Understanding luxury in the Gulf Cooperation Council

This article is part of our Advanced Membership package. To enjoy unlimited access to The Long View from Vogue Business and bi-monthly Market Insights Reports and webinars, sign up for Advanced Membership here. High-level summary: Luxury in the Middle East means, primarily, the Gulf countries. These are the six nations that make up the Gulf Cooperation Council: the United Arab Emirates, Bahrain, Kuwait, Oman, Saudi Arabia and Qatar. Together, they form an important market for global luxury brands. Explosive population growth, continuing urbanisation and a process of social liberalisation are transforming the region, with more women likely to enter the workforce in the years to come. Most of these changes are to the long-term benefit of the luxury sector. A 2019 McKinsey report found the GCC’s per capita spend on fashion is among the world’s highest, topping $1,600 per person in UAE, making it a prime target for fashion brands and retailers. The GCC has one of the fastest-growing populations in the world with 40 per cent of the population under the age of 25. Luxury customers in the Middle East have a sophisticated appreciation of fashion, but disposable income is directly linked to fluctuations in the global oil market, a unique aspect of the region that drives consumer spending trends. Additionally, cultural tastes within this region are very specific. Dubai, in UAE, is considered the region’s fashion capital. Euromonitor’s International Luxury Goods 2020 report estimates the size of the luxury goods market in UAE at $8.4 billion in 2020, slated to reach $11.4 billion by 2025. This year, Dubai was counting on Expo2020, a world expo postponed following the Covid-19 pandemic, to bring in 25 million additional visitors. Expo has been rescheduled to October 2021. Over the last decade, the region has witnessed both a rapid growth in sales of luxury goods followed by a sharp slowdown. Euromonitor’s figures show the growth rate peaking at 14.9 per cent in 2013-2014, contrasting with just 1.6 per cent in 2018-2019. While indications of a market upturn were promising in Q1 2020, Covid-19 put paid to that: the growth rate for 2020 has been around -22.7 per cent. However, with the global figure around -30 per cent, the region has fared better than some and could recover faster. Famed for its mall culture, Dubai boasts over 65 malls, including the world’s largest, The Dubai Mall, with 502,000 square metres of retail space. It’s filled with luxury label multi-level flagships, including the likes of Valentino, Bottega Veneta and Gucci. Miu Miu has its largest global flagship there. Even before the Covid-19 pandemic, e-commerce was growing fast, according to a 2019 report by Bain & Company. A growth rate of 29 per cent p.a. in 2017 to 2019 pushed sales to $14.3 billion, with Saudi Arabia and the UAE leading the way. While international brands have traditionally entered the market through local partners, many are now exploring franchise models, either through joint ventures or, as with Cartier in Saudi Arabia, through directly operated models. For luxury, preferred partners are experienced family-run companies such as the Chalhoub Group, Al Tayer Group or Alshaya Group. A strong local understanding is necessary to navigate this multi-ethnic and multi-country region. Cyrille Fabre, partner and director in Bain & Company’s Middle East office, predicts consolidation in the market, with some smaller brands likely to exit the market. The role of digital E-commerce has been given a huge boost by this year’s pandemic, representing 21 per cent of the luxury market in 2020, compared to just 5 per cent in 2019, according to Amna Abbas, consultant at Euromonitor International’s Dubai office covering fashion and beauty. Internet penetration in the UAE and Saudi Arabia is high, at 99 per cent and 89 per cent respectively in Q1 2019. Retailers pivoting to digital saw encouraging traction during the lockdown. Samara Punjabi, CEO of Times Square, retailer and distributor of high-end accessories brands in the Middle East such as Manolo Blahnik, says, “Our bricks-and-mortar presence previously contributed 97 per cent of our sales. However, the pandemic has increased our online sales, which now account for 30 per cent of our total sales. We anticipate that this trend is here to stay.” Currently, most Gen Z fashion shoppers in the Gulf prefer fast fashion e-commerce brands such as PrettyLittleThing and Boohoo. They are potential future consumers of luxury. This sector is worth $1 billion in sales in the Gulf, notes Fabre. “This segment is over-indexed in the region versus other countries.” Engagement with consumers through social media can drive conversions, but it needs to be authentic. Dipesh Depala, co-founder at The Qode, a Dubai-based public relations and events agency with clients including Berluti, Cartier and Givenchy, observes: “Influencer marketing has become, and continues to be, a very effective means of communication in the Middle East. However, the level of effectiveness in terms of ROI depends on the brands’ ability to select and engage the correct influencers, and the understanding that the success of an influencer campaign is not necessarily based on the number of followers or engagement the influencer has.” An example is French luxury bags specialist Moynat, which worked closely with Karen Wazen Bakhazi (4.9 million followers) last year and saw immediate traction and an uptick in sales. All major luxury groups are investing in e-commerce, with Chalhoub Group, the local partner for brands like Dior and Louis Vuitton, announcing in September a “Digital Transformation” agreement with Salesforce, a global provider of customer relationship management (CRM) solutions. The objective is to provide personalised customer journeys across all digital and social media channels. However, this doesn’t mean that bricks-and-mortar retail is on the way out. Bain’s Fabre is convinced that mall culture will remain a big part of the region. “Despite Covid and the growth of e-commerce, flagship malls and flagship brands have recovered quite quickly.” He points out that malls are epicentres of social activity in the Middle East. A blended approach is favoured by Shahram Shamsaee, CEO of Merex Investment Group LLC, a joint venture between Meraas and Brookfield, holding retail assets such as La Mer, City Walk and The Beach in Dubai. “There is always an audience for unique destination experiences, which encourage people to visit frequently and which e-commerce cannot provide. There is an evolving trend of integrated destinations, which also include technology to enhance way-finding, leveraging click-and-collect purchases and other similar solutions,” he says. While retail prices in this region at marquee malls remain on the higher side, many landlords offered tenants financial relief during the pandemic. The modest wear opportunity Modest wear is considered a significant growth category. That forecast received a setback in April this year with the closure of The Modist, citing the impact of the pandemic. Three years ago, on its launch, the Dubai-based modest specialist e-tailer became a trendsetter with its high fashion edit focusing on the untapped global Islamic clothing market. This segment is expected to reach $88.35 billion in value by 2025, according to US marketing and consulting firm Grand View Research, with much of that spend coming from Saudi Arabia, Qatar, Kuwait and the UAE. Global e-commerce players such as Net-a-Porter and MatchesFashion have started exploring the potential of modest wear capsules. In the GCC, traditional attire for women is the abaya. Though Gulf countries have relaxed strict dress codes, many fashionable women uphold the cultural dress heritage in a stylish and contemporary manner. Analysts believe there is a strong opportunity there. “A well marketed luxury modest wear range would cover a potential gap in the market, providing a wider range for Arabs, Muslims and those who want to wear modest wear in general,” says Euromonitor’s Abbas. The enduring appeal of modest wear has a positive knock-on effect for sales of fashion accessories, fine jewellery and watches in the Middle East. “Bags, watches and other accessories are larger market segments in the GCC than in other countries,” says Fabre. Analysts note the pandemic did not create as much disruption in the watch and jewellery sector as clothing. “Middle Eastern clients have a real passion for watches,” says Mehdi Rajan, IWC Schaffhausen brand director Middle East, India and Africa. “You find very strong networks of collectors in almost every GCC country. This culture of refinement and appetite for luxury timepieces is very well anchored in the region.” Accessories and footwear are strong product categories. Samara Punjabi of distributor Times Square has focused on accessories brands ranging from Manolo Blahnik to Furla. “Accessories and footwear are considered a versatile fashion investment in this region more than anywhere else. They add visible style to the outfit that we choose,” she says. “What’s more, they can be worn repeatedly offering a better ROI.” The Covid factor The Covid-19 pandemic has left a lasting mark on the luxury sector in the Middle East. The GCC luxury market has experienced negative growth of nearly -23 per cent for 2020. This challenging market has pushed forward a shift to e-commerce. Travel restrictions also forced brands to focus on the local consumer. “Covid-19 was a catalyst or accelerator of preexisting trends, pushing us towards an omnichannel approach and developing digital solutions,” says Rajan. “We also see a clear demand for wellbeing and sustainability from our clients, especially the younger generations. This was underlying already in 2019 but it really became a decisive criteria.” Covid-19 has had a heavy impact on the luxury goods industry, notes Abbas. Most countries in the region were in lockdown from March to June, with malls shut. Countries only started the deconfinement process in June. “As a result, sales picked up again through June, July. What helped was the government support,” says Abbas. “Malls in UAE reopened in time for the annual Dubai Summer Surprises (DSS), encouraging residents to shop, albeit with strict social distancing and sanitising measures.” Tourism is now returning to the UAE, prompting a recovery in luxury goods sales. Residents who have been unable to travel abroad for vacation have also compensated by shopping for luxury goods locally. Selected luxury retailers such as Michael Kors and Coach participated in an exclusive 12-hour one-time sale on 9 July during Dubai Summer Surprises, directly after lockdown ended. Overall, industry analysts believe recovery will happen sooner than in many other markets. The Chalhoub Group is one of the Middle East’s leading luxury retail distribution companies, representing brands such as Dior, Louis Vuitton and Fendi. Headquartered in Dubai, the company operates over 600 stores in 14 countries and employs 12,000 people from 100 nationalities. Under Chalboub’s leadership, the company launched Level Shoes District, the giant 96,000-square-metre shoe zone in Dubai Mall. Founded in Damascus in 1955, the family business has been a key developer of the luxury market. A recent pivot to focusing on e-commerce was given added impetus during the Covid-19 lockdown. Instagram: @ChalhoubGroup: 17.4K followers Revenue: Declined to comment. Market share: The group covers 14 countries. On the Middle East market: “One must think about the local customer first. Do not think of this as an international hub. Make sure you have the expert team to penetrate the market, knowledge of infrastructure and understand customers. Stop thinking of the Middle East as a cash cow. It is a place where you need to invest, and you will see a return on investment.” On mall culture vs e-tail: “Malls here are districts because climatic conditions don’t allow for high streets. We need constant discussions with developers to ensure we create districts where customers enjoy spending time. Convenience is where e-commerce fits in. Customers are shifting from physical to digital. Growth has been tremendous, but has slowed down. But are we having the right experience on digital? During lockdown, we built 20 sites in one month, some pop-up sites. We need to go through the experience and change it rapidly. “The future is about bringing those two worlds together — they must be seamless. We closed more stores in 2019 than any other year, yet we are still investing in the right stores: the Dubai Mall’s two-story Louis Vuitton store opened last month, including a salon privé and dedicated travel room. Experience is key: creating delight whether on or offline.” On the importance of a local partner: “We started in the luxury business 65 years ago, signing our first joint venture over 40 years ago. We transformed from distributors of franchisees to a partner. A good local partner must move with the market. This region has complexity, one must understand how each country works: the legal system, logistics and necessary talent and resources needed for each market. There is also the question of infrastructure. We have young customers who evolve rapidly; you need to make sure you understand all the facets of the culture.” On the effects of Covid-19: “Things will be better by 2025 if we invest in building capabilities and don’t give up. The four or five years pre-Covid had much smaller growth than in 2015 — we grew at a rate of 5 or 6 per cent. Pricing was a main factor: the dollar peg and additional pricing made it perhaps a less attractive market for visitors. “We focused more on the local customer. Things started to pick up in January. July, August and September were better with local customers not travelling so buying locally. Bahrain was worst hit as it’s dependent on the Saudi customer. The pandemic forced us to offer better service to local customers who didn’t travel and have purchasing power, and less at tourists. “November and December, we might be a little down, but not as deep as feared because of the local festivities and people not travelling. The impact will be lesser. There is a new reality — we must build and transform ourselves to always fit that reality. Organisations who understand and embrace this can recover 2019 figures by 2022.” MatchesFashion started out with a single shop in Wimbledon, south-west London, over 30 years ago and has grown into a leading global destination for online luxury for both men and women. The company has been shipping to the Middle East since 2007 and it is now a key market for the luxury e-tailer. Jess Christie, with the company since 2011, was this year promoted to chief brand and content officer. On the Middle East consumer: “The Middle Eastern customer is style savvy and appreciates luxury and quality. It is a market that engages with us quite early in the season — she’s a fashion pioneer who invests with confidence and doesn’t wait for trends. As well as supporting local talent, our Middle East consumer also enjoys shopping from our luxury global brands and runway veterans, such as Gucci, Bottega Veneta, Valentino, Saint Laurent, Malone Souliers and Fendi. “Dresses continue to be the bestselling category, key styles being long day dresses and sundresses from our year-round Vacation Edit. This year, sales of fine jewellery have tripled in the region. Our customers are looking to invest in special pieces that can be cherished forever and subsequently passed down to loved ones.” On integrating with local fashion: “MatchesFashion has long been established as a champion of global design talent, such as our recent partnership with Fashion Trust Arabia (FTA), which has opened a new opportunity to shine a light on designers from the MENA region. Working closely with the Fashion Trust over the years, we felt it the perfect opportunity to support Middle Eastern and North African design talent through Fashion Trust Arabia when the nonprofit organisation launched in 2019. The programme provides a year-long mentorship programme to the Fashion Trust Arabia winners. Throughout the year it ensures our messaging is localised. For example, we offer beautiful and sensitive Ramadan messaging with the ‘Relaxed Ramadan’ edit to our customers in the MENA region.” On the importance of on-ground events: “Our private shopping team has been hosting pop-up shopping events throughout the Middle East since the first time MatchesFashion hosted an event in Doha back in 2011 with key designers. We have also previously partnered with Harper’s Bazaar Arabia on their annual Best Dressed supplement in March 2016, hosting an exclusive event to celebrate the magazine’s sixth edition, which included a curation of shoppable key looks for the season. “In 2018, we hosted a series of activations with Michael Halpern and Lynn Ban in Dubai and Kuwait to launch their exclusive collections with MatchesFashion. We also launched The Curator, our personalised loyalty programme, last year and have found that our customers in the MENA region engage with this well, accounting for over 80 per cent of demand within the region.” Key takeaway: The luxury industry in the Middle East is expected to be worth $13.6 billion by 2025, according to Euromonitor. Covid-19 has had a heavy impact on sales but a reset to pre-Covid-19 levels is predicted by 2022-2023. There are still many untapped opportunities in this market with its youthful fashion-savvy consumer, but it’s necessary to have an appetite for investment and strong knowledge of the market dynamics. E-commerce is a key growth area and local social media expertise a must for any luxury brand. To receive the Vogue Business newsletter, sign up here. Comments, questions or feedback? Email us at feedback@voguebusiness.com.

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