LONDON — The unfolding financial crisis in Dubai is cause for concern, but not alarm, said luxury goods principals and industry observers, who believe the emirate’s debt problems will have limited impact on the world economy.
This story first appeared in the November 30, 2009 issue of WWD. Subscribe Today.
Luca Solca, senior research analyst at Sanford C. Bernstein Ltd. in London, said most luxury goods companies have already absorbed the impact of Dubai’s debt crisis.
“I don’t think what we’re seeing and hearing today will bring additional bad news to the luxury brands,” he said. “The Dubai market has been suffering for at least a year and I’m sure orders from the region were close to zero already. Also, most of the brands out there operate with local partners, which means they will be further shielded from any impact from the crisis.”
Linda Pilkington, founder of the London-based luxury fragrance brand Ormonde Jayne, said a slowdown in Dubai has been evident for some time.
“At night, you can see huge blocks of buildings with no lights on,” she said. “It’s very spooky.”
Despite the downturn, Pilkington is pressing ahead with Ormonde Jayne’s plans to open a corner in a concept store in the Dubai Mall. The brand already has an in-store shop in Boutique 1 in Jumeirah Beach.
“Sales are not riveting,” said Pilkington, adding that Ormonde Jayne’s volume in Dubai is flat year on year.
Dubai hit the front pages over Thanksgiving weekend after its chief investment vehicle, Dubai World, asked its lenders for a six-month freeze on repayments of a $59 billion debt pile, sending financial markets here into a tailspin and setting off a panic about the potential new wave of bad debt to hit Europe’s banks. The FTSE 100 fell 3.2 percent on Thursday, while the Dow Jones Euro Stoxx 50 index slipped 3.4 percent.
Signs of trouble surfaced earlier this month when Istithmar, the unit of Dubai World that owns Barneys, began selling off chunks of prime London real estate at fire sale prices to reduce its debts. The company has repeatedly said it does not plan to sell Barneys, which it purchased for $900 million in 2007.
An Istithmar spokesman in New York could not be reached for comment. The Islamic festival of Eid ul-Fitr, which marks the end of Ramadan, began Thursday and runs until Tuesday and offices in Dubai were shut.
Dubai is both a major shopping destination — home to the world’s largest shopping emporium, the 5.6 million-square-feet Dubai Mall that boasts stores such as Bloomingdale’s, Chanel, Gucci and Louis Vuitton — and a significant investor abroad with stakes in the London Stock Exchange, Deutsche Bank and British icons such as the QE2 and the London Eye.
“It’s not the end of the world for luxury brands, it’s a bit of a setback,” said George Wallace, chief executive officer at MHE Retail, a London-based consultancy. “If you are a global brand, it was one of the easiest places you went to for global expansion. But in the last five years that’s shifted to India, China and Brazil. Compared with somewhere like China, Dubai was never going to be a massive market.”
Vittorio Missoni, ceo of the family-owned company who was in Dubai recently to cut the ribbon on the brand’s second flagship, said he noted “a positive mood,” with shoppers from Saudi Arabia, Pakistan, India and Iran.
“The situation is not clear and there are no commercial consequences so far, but I hope this will not have a Lehman Brothers effect on the Middle East,” he said, referring to a cascading economic fallout.
Dubai generates sales of about 1 million euros, or $1.5 million at current exchange, for Missoni, which has been present in the region for the past decade.
Franco Pené, ceo of Gibò Co. SpA, which manufacturers and distributes clothing and accessories collections for designers including John Galliano, Paul Smith and Michael Kors, said Dubai represents “minimal” business for his brands. He said he was hoping the debt crisis would be “absorbed at a financial and economic level, without violently impacting the banking system.”
Versace ceo Gian Giacomo Ferraris said the company was aware of the “international situation” and that the recent openings in the Dubai Mall “are in line” with Versace’s development projects.
Spokesman for Gucci Group and Compagnie Financiere Richemont, parent of brands including Cartier, Dunhill and Van Cleef & Arpels, declined to comment. A Burberry spokesman declined to comment specifically on the crisis, but said for the six months ended Sept. 30, emerging markets, including the Middle East, generated 10 percent of the group’s revenue.
Industry observers said they were concerned but not panicked about the country’s fate.
“Emerging markets and the Middle East were the only regions posting growth for the luxury industry,” said Dennis Weber, luxury goods analyst at Evolution Securities in London. “There are positive signs about a potential recovery for the luxury goods sector, but I expect there will be more setbacks like these.”
Wallace of MHE Retail said, “Dubai had overreached itself with these absurdly huge malls. I don’t really see that in other Gulf countries like Kuwait and Qatar. There will inevitably be shock waves in the Gulf, but this is a Dubai crisis rather than a Gulf one.”