According to a new report premium/luxury operators are driving growth in the £14.7bn UK department store sector. The sector returned to growth in 2006 following two years of decline, and has not only sustained this trend for the second consecutive year in 2007, but is likely to outperform in 2008. Though Marks & Spencer’s recovery was a major factor in the return to growth in 2006, it is the high-end operators that have been the main drivers in 2007.

The top three luxury department store operators, Harrods, Selfridges and Harvey Nichols, have collectively outpaced the overall department store sector by a significant margin for the past six years and have been instrumental in sustaining its growth in 2007.

The UK department store market contracted in 2004 and 2005 as a result of a weak performance from market leader Marks & Spencer combined with the exit of struggling players. Since then the sector has experienced two consecutive years of growth and is expected to enjoy a third in 2008. .

Apart from market share gains, profit densities have improved at all three of these department stores. Harrods, Selfridges and Harvey Nichols occupy three of the top five places for profit densities, alongside Marks & Spencer and John Lewis.

Of the top ten department store retailers, Harrods recorded the biggest improvement in operating profit per square foot between 2005/06 and 2006/07 with a rise of £30, followed by Selfridges with an improvement of £16 per square foot. This has been achieved by making existing space more productive rather than opening new stores.

These retailers are creating a virtuous circle by investing in their stores and ensuring the store experience matches the aspirational status of the brands they stock. This not only differentiates them from the rest of the high street, and crucially from supermarkets’ burgeoning non-food offers, but also provides consumers with a pleasurable shopping experience that combines the convenience of having a comprehensive offer in one location with leisure and indulgence.

John Lewis has also enhanced the shopping experience for its shoppers with store refurbishments, improved product ranges and the introduction of more contemporary brands. These, and the success of its online offer, have been a major factor in it growing its market share from 16.8% in 2002 to 19.1% in 2007 widening the gap with Debenhams and closing in on Marks & Spencer.

These trends show that it is wise of House of Fraser to focus on enhancing its own premium positioning with its store refurbishments, the introduction of new, exclusive brands, and improved customer service.

The market leaders, Marks & Spencer, John Lewis, Debenhams and House of Fraser all have extensive store opening plans in 2008 and this will ensure market growth. Consumers are also expected to continue spending with the premium operators. As money becomes tighter, consumers are more selective about where they spend and are more in need of a rewarding and indulgent shopping experience to lighten their mood.

Related research: UK Department Stores 2008