Gulf retailers face an uphill struggle (page 1 of 3)

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.