The Americans Are Coming!

August 19, 2012

The Sunday Times

By Gavin Daly

Lunchtime on a gloomy August Thursday, shoppers are milling half-heartedly around the Dundrum Town Centre on the south-side of Dublin city.

Up on level two, the mood is younger, more upbeat. Music blasts from Hollister, a trendy US fashion retailer that opened its doors just over a year ago.

Inside, in near darkness, pink polo shirts vie for spotlit shelf space with lime green hoodies and skinny jeans in a rainbow of colours. Hollister is doing a brisk trade.

The customers are in their teens and early twenties; girls outnumber boys by some measure. Stylish sales assistants, kitted out in the latest Hollister fashions and flip-flops, give shoppers a dash of perfume on the way in.

“Have a nice day,” they say to those on their way out to the wet Irish summer. At the rear of the shop, a large plasma TV screen shows crashing waves, while surfer-style music blares. A little bit of California has come to Dublin.

T-shirts sell for €24, American-style track pants for €44, hoodies from €49 to €79. There is a sale on board shorts, but nothing else is discounted.

Despite depressed consumer spending nationally, Hollister’s customers often queue at weekends behind a velvet rope to get into the store.

The Dundrum store has “greatly exceeded” the expectations of Abercrombie & Fitch, the parent of Hollister, Jonathan Ramsden, chief financial officer of Abercrombie, told analysts recently. The group aims for an operating profit margin of 30% from its stores. Dublin is well ahead of that.

Local retail sources say the Dundrum store is among the best-performing of the 578 Hollister stores in the world.

“It’s trading exceptionally well, way up there in terms of their world rankings,” said one source.

Abercrombie’s investment in an average Hollister store is repaid in 18 months of opening –two years tops—according to an investment case Ramsden presented to analysts. The risk of opening in Dublin, even during an economic meltdown, was “relatively low at this point”, he said.

Abercrombie is now wading deeper into the Irish market with the opening of an Abercrombie & Fitch store slap bang in the middle of Dublin city centre. It is betting big, with a €7m fit-out of a 27,000 sq ft store, previously occupied by Habitat, on College Green, close to Trinity College.

If anything, its opening will surpass even Hollister’s.

By any measure, it’s a tough time to be a retailer in Ireland.

Shuttered shops line many streets. Retail sales fell 13% by volume and 17% by value between 2007 and the end of 2011, according to data published by UCD Michael Smurfit Graduate Business School and the Marketing Institute of Ireland.

Last year was worse than 2010, and this year is not shaping up any better. Retail sales fell a further 1.3% by value in the first quarter of 2012 and 0.1% in the second quarter.

Mary Lambkin, professor of marketing at the UCD Smurfit School, said this year would be very challenging for retailers. She predicts a drop of about 2% in retail sales for the year as a whole and doesn’t foresee any recovery next year, with “a modest level of growth returning from 2014 onwards”.

Amid the gloom, there are some winners – and many of them have American accents. Brands such as Forever 21, Tommy Hilfiger, American Apparel, Jack Wills and even Starbucks are trading well even as Irish retailers are shrinking.

Forever 21, a US fashion brand, was mobbed on opening in the Jervis shopping centre in Dublin city centre in November 2010. It took in €5.9m in less than four months after opening – the equivalent of almost €400,000 a week.

Tommy Hilfiger, known for its “fresh preppy” fashions, is reporting steady trading at its Irish flagship on Grafton Street, Dublin’s prime shopping avenue, where it pays €1.6m a year in rent. It opened in late 2008, just as the market went sour, but Hilfiger has expanded since, opening a two-floor, 650 sq metre outlet at the Liffey Valley shopping centre.

After a difficult entry into the Irish market, when it sustained heavy losses, Starbucks is profitable here and on the expansion trail. It has 28 Irish stores, compared with 24 a year ago, and two more are planned before the end of the year, at the Nutgrove and Stillorgan shopping centres, both in upmarket Dublin suburbs. Each store will create 15-20 new jobs, said Kris Engskov, a former aide to Bill Clinton who runs Starbucks UK and Ireland.

“Irish shoppers are always after the new, sexy brand,” said Larry Brennan, head of retail for Savills, the estate agent that lured Abercrombie to Dublin. He got Hollister into Dundrum and previously brought brands such as Superdry to Dublin.

Abercrombie was a big fish. Brennan started courting the American retailer after it opened its London flagship at Burlington Gardens in Mayfair, in 2008. “It certainly wasn’t easy. I was trying to get to talk to them for over a year.”

The turning point came when Abercrombie opened a Hollister store in Belfast in 2009 and found it swamped with shoppers from the south. Online demand from Ireland was strong.

“Once the Irish seal was broken, it got easier,” Brennan said. “They know there is a market recovery and they have good brand recognition.” Getting Hollister into Dundrum was fairly straightforward compared with luring the full Abercrombie store.

Ramsden said the company went “back and forth a couple of times” and dropped its Irish plans entirely at one stage. “We signed up for it and then we decided we wouldn’t open it, because we were nervous,” he said.

Falling rents helped. The company is paying about €750,000 a year on a 10-year lease, with no upward-only clause.

Dublin is already feeling a warm glow from Abercrombie. Brennan is close to letting a shop beside Abercrombie to a “good retailer with a nice brand”. Call it the halo effect.

“There was good demand for it. Once the hoarding went up next door and Abercrombie was actively fitting out the store, we got a deal done.” Stores such as Abercrombie and Hollister help create shopping destinations, he said.

Mark Schwartz is another American influencing Irish shoppers. Schwartz is chairman of Arnotts, the Dublin department store, but makes many of his decisions from the 26th floor of the John Hancock Tower in Boston, where Palladin Capital, his advisory firm, is based.

“Retail is Darwinian,” he said. “It’s survival of the fittest. You have to innovate.”

Palladin was hired by Ulster Bank and Irish Bank Resolution Corporation to run Arnotts, and Schwartz made 26 trips to Ireland last year.

About €10m has been spent in-store in Arnotts and 100,000 sq ft of the shop has been overhauled. “We want Arnotts to be the leading shopping destination in the country, whether you’re looking for a business suit or a handbag or a TV.”

American brands have featured heavily in the Arnotts overhaul. The electronics area is dominated by Apple products and Ralph Lauren is prominent in the clothing departments.

New additions include Coach, the US maker of luxury handbags and accessories, and Brooks Brothers, the preppy clothing retailer. The store has added a 9,000 sq ft “shoe garden” for women’s footwear and an expanded jewellery and watch section.

“Customers are interested in value, not the cheapest price,” he said. “If they are going to spend money, they want value for their money.”

Schwartz, whose experience includes restructuring Nine West and investing in Toys R Us, is looking at other opportunities in Ireland. Palladin has up to €50m to invest in its own right, but has access to hundreds of millions through partners.

“We could easily step in and purchase a shopping centre and manage it for long-term growth, for example.”

Brennan is on the lookout for the next big thing. Victoria’s Secret, the US lingerie maker is on his radar, after opening last month in the Stratford City shopping centre in London. Banana Republic, owned by The Gap, is also eyeing Ireland.

Americans may also ride to the rescue at Clerys, the troubled Dublin department store. Gordon Brothers, an American restructuring house, is reported to be near a deal on the loss-making store. Schwartz is a former chief executive of Gordon Brothers. The remedy required to reinvigorate the fading Clerys is likely to be the same: a large dallop of investment, new brands, the creation of a shopping destination.

There is sure to be a queue on College Green when the hoarding comes off the Abercrombie store and the doors open. Management will be looking to the tills for proof that the gamble worked.

They may have reason to be optimistic. The Abercrombie flagship store in London, a popular destination for visiting Irish, had sales of $64m (€52m) in the 12 months to the end of July, the company revealed in an earnings conference call last week.

Despite the impact of the poor economy, the store had earnings before interest, tax, depreciation and amortisation of $33m – a profit margin of nearly 50%.

Last weekend, it opened an Abercrombie flagship in Hong Kong. In the first five days, it had sales of $1m.

Mike Jefferies, chief executive of Abercrombie, said last week he had “confidence in the global appeal of our iconic brand”, even in uncertain times.

Dublin is unlikely to let him down.