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Fri 20 Nov 2009 04:00 AM

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Battered, but still fabulous

Harvey Nichols CEO Joseph Wan explains to Arabian Business how an economic "earthquake" forever changed the retail game.

Battered, but still fabulous
Battered, but still fabulous
The Dubai store, the largest Harvey Nichols outside the UK is still performing well.
Battered, but still fabulous
Source: Asteco, Colliers and J.P. Morgan estimates.
Battered, but still fabulous
Emerging market consumers such as the Chinese need to become more sophisticated, Wan argues.

Luxury retailer Harvey Nichols saw profit plunge last year, but nobody at the company is talking about an economic recovery. Chief executive Joseph Wan explains to Arabian Business how an economic "earthquake" forever changed the retail game.

When us investment bank Lehman Brothers collapsed in October last year, Britain's most upscale department store was left with a mountain of inventory. Veteran chief executive Joseph Wan had no choice but to commit the cardinal sin of luxury retailing: cutting prices.

The Knightsbridge-based retailer, known to international television viewers as the top shopping spot for "Absolutely Fabulous" fashion victims Patsy and Edina, didn't exactly shout from the rooftops about the bargains that were on offer.

"Slashing prices, clearly, is not the right thing to do," Wan says solemnly.

In a normal downturn, high end retailers steer away from the deep discounting midmarket names resort to. It is better to let revenue take a hit than to erode some of that hard earned cachet, they reason.

So when Harvey Nicks had to do it, it was done as discreetly as possible, so as to minimise the damage. "You do it in a better way, a more subtle way, than just to give a discount in the window," says Wan.

Rather than the usual sales scrum, regular customers were invited to attend special themed evenings, sometimes based on which credit card they held, where they were offered champagne and canapés. And discounts. "It's that kind of thing that we did a lot last winter," he says.

The discounting ate into the company's profit margins, leading to a 40 percent decline in last year's profit. By January this year the situation had stabilised and it was able to adjust next season's buying accordingly. Profit is recovering, but revenue remains down, and has fallen further since the full year results in March.

Inside the company, nobody is talking about an economic recovery.

"We don't even want to know, or waste time on predicting when a recovery will come. We are now all focusing on understanding the changes," he says.

"The rationale for that is that I am not looking at this financial crisis as just another economic slowdown, and then there will be a recovery one or two years later.

"I believe this global credit crunch has actually changed and shifted the landscape of many industries, including retail, very substantially. Like an earthquake, once it is done, it's done. You certainly can't put it back together."

He cites a number of reasons for the gloomy outlook. When Western governments begin to cut back on further spending, there could be further job losses. Many of them are talking about increased taxation to help finance their soaring budget deficits.

At the same time, households are being encouraged to reduce their debts. Those who want to keep spending are finding it harder to get credit, arguably the most powerful ingredient in the previous consumer boom. There are even signs that consumers are beginning to save more.

"When you add all of this together, it is unavoidable that your total consumption pool in the western world for luxury goods must shrink, substantially," he says.

One of his strategies for dealing with this new retail landscape is controversial. The company is introducing "lower price entry points" to attract a broader range of customers. In plain English, that means selling some more affordable stuff alongside the GBP2,265 ($3,783) handbags by Irish designer Pauric Sweeney.

"If we just continue doing what we have been doing - successfully, to be fair - up until Lehman Brothers collapsed, I don't think that's the right thing. It wouldn't help us because the total consumption pool for the luxury market in the western world in my mind will shrink significantly," Wan says.

Industry observers worry that the move could backfire. When he took the helm in 1992, Wan threw out the highstreet brands from Harvey Nichols and worked hard to turn it into one of Britain's best known upscale brands for fashion. A broader pricing range could confuse customers and jeopardise some of that brand equity.

But the Harvey Nichols brand does not just stand for luxury. First and foremost, it is the department store of choice for fashionistas, he claims.

"We do believe that we've got the right strategy and the right execution tactics to ensure that we do this without diluting our brand value," he says.

"We know very well what our brand DNA is: Harvey Nichols stands for fashion leadership. As long as they are really leading edge fashion, high price point or low price point is not really relevant.

"We know that if we can do this selectively and correctly, it will increase our business by bringing in new customers whom we did not cater to before, but at the same time preserve our brand value."Among the bright spots over the last year has been the Dubai store. The largest Harvey Nichols outside the UK is still outperforming, despite a revenue decline that, like the rest of the downturn, lagged the international slowdown by a few months.

Offering some more of the honesty that is usually so rare in region's retail sector, Wan says he has reservations about the number of upscale department stores coming to Dubai. "I have my reservations regarding the future sustainability of so many competitors in the same place, where the population is... maybe less than two million," he says.

"But at least we, Harvey Nichols, have the first-mover advantage. We were the first ones to come, and ever since we opened we have been trading very successfully."

The Dubai branch opened in March 2006 and is operated by the Al Tayer Group.

American rival Saks Fifth Avenue opened in BurJuman in 2004 as a joint venture with the Chalhoub Group, and launched a second branch on The Walk at the Jumeirah Beach Residence in 2008.

France's Galeries Lafayette, a partnership between Emaar Malls Group, Galeries Lafayette and Gard Investments, opened in The Dubai Mall in May this year. And US rival Bloomingdales has partnered with the Al Tayer Group to open two outlets in the same mall in February next year.

"I will have to wait and see. Clearly, in the long term it is hard to believe that all of us will be doing very well," he says.

"But who will be doing better or worse I do not want to forecast, it remains to be seen. All I can say is that up to now, we have been doing exceptionally well, well above all our original expectations."

The company currently has stores in the UK cities of London, Bristol, Manchester, Edinburgh, Birmingham, and Leeds. The international expansion so far includes Dublin, Dubai, Istanbul, Riyadh, Hong Kong and Jakarta. Kuwait is set to open in 2011, and the company is eyeing a second Turkish store in the country's capital, Ankara.

According to the CapGemini Merrill Lynch World Wealth report, the wealth of the world's 8.6 million millionaires totalled $33 trillion. By 2013 that number is projected to rise to $48 trillion, with the bulk of the growth coming from outside Europe and the US.

"No question, the future is in the emerging markets," he says.

But for a Hong Kong-born retail executive, Wan is conspicuously underweight on China. While most major luxury brands have been in the country for more than a decade  - Louis Vuitton arrived in 1992 - Harvey Nichols has yet to make it to the mainland. "I have been watching China very closely. I do not believe that it is ready for us yet," he says.

The decision is based on the relatively slim profit margins that come with being a department store. Single brand retailers like Gucci and Prada can afford huge mark-ups on the products they sell. An independent retailer has to buy the goods from them at much higher prices, leaving a smaller margin and less money to pay for prime locations in emerging market boomtowns. They also need significantly more space.

Many emerging market consumers, including the Chinese, also need to become more sophisticated before the business can become profitable, he argues.

"All they are talking about when they are talking about buying luxury goods is buying logos. They do now necessarily understand the fine craftsmanship, the design, the fabric, the material of the good. They just want the logo, that is what they mean by luxury market," Wan says.

"Our selling point is that we have an expert buying team searching around the world every season, introducing the best of the best. What we are selling is edited fashion."

For the time being, other BRIC nations are a better fit for the company, and fashion conscious Brazilians look set to become its next target.

"I think Brazil satisfies my criteria. There are wealthy and sophisticated customers there. Brazil would certainly give us a good opportunity in terms of our next opening," he says.

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