Gulf retailers face an uphill struggle

The scene: an upmarket department store at one of Saudi Arabia's swankiest new shopping malls. The setting: the luxury counter, stocked with the latest outfits and accessories from fashion's biggest names. The merchandise: very expensive and very, very chic. And the problem: no customers.

Despite being one of the world's most recognized brands, Saks Fifth Avenue, which has over 60 stores in the United States, has had a stormy start since its Middle East launch. And the store's problems have little to do with the brand image. Nor are prices a factor.

'The opening of our Saudi outlet seems to have coincided with a general decline in consumer sentiments across key Gulf markets, particularly at the luxury end,' said a senior official with the regional franchise. 'Initial volumes have not matched our expectations. But we are not about to push any panic buttons and lower the price points on our merchandise.'

However, the panic button is being pushed elsewhere. The Gulf's luxury market is passing through an extended dry spell. According to analysts, the segment may have slumped by as much as 30 percent last year. Saudi Arabia and Kuwait were the worst hit, with the UAE not too far behind.

Leading British high-end retailer Harvey Nichols has also taken the plunge in the region, opening its first overseas store in Riyadh in May 2000.

According to Bernard McGrehan, the vice president and chief operating officer of the Riyadh store, 'We chose Saudi Arabia for this first store as we know that customers here have a fine eye for quality and pay great attention to detail - just the qualities we are looking for in our patrons.' The retailer says sales at the Riyadh store grew 'as the store further established itself.' However, the retail group played down its expectations in its September 2002 report: 'We expect to continue to earn only the minimum guaranteed royalty from the licensee.'

Leading boutiques are even more pessimistic, slashing prices on the latest collections well ahead of typical sales periods. Even then, the consumer seems not to have taken the bait. 'In these circumstances, I would consider it a good day if we could attract five potential customers, and book sales from two of them. But such days are getting to be a rarity,' said a brand manager for one of the most sought-after international fashion names. 'Today, customers are even unwilling to go window shopping.'

Elsewhere, there has been a rash of store closures, in some cases within months of the opening. Some of the brand operators have pulled out of high rental malls to standalone stores in more downmarket locations. So why is there such a sense of disarray in the Gulf's $3 billion-a-year luxury goods market? Is this a short-term trend linked to possible conflict in Iraq? Or does the malaise run deeper?

'There has been a definite slackness at the top end in 2002, and the general market sentiments have not helped,' says Ramesh Prabhakar, the CEO of Rivoli, one of the biggest names in the Gulf's luxury retail sector because of its alliances with the likes of Cartier and Montblanc.

The first indications of a decline were apparent right from the second half of 2001, and got progressively worse in the aftermath of September 11th. There followed a slight improvement in the second quarter of 2002 before settling down to the current round of uncertainty. But industry analysts are as undecided about the reasons for the soft market conditions as they are about the solutions.

'Blame it all on George Bush and Tony Blair,' is a phrase bandied about by many, while others draw parallels to similar market conditions in the United States and Europe. 'The psyche of a customer who would buy a Louis Vuitton attaché case or a Gucci loafer is not radically different, whichever culture he may come from,' says a senior official at the Middle East office of AC Nielsen, the global market research firm. 'The current sense of foreboding about the general economic and political climate is near universal, with few exceptions. This is taking a toll on retail sentiments everywhere.'

Buyers may also have been put off by higher prices brought on by the recent firming up of the euro and the Swiss franc. For the luxury sector, this is of particular concern given that the majority of the brands have their origins in Europe. The consequent retail price hikes within the luxury segment have ranged from 15-20 percent, with average profit margins of anywhere between 15-20 percent. A further rise in prices on these goods at the start of 2003 season has not been ruled out.

Retailers, at least in Dubai, point to another key missing element that has hurt sales: the high-spending, brand-chasing tourist. Last year, for the first time in recent history, luxury goods sales in Dubai - a market quite dependent on tourist income - relied more on the resident than the itinerant traveler.

And that's bad news for retailers - the emirate's prospective client base for top-tier brands is thus cut to 150,000 at the maximum. And locals are not about to indulge in their passion for Armani suits every year. 'It is not that tourists are not coming to Dubai - they are - and Dubai Duty Free's record sales this year will attest to it,' said a store manager for a leading Italian fashion house. 'But we are not seeing that many of those who come and pick up the latest designer wear or accessories. This has ominous portents for the luxury market here.'

Bitter differences are creeping into principal-franchise relationships in these markets. There has already been some parting of ways, with the brand owner deciding to exit the market altogether rather than have its name damaged permanently.

If and when the Commercial Agency Laws in the Gulf states are finally scrapped, many more splits are envisaged. 'If we, as distributors, are able to commit resources and ensure brand principles are maintained, the relationships will continue irrespective of any changes in the laws,' says Prabhakar of Rivoli.

'We have spent many years representing luxury brands in this area and protecting and developing their brand image. I do not believe that these relationships will change drastically overnight. But non-performers may not be able to take shelter under the protection of agency laws for much longer.'

There are many compelling reasons for the brand owners to seek a repeal of the laws as early as possible. Most of the brands have arrangements for different lines with different partners built up over the years. For instance, rights to represent Gucci eyewear in a particular market could be with one local company, whereas its accessories line could be with another local company.

The straitjacket that is the Commercial Agency Law offers no recourse if the eyewear representative refuses to provide any pieces to the other local firm, even though Gucci is a clear beneficiary. Sound complicated? It is, and it's also bad for business.

Much of the muddle has been created by the brands themselves. They have been indiscriminate in the past when awarding their regional rights. This has led to some very questionable alliances, for which many brands are now suffering.

One Kuwaiti group, for instance, has the regional rights to as many as 80 prominent brands, many of them fashion. It is anybody's guess as to whether the group has been able to do justice to all its holdings. There has been intense speculation of late that an attempt by one of the brands to cut its ties and seek another partner has fallen foul of the agency laws. A messy legal battle is a possibility.

'As soon as the agency laws are scrapped, there is going to be a major consolidation by the brands. In most cases, brands will seek to do their own thing and they will do so with impunity,' said an official with Richemont, the Swiss group that owns some of the world's best-known luxury brands, including Cartier.

Cartier is seen as the touchstone for other brands to get their acts together in the Middle East. After the celebrated split with its erstwhile regional partner, IMG, Cartier decided to oversee every facet of its operations - from stocking to points of sale - on its own, through its own office in Dubai. The move has since paid off spectacularly, and the brand has been one of the stronger performers in the region ever since.

'What Cartier did was get a handle on the problems as soon as they arose and then surmount them. Cartier had the commitment,' says one Dubai-based retailer. 'The question here is how many others are willing to follow such a route, and, if they are, how far will they go.'

What are the luxury sector's prospects for this year? Early trends suggest that any cause for optimism is misplaced. With all the concerns being expressed about travel to the Middle East, tourist-related sales could hit a new low. 'We believe that the bottom will be hit during the first half of 2003, before making a slight turnaround in the second half of the year. That would be the most optimistic projection as of now,' said an official with the Chalhoub Group, which represents Louis Vuitton and Ralph Lauren.

Even if there is a second-half recovery, it may be a case of too little, too late. And markets such as Saudi Arabia and Kuwait may not be able to get on the recovery bandwagon at the same time as the others. As for the brands themselves, thinking local seems to be the key to success: launching Gulf-specific lines appears to pay off. The name of Parisian fashion house Givenchy has been mentioned in this regard. Italian brand Prada has already introduced a capsule collection for the Gulf market.

While such initiatives by themselves will not effect a change in the luxury goods sectors' fortunes, the issue here is that attempts are still being made. However, for the majority, this is a time of waiting. 'Gulf markets offer the best retail experience, extremely competitive prices vis-à-vis Europe and the latest fashions at the right time,' says a Hugo Boss boutique operator. 'What more can be done to get the shoppers back?'