Moda Mall, Bahrain World Trade Centre, Bahrain

LUXURY RETAIL

Rich pickings

August 2010

Despite the global downturn, the Gulf luxury retail market continues to enjoy strong growth

Anyone who paid even a short visit to one of the countries of the Gulf Co-operation Council (GCC) in recent years could not have failed to notice evidence of spending of the most conspicuous kind by governments and individuals alike.
In the last decade, the luxury market in the region has given every impression of being far from a niche offering. In Dubai, the iconic Burj al Arab, with its underwater restaurant and hugely expensive suites, was merely the most well-known of a rash of high-end hotels constructed during the boom. In 2008, a $1 million, seven-day holiday offered by Abu Dhabi’s Emirates Palace hotel made headlines around the globe.
Aston Martin – the carmaker purchased in 2007 by a consortium with a strong Kuwaiti presence – reported a run on the bright colour schemes favoured by many of their Gulf clients, while an executive at one air charter firm catering for VIPs estimated the size of the regional private jet market at $1 billion. The shopping mall became ubiquitous as ever-larger consumer sheds packed with high-end stores, including Saks and Harvey Nicholls, opened their doors.
The Gulf Luxury Fair, an annual event held in London, brought together the products of a number of luxury European brands to tempt Gulf Arabs visiting the UK capital during their summer vacation – among the items on display at last summer’s event was a watch costing around $750,000.
Today, the new generation of Gulf chief executives who emerged during the boom years are as likely to be battling with creditors as they once were brandishing their credit cards.
However, even as many in the region settle into a marginally more austere way of life in the wake of the global financial crisis, the demand for luxury goods in the Gulf remains stronger than in many more developed markets.
A combination of economics and demographics means the region is still likely to be a strong proposition for luxury brands in the years ahead. Only time will tell if the Middle East lives up to the promise Philippe Charriol, president and chief executive of the luxury goods group which bears his name, saw when he said its potential for luxury brands “is among the highest in the world”.
Even last year, which history may show was the nadir of the economic downturn, the figures for luxury brands in the Gulf and wider Middle East region were encouraging for firms in the sector.
While new luxury brand store openings were sharply down globally from 750 in 2008 to just 300 in 2009, the Middle East accounted for 30 per cent of new openings, according to information compiled for Swiss bank UBS. Demand for luxury goods in traditionally lucrative markets fell in 2009 – Japan was estimated to be down by four per cent last year – but the Middle East showed two per cent growth.
Stefanie Scholtysik an analyst at UBS Wealth Management Research, who visited the Gulf recently to present the firm’s predictions for the luxury market to an audience of regional executives, says: “I think that [the growth in demand for luxury goods in the Middle East] is quite astonishing and the numbers are impressive when you recall the global market went down quite sharply.”
This is all part of a geographical shift in demand for luxury items which is seeing emerging markets – led by China, which recorded a 12 per cent growth in demand last year – become increasingly important to some of the most established names in high-quality goods.
According to Scholtysik, as recently as 2000 Japan accounted for 50 per cent of sales of all luxury goods items. One survey showed that over 90 per cent of Tokyo women in their 20s owned an item by luxury French fashion firm Louis Vuitton. However, Japan’s significance to luxury firms is on the wane due to the growth of the emerging markets.
“In 2015, the Chinese market will overtake the Japanese market,” she says. “The Middle East, while still quite low in terms of global market share, is growing. That’s good news for the Middle East.”
Purchasing luxury goods, far from being weak-willed displays of extravagance, can actually prove to be a sound investment, Scholtysik believes. Watches and leather goods in particular, almost all made by firms with a distinguished heritage based in Europe, have been proven to hold or increase their value over time.
For the Gulf-based investor with a penchant for luxury, there is an alternative to actually purchasing the products themselves: namely, investing in the firms that produce them.
Luxury is big business, with many of the brand names most synonymous with the sector listed on the stock exchange. For example, the LVMH group – the French holding company whose brands include Louis Vuitton, Fendi and Moet and Chandon – has a market capitalisation of €38 billion.
There is an oft-repeated claim that luxury brands are impervious to the ill-effects of recessions – the reasoning being that the rich will always have a disposable income to spend, no matter the financial weather – but few luxury brands have been left untouched by the credit crunch.
Robert Polet, president and chief executive of the Gucci Group has identified a “noticeable trend away from conspicuous consumption to conscious consumption”. Pierre Mallevays, managing partner at Savigny Partners, a London-based boutique investment bank which specialises in luxury goods, says the crisis “has changed the definition of ‘value’. That was a dirty word in the luxury goods circle before the downturn, just like ‘mass’”.
Scholtysik maintains that if investors are selective there is value to be had – and predicts that the luxury market will grow by two per cent this year, and a larger number in 2011, albeit from a low base. While assessing what firms they may wish to buy shares in, investors should look at how a luxury brand controls its distribution. There are two main approaches to this, she says. “One is that they sell it through their own stores and its own channels. This has two advantages: they have full control of the brand and full control of their pricing. On the other hand, it eats up a lot of capital and it is one of the most expensive ways to do it.
“The other possibility is to go through wholesale to third party retailers. There you have the risk that they can start to discount your product and you cannot control your brand anymore. But you can generate or sell a lot more volume.”
The sector is also a bellwether of changes in consumer habits and demographics. Scholtysik says that the luxury market has a four-stage cycle, the first of which – recovery – is predominantly led by women. 
“When you come out of a recession, this phase is very driven by women, and the demand is very strong. In such a phase, we recommend that you own some luxury good stocks, but you are selective and specific in your investments.”
As demand grows, the market for such goods can overheat, as arguably seen recently in the Gulf. “When do we know that the market is overheated?,” asks Scholtysik. “It is usually when men start to buy very expensive luxury goods items.”
Economists take note – when trying to ascertain the likelihood of imminent recession, you might be well advised to look up from your spreadsheets and scan your male colleagues’ persons for signs of extravagant jewellery or pricey leather goods.
More seriously, luxury brands can also betray demographic shifts – with strong performance of luxury demand in a particular market often a sign of a growth of women in the workplace, leading to a rise in disposable income.
Luxury stocks often exhibit similar behaviour to stocks in the travel sector, sharing a vulnerability to incidences of war or health epidemics.
“Only six per cent of luxury goods items are bought in China, but 12 per cent of all consumers are Chinese. The gap is due to Chinese travellers making purchases while travelling internationally – particularly to Europe. So luxury brands are dependent on tourism and that is why luxury good stocks can be considered as a tourist stock,” says Scholtysik.
While the luxury market has been hit by the recession, as long as the affluent cities of the Gulf are home to an aspirational set – the haves and the have-yachts – the region will continue to form a key part of the international strategies for some of the sector’s biggest names. The sensible investor of more modest means, unable to quite meet the asking price of the more extravagant items, can still enjoy a dabble in the luxury market – even if it is in stocks, and not rocks.

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