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War Against Iraq: A Chilling Prospect For Economy, Retail

Retailers and luxury goods companies beware: if the lagging economy and dour consumer confidence aren’t bad enough, the looming war with Iraq could cast even more of a chill on sales during the next few months.<br><br>The potential for more...

Retailers and luxury goods companies beware: if the lagging economy and dour consumer confidence aren’t bad enough, the looming war with Iraq could cast even more of a chill on sales during the next few months.

The potential for more turmoil is being echoed by everyone from Bernard Arnault, chairman of LVMH Moët Hennessy Louis Vuitton, to the U.S. Federal Reserve. Many draw parallels to the situation that preceded the Gulf War in 1991, when months of speculation and buildup caused consumers to seal their wallets and cancel any travel.

The one dissenter is, ironically, the retailer who is literally on the front lines. Majed Al Sabah, owner of the luxury megastore Villa Moda in Kuwait City, contended the war, in the long run, offers the luxury world an opportunity. And while consumers in the U.S. and Europe might be zipping up their wallets in fear of an Iraqi conflict, his Kuwaiti customers are still spending away.

“Any attack against Iraq is likely to come from our soil,” Al Sabah said in a telephone interview from London’s Heathrow Airport en route to Kuwait. “The people of Kuwait are sick of Saddam Hussein. We just want to get rid of him. There have been rumors that we would attack him for years and I hope this time it is serious. The amount of tanks and missiles you see on our soil is mind-boggling. You can see them being unloaded from the windows of Villa Moda, yet still my customers buy.”

Al Sabah said he has just reordered 300 Fendi bags, 400 pairs of shoes and 30 Fendi fur coats because he sold out of the items in the last month. While Kuwaitis are obviously nervous about a potential war, they recognize the long-term benefit of getting rid of Saddam.

“There is an upside, which means a large amount of optimism,” he said. “The rebuilding of Iraq will start from Kuwait — food stuffs, medical supplies and infrastructure. Iraq again will become important for business. Since the early Eighties it was a booming business for Kuwait, even for retailers. Saddam was buying suits on a monthly basis for himself and his sons worth $100,000 each time. Suits, shirts, ties, everything from Zegna and other labels.

This story first appeared in the September 17, 2002 issue of WWD.  Subscribe Today.

“So at the end of any war, there will be happiness because the POWs would be released and people could help rebuild Iraq. In my view, I soon will be planning for a Villa Moda in Baghdad.”

As for the fears in the U.S. and Europe over any war, Al Sabah pooh-poohed them. “The Western and Asian worlds are driven by the media,” he said. “If you watch CNN you would never set foot in the Middle East. We have more American troops here than policemen; it couldn’t be safer.”

Whatever the view, there so far has been little public comment about the effect a war with Iraq would have on the economy as news reports focus on the diplomatic jockeying at the United Nations over the regime of Hussein. But, despite Al Sabah’s claims, any conflict is likely to generate more bad news for retailers and luxury goods companies that still are struggling with the after-effects of 9/11: less travel; lower consumer spending on luxury goods and apparel because of changed priorities and, in the U.S., a poor back-to-school season thus far.

Chanel president Francoise Montenay said, “As a rule of thumb, the luxury business never benefits from war. It creates an uncertainty that trickles down to the consumer. As a consequence, people don’t indulge themselves as much.”

An exception to the general silence about the economic impact of any conflict is an outlook survey released last week by the Federal Reserve containing anecdotal comments from business managers throughout the country. The bank’s southwest district office in Dallas reported a “war with Iraq or another major terrorist event could lead to declines in activity” by threatening the “fragile” economic recovery from last year’s recession.

Meanwhile, Arnault said at a news conference last Thursday that war with Iraq is “the biggest problem” his company’s DFS, or duty-free shops, division faces. “If there’s war, airports and tourism will screech to a halt,” he warned.

“I think that it cannot not affect business because it will affect morale and any feeling of vulnerability we have will be heightened,” said Janet Brown, owner of the eponymous boutique in Port Washington, N.Y. “But I believe there will still be important evenings to raise money for charities, children will still have to be taken to school and business will continue, but only the true professionals will be able to survive in this very, very delicate time.”

Brown believes her customers in turn will also alter their shopping habits.

“My customers will shop with a bit more temerity….I think we’ve all begun to feel that rather than conspicuous consumption, we see customers cherry picking. Rather than consuming aggressively, they are buying items that are especially beautiful and especially luxurious, but they are not consuming with the same veracity that we’ve seen over the last five years. I don’t know if we’ll see that again. I think with Sept. 11 and the times…we’ve all mitigated this need to consume and now we’re consuming in a much more special way,” she said.

Jeffrey Kalinsky, owner of the Jeffrey stores in New York and Atlanta, hopes customers won’t deny themselves the pleasure of shopping given the current political clime.

“My prediction would be that people will try to live their lives as normally as possible — try to seek comfort from the same places they’ve always sought comfort. Am I going to quit going out to eat if we’re at war? No. Am I going to quit going to a store that I like and buying a new pair of shoes? I doubt it. I might do more volunteer work. Life can’t stop no matter what happens and uncertainty is about the only certainty right now. The way I’m dealing with uncertainty is to keep living and to keep going and to live one day at a time,” he said.

Bulgari chief executive Francesco Trapani said, “If Iraq is attacked, the effect will be negative on tourism, consumption, the stock market, etc., but it will be modest considering that the current situation is already very difficult.”

Jacques-Franck Dossin, luxury analyst at Goldman Sachs in London, said of the potential impact, “War with Iraq represents a clear risk for the [luxury goods] sector, as it would affect travel flows, and as the sector is highly dependent on travel flows. In particular, Japanese are very sensitive to terrorism or war-related risks, as we have seen in the past. We believe that LVMH and Gucci are potentially more exposed than other brands, given a higher dependence on Japanese travelers, and given the presence of DFS within the LVMH group. DFS still caters predominantly to Japanese nationals on travel.”

Claire Kent, luxury analyst at Morgan Stanley in London, said the main impact of war with Iraq would be reduced tourism. She also said the war would have a negative impact on consumer sentiment. Kent said LVMH would be the most exposed, since it relies most heavily on tourism. She said Gucci and Richemont would also feel a strain.

Travel retail experts said a war would definitely have negative consequences, but there is some debate as to just how bad it could be. Doug Newhouse, managing editor of London-based magazine The Duty Free Business, said the only analogy to the current situation, though, is the Gulf War, “which decimated the business for something like six or seven months.”

“As soon as there is any sign of trouble, the Japanese stop traveling, and it is already bad as it is. When we talk Hawaii, we’re already seeing Japanese tourism down 20 percent — without a war,” he said.

He said the airports that risk to lose the most in terms of retail sales include Vancouver, San Francisco, Los Angeles, Honolulu and Guam. He also noted a major drop in air traffic could push several airlines over the edge as they are so close already. He cited the already tenuous situation at carriers like British Airways, United, Delta and Continental.

Newhouse said it would take at least four months for travel to start recuperating after a military conflict. It takes about two months for consumers to regain confidence, another month for the bookings to start and another month for the tourists to actually arrive, “during which time airlines have to survive with no passengers, shops have to survive with no customers.”

He also noted that tough times could spur consolidation in the duty-free industry as stronger players could snap up the weaker ones who are struggling.

Jan Nygren, vice president of business development at Generation AB, a Sweden-based research company specialized in travel retail, agreed a war would be bad news but didn’t paint as grim a picture.

He notes that during the Gulf War, international air travel in 1991 dropped 4.9 percent on the year while international shopping spending dropped by only 0.1 percent. In other words, big spenders kept traveling throughout the period despite a drop-off for the masses. But he acknowledged that the post-Sept. 11 climate is already quite different from that of the early Nineties.

“At that time, you didn’t have people’s fear of flying yet. It wasn’t as obvious in the early Nineties as it is after Sept. 11.”

Needless to say, travel and retail spending are already suffering. Worldwide tax and duty-free sales in 2001 fell 5 percent to $19 billion. Italy, one of the biggest tourist destinations in Europe, is already seeing fewer foreigners. Hotel reservations by foreigners dropped 2 percent in the first six months of the year, according to data from hotel organization Federalberghi. American and Japanese visitors have been particularly scarce.

Wedbush Morgan Securities’ Elizabeth Pierce said: “It will boil down to the consumers’ perception of their own safety.” Pierce also noted that importers’ abilities to receive goods from offshore manufacturers could be slowed down by increased scrutiny at U.S. ports.

“The CNN effect will take over,” said WR Hambrecht & Co. analyst Bill Dreher. With average ticket prices already down, a war would likely limit customer traffic.

“Given that consumers have been in a recessionary environment for more than a year and there’s no immediate sign by the rank-and-file consumer that things have turned or are rapidly turning, people have basically cut the spending habit,” he said.