Luxury brands in the GCC

It's at the opposite end of the retail spectrum, as far from luxury as you can go. Yet even for the very top-end brands in the Gulf, the arrival of the worlds mightiest retail chain would come as a welcome sign of the times, proving once and for all that the regions retail sector is ready to take its rightful place on the global stage.

That's why everyone in the industry is watching and waiting for the arrival Wal-Mart - with its nearly 3,000 stores and $218 billion in annual revenue. We are aware of the prospects the Middle East territory may have to offer a business such as ours, said a Wal-Mart spokesman. And as with any such opportunity, Wal-Mart reserves the right to look at it and make an informed decision.

But any talk about our imminent plans for entry is quite premature. What, exactly, is Wal-Mart waiting for, and why should that matter to the regions luxury retailers? According to informed sources, Wal-Mart is priming itself for an eventual entry in the region, but the timing is far from finalized.

Apparently, the decision-makers at the retail giant want to see regional markets fully implement World Trade Organization (WTO) regulations - with their emphasis on open markets Ð before making the big move.

The reluctance of Wal- Mart to tap Gulf markets obviously means the most for low-end retailers, but it matters to the worlds top luxury retailers, too: once the big W rushes in, so will everyone else. And nobody wants to lose first-mover advantage. That explains, in part, why the action is getting ever more intense at the luxury end of the market.

Saks opens in Dubai

As Saks Fifth Avenue opens its second Middle East outlet, at Dubai's expanded Burjuman Mall, the iconic British upmarket retailer Harvey Nichols has just announced a plan of action to raise its profile in the region. New openings. Harvey Nichols has appointed a franchisee, the Dubai-headquartered Al Tayer Group, to oversee the opening of its second Middle East store at the Mall of the Emirates in Dubai, which is still under development.

The store is scheduled to open in late 2005, to coincide with the opening of the mall itself. Saks and Harvey Nichols have taken a similar approach with their Middle East campaigns. Both opened their first regional stores in Saudi Arabia within a short period of each other. And, so far, their experiences have been similarly poor, according to market watchers.

For both Saks and Harvey Nichols, operations in Saudi Arabia are reportedly suffering significant losses, buffeted by anti-Western sentiments among Saudi consumers as well as recent security concerns. For Saks, it certainly helps that its franchise for Saudi Arabia is held by Prince Walid bin Talal, one of the worlds richest men. The franchise holder for Harvey Nichols is a prominent Saudi Arabian business group.

It was never our belief that Harvey Nichols would be successful from day one of its operations being launched in Saudi Arabia, said an official with the franchisee in the kingdom. For a high-profile operation such as Harvey Nichols, and in a market like Saudi Arabia, the gestation period could be anywhere between two to four years.c In contrast, both Saks Fifth Avenue and Harvey Nichols are foreseeing a much softer landing in Dubai.

The emirates' retail sector has been passing through an unprecedented growth period in terms of new retail space development, especially at the premium end of the scale with the recent 1 billion dirham ($272 million) expansion at Burjuman, arguably Dubai's most profitable mall, and the Mall of the Emirates from Majid Al Futtaim Investments, which also owns the Deira City Center.

Coinciding neatly with the retail expansion is the increase in tourist traffic through Dubai, especially of high-spending European and Japanese visitors. Dubai's projections of 15 million visitors by 2010, once dismissed as excessively optimistic, now looks well within reach. India is proving to be another captive market for luxury retailers in Dubai.

One outlet at Emirates Boulevard reportedly bagged sales of over 2 million dirhams from an Indian family on a one- day visit to shop for wedding finery. Dubais retailers have been too intent on tapping the Gulf and European visitor, said a senior official with an international research agency. But they cannot any longer ignore the potential that India has to offer, and the smart retailers are cottoning on to that pretty fast.

Thinking big

Both Saks and Harvey Nichols are thinking very big. Sakss store in Dubai will be, at a whopping 80,000 square feet, twice the size of the one in Saudi Arabia. The dimensions of the Harvey Nichols outlet are expected to be as significant. Considering their poor performance so far in Saudi Arabia, are these luxury chains biting off more than they can chew?

Not by a long shot, insists Sakss franchise holder in Dubai There is no question of the Saudi Arabian experience being repeated in Dubai. The retail environment and mix in Dubai is totally different from the kingdom, said one of the four shareholders. Weve got the location, the merchandise and the pricing just right.

This will represent a whole new experience for shoppers in Dubai and those coming to Dubai. Of course, the prevailing sentiment among retailers, especially at the high end, is that Dubai marches to a different tune than the rest of the Gulf. A case in point would be what transpired in 2003 - by any measure, a tough year for the Gulf's retail sector.

The Iraq war was followed by the SARS crisis and, toward the end of the year, there was the strengthening euro, up 30-40 percent over the dollar. These three factors forced the luxury sector to contract in Saudi Arabia, while remaining flat in Bahrain and Kuwait. Again, though, Dubai is the exception.

The top end of the market is estimated to have grown by five to seven percent last year - nothing exceptional, but still good enough - helped largely by a robust third and fourth quarter showing. That explains why Kenneth Cole, the New York-based retailer, has set up a store in Dubai at the Burjuman extension - its first venture in the Middle East - through a franchise arrangement with Apparel Inc., a Dubai-based firm.

This decade will be about the big American brands finally discovering the Middle East, particularly Dubai, said a top official with Apparel. Brands such as Kenneth Cole do not make their decisions lightly, but have come to Dubai having seen manifold potential for growth. It is believed that Kenneth Cole will be using the Dubai platform as a springboard for a gradual expansion across the region.

Saks, Harvey Nichols and Kenneth Cole have all used the franchise route to develop their interests in the Gulf. With WTO regulations looming, many industry observers had spoken about the end of the multibillion-dollar franchising industry in these markets, which had been the main vehicle for growth of the big family-owned businesses in the past.

It now seems that such thinking might have been shortsighted. International businesses, especially those in the luxury line, see local partnerships as the best way to develop their interests, said the Saks franchisee in Dubai. What will happen with the WTO is the freedom to choose their local partner. It will be easier to exit relationships that are no longer working to the benefit of either party. But the franchising model will continue to remain strong in the Gulf - forever.

New alliances

Indeed, many new alliances could happen sooner rather than later. Some US brands, put off by the Saks and Harvey Nichols experience in Saudi Arabia, may think again once their Dubai stores go live. But they had better act fast, since space at all the major mall developments has been taken up.

Industry watchers believe that the next wave of new brands will come with the opening of Dubai Mall - being developed to be the worlds biggest by Emaar Properties. The mall is expected to open some time in 2006. The nature of Dubai's hugely competitive mall business requires Dubai Mall to come to market with some of the biggest names in the retail industry to befit its status, said the official with the research agency.

We believe that some of the bigger US brands, including those already present in the region and some which are unrepresented, will seriously consider Dubai Mall as it offers the last possible space for prime location in Dubai. With Dubai getting all the attention, what of the chances of Kuwait and Bahrain in luxury retail?

Kuwait is currently reaping a tentative peace dividend, which has led to some major moves in mall development. Bahrain, too, is witnessing heightened activity, and new retail space is being developed. But both markets are yet to get the tourism dollars coming in the way that Dubai has.

Moreover, who would even consider Kuwait as a holiday destination? asked the official at the research firm. Bahrain, on the other hand, stands a much better chance with its Bahrain Financial Harbour project, which could bring hundreds of white-collar professionals into the country for long-term residence. It also has certain charms on the tourism front. But the government has to do more.

As for Saudi Arabia, will the current circumstances jeopardize future prospects? Industry sources are forecasting another year of contraction for the luxury market. It is a long road to recovery for the kingdom, and during that time the rest of the Gulf states will advance rapidly in the retailing sphere.

But Saudi Arabia's large population base and the captive tourist numbers provided by the annual pilgrimage should provide some respite, predicts the research firm. All of this leaves Dubai in a seemingly unassailable position. Although there is, of course, the small matter of convincing Wal-Mart to finally make its long overdue entry.