Twin Cities Retail: The Luxury Complex

Picking up the pieces after Neiman Marcus: Why high-end retail is a tough sell in the Twin Cities.
Twin Cities Retail: The Luxury Complex

It is the distinguishing characteristic Twin Cities retail brokers are trying to downplay: two major luxury department store closings within a year. And this time, it’s not strictly a downtown issue. Bloomingdale’s left Mall of America, with its 42 million annual visitors, and Neiman Marcus says it has studied the entire Minneapolis-St. Paul market and no longer wants to do business here. It hurts not just our municipal egos, but our chances of attracting other top national chains.

Why does luxury retail struggle so in the Twin Cities? Minnesota’s unemployment rate is lower than the nation’s as a whole; the average income is higher. Minnesotans attend the theater, eat at fancy restaurants, live in big houses, drive expensive cars, and work for Fortune 500 companies. But no one wants to pay full price for an Ermenegildo Zegna suit.

The Twin Cities has a long history of losing some of the best upscale stores: Saks Fifth Avenue, Polo Ralph Lauren, Mark Shale, to name a few. Yet each high-profile exit feels like a surprise—probably because certain luxury brands seem to thrive here: Louis Vuitton, Tiffany & Company, and Burberry. Several newer boutiques in town are successfully catering to the high-end shopper. And upper-midmarket Nordstrom continues to amp up its designer offerings at the very mall where Bloomingdale’s could not survive.

It’s not fair to say Minnesotans don’t spend enough to support high-end retail; then again, it’s not entirely accurate to say we do. The reality, according to industry experts, seems to be this: Minnesotans are unusually picky consumers who never really got over their first girlfriend, Dayton’s, more than a decade ago. To succeed here, high-end retailers must understand the modest, value-conscious, service-oriented psyche.

A Dayton’s Nordstrom Kind of Town

“We’re still Dayton’s people,” says retail broker Stephanie Meyer, a senior vice president with Mid-America Real Estate. “We miss Dayton’s terribly. Nordstrom replaces their service, their return policy.”

Where Bloomingdale’s never seemed to connect with Minnesotans, Nordstrom has gone out of its way to tailor its products and services to the community. “We want to be the hometown store,” says Nordstrom spokesman Colin Johnson.

When Macy’s took over Marshall Field’s several years back and eliminated many of its designer lines, Nordstrom scooped them up and added an annual designer fashion show to connect with luxury shoppers. “We do a lot of listening and respond to what our customers seem to respond to,” Johnson says. “Our model is to make sure we have great balance to our offerings. Whether that’s a $500 sweater or a $50 sweater, we want to provide the best possible fashion and best possible quality at that price.”

By emphasizing quality and service, Nordstrom has been able to sell more of those $500—or even $1,500—sweaters than Neiman Marcus or Bloomingdale’s did. “For a number of years, we’ve been working hard to strengthen our designer presence [at MOA],” Nordstrom’s Johnson says. “All we know is our customer has responded favorably. We saw an opportunity and have continued to build on it.”

Nordstrom isn’t the only one. Sales growth at Galleria in Edina has been largely concentrated on luxury brands, says the retail center’s Vice President and General Manager Jill Noack. Beyond upscale retailers such as Cole Haan, Tiffany & Company, Louis Vuitton, and BCBG, many of Galleria’s local tenants do well selling designer brands, from $300 Missoni scarves at StyledLife to $1,200 Mulberry bags at Pumpz & Company.

“There is no lack of luxury customer here,” Noack says.

Finicky, Self-Aware Consumers

The key is figuring out what Twin Citians will spend on. “Luxury cars, houses, and household goods, yes, but maybe less on clothing or accessories, compared [with] other cities,” says Susan Sun, owner of women’s designer apparel boutique OPM in St. Louis Park. The store has had to adjust down its average price to survive, but Sun says she is not afraid to mix in special items.

“Selling luxury goods is like selling desire,” Sun says. “Minnesotans appreciate low-key luxury goods that may not scream ‘look at me’ in public, but rather [buy] for themselves, because they appreciate the value. In order for them to take out their wallet, an item has to be personal enough and special enough that they can’t find it anywhere else.”

That attitude is not necessarily compelling to national retailers, especially in a state already known for its high cost of doing business, points out Paula Mueller, president of the Minnesota Shopping Center Association. Minnesota ranks 45th out of 50 on the National Tax Foundation’s State Business Tax Climate Index.

“I’ve talked to retailers who’ve said they would come to Minnesota, but only if they could open four or five stores, and they don’t see that they can do that here,” Mueller says, due to the size of the market and our modest spending.

Mueller is the general manager of Northtown Mall in Blaine, which is also home to big companies with well-paid executives, such as Aveda and Medtronic. The average household income around Northtown is $102,000, which Mueller notes is approximately $30,000 more than the average in Uptown. But fashion-forward specialty brands including Jonathan Adler home goods and John Fluevog footwear didn’t consider Northtown before grabbing space this year near Lake and Hennepin for their first Twin Cities locations. Numbers aside, Uptown has solidified its reputation for unique, modern upscale retail—especially home furnishings.

“We have pockets in the Twin Cities,” Mueller says. “People in this market are willing to drive for what they want. But just because they have money doesn’t mean they buy.”

Study after study shows that Minnesotans are choosier at the mall than are shoppers in larger markets, and even in some markets of similar size. “The Minnesota customer is less willing to pay a premium for goods handled by upscale department stores,” says David Brennan, co-director of the Institute for Retailing Excellence at the University of St. Thomas’ Opus College of Business. “Those Minnesotans who are willing to purchase those goods often do so at stores in other cities.”

Brennan’s belief is widely held by local high-end retailers and luxury shoppers, but difficult to back up with data. If true, it portends a challenging vicious cycle, where we eschew local outposts of national retailers to shop their branches in New York, Beverly Hills, Chicago, or Naples, Florida. The result is dumbed-down iterations of those stores in local malls or none at all, further driving shoppers out of town.

The Only City to Lose Neiman Marcus

Analysts agree Bloomingdale’s shot itself in the foot by watering down the luxury merchandise in this notoriously price-conscious market. In doing so, they alienated would-be high-end customers.

Neiman Marcus was different. The store, while not the toniest in the chain, still feels beautiful and cared-for. Unlike Bloomingdale’s, which never had executives in town, Neiman Marcus staffed its Minneapolis store with a public relations manager who got involved in local charities and hosted store events. The store also boasted a loyal team of longtime sales associates who were treated well by the company, and in turn, treated customers like royalty. What the store didn’t have was a thriving downtown capable of drawing wealthy tourists or shoppers from the suburbs.

“The wealth here is in the suburbs, and that customer didn’t go downtown just for Neiman Marcus,” real estate broker Meyer says.

Neiman Marcus will close at Gaviidae Common on January 31, after negotiating an early exit to its lease. Whereas Bloomingdale’s at MOA was one of several underperforming stores around the country that Macy’s, Inc., closed this year, Minneapolis is the only city to lose Neiman Marcus. In fact, this is the Dallas-based retailer’s first store closing since 2005.

No replacement has yet been announced. “We’ll be exploring all avenues and alternative uses,” says David Sternberg, a senior vice president and general manager with Brookfield Properties Corporation, Gaviidae’s landlord. “The marketplace and the consumer are going to determine the retail profile for downtown.”

There are really just two spots a luxury retailer is going to consider in the Twin Cities today: Mall of America or Galleria. And while Galleria might have liked to get Burberry, and MOA would take Louis Vuitton in a heartbeat, the two centers coexist with little acrimony. Galleria’s Noack says there are plenty of stores to go around. “Other than a few exceptions, one or the other ends up with a particular tenant for the right reason.”


A Downtown Problem or a Twin Cities Problem?

It may surprise some to know that among the biggest champions of upscale shopping in downtown Minneapolis are Galleria and Mall of America, the suburban centers largely responsible for shifting retail momentum away from the city center.

“I do hope that downtown can come back—it helps everybody,” says Maureen Bausch, MOA’s executive vice president of business development. Any retailer considering a new market—even a suburban location—will take a look at downtown as an indicator of the city’s overall health.

“We’re absolutely healthy, but the one question we always have to answer is ‘Can luxury do the business here?’ ” Bausch says. “We have to show them the numbers and market around the department stores and downtown.”

Meyer points out that the stores doing well in downtown Minneapolis are more moderately priced than Neiman Marcus—stores like Gap, Banana Republic, and Saks Off Fifth, the discount division that replaced the upscale Saks Fifth Avenue store at Gaviidae in 2004. Gone is the Louis Vuitton shop at Macy’s Minneapolis. Our flagship Macy’s, says District Vice President Cindy Eliason has said, is focused on the average downtown worker, not that worker’s boss.

Bausch thinks downtown Minneapolis needs to do more to raise its standing. “We need more housing, more high-end corporate headquarters. If we do outlet stores in place of Neiman Marcus, I think it would do more damage than good. Would they do well? Probably. But they wouldn’t do a lot for our image as a sophisticated, urban area.”

Perhaps we should worry less about trying to be sophisticated and more about what works here, Meyer suggests. “I don’t know if we need a huge influx of higher-end tenants.”

That’s the philosophy Southdale Center has followed in its reinvention. Once the premier Twin Cities mall, Southdale has lost upscale stores in the last several years to neighboring Galleria, and has failed to draw new concepts, which went to MOA instead. Rather than fight that trend, Southdale is repositioning itself as “middle to upper end,” Southdale Manager Laurie Van Dallen says. Signing mid-level department store Herberger’s last year for a long-vacant anchor space was a big step in that direction. The mall is in the final stages of what has been reported to be a $19 million renovation by owner Simon Property Group, Inc. and the city of Edina.

Meanwhile, Mall of America decided to chop up the Bloomingdale’s space rather than fill it with another department store. Fast-fashion emporium Forever 21, Inc., was first to grab 80,000 square feet for a superstore much like one it opened a couple of years ago in Manhattan’s Times Square. No tenants have been announced for the remaining 120,000-plus square feet. Back in January, MOA promised “four international fast-fashion retailers” as well as a discounter. Both are concepts more likely to draw young shoppers than a department store would.

Bausch says lease agreements simply take a long time to finalize, and predicts the space will be mostly full by the end of 2013. Her team is already looking ahead to the next phase. Bausch believes there is room in the Twin Cities for another upscale department store, though most have tried this market and failed.

Noack, at Galleria, disagrees. “I think we are one of the few cities that has always had way too many different department stores. While most cities have many more in quantity, they are more of the same name. There are a couple in particular that I would love to see open a second location here, but I’m not sure we need another new name in town.”

Either way, no one is expecting a department store to fill the Neiman Marcus space, and retail of any sort is not a gimme. Its vacancy comes perhaps a few years too early, as downtown residential density grows surely but slowly. But the real message in Neiman Marcus’ closing and emphatic statement of abandonment seems not to be that we lack population density, affluence, or the right venues. It is that “thrifty” is our middle name, especially when the neighbors are watching.

Allison Kaplan has covered the local retail scene for more than a decade. She is a senior editor at Mpls.St.Paul Magazine.