery stores like Aldi and Lidl, with low overhead, limited selections and cut-rate prices, are enjoying a brisk business.

While he admits that Germany's poor economic climate has kept people from going on shopping sprees, according to him, it's not only a lack of money that is drawing people to the low-end. It's a simple, and very German, desire to save on certain things, like food, no matter how much money is in the bank account.

"It's often the case that one drives with one's Mercedes to the discount store to shop for cheap," he said.

The same phenomenon is helping the high-end as well, as the trend to mix and match luxury and discount items catches on, the "crossover look." Shoppers save money on no-name jeans and a simple top, but then splurge for designer shoes or a bag.

"And it has to be the ‘it' bag, very expensive," said DepartmentStore's Contzen.

The only loser in this scenario: the already struggling mid-market retailer, whose future appears as unsteady as a pair of Manolo Blahnik high heels.