Luxury Brands Rush to Dubai’s New Boom

Bain & Co. forecasts the city's annual retail sales to grow at an 8 to 10 percent clip for the foreseeable future.

The Burj Khalifa in Dubai towers over the city, which Bain & Co. projects will see annual sales growth of 8 to 10 percent in the near term.

The Burj Khalifa in Dubai towers over the city, which Bain & Co. projects will see annual sales growth of 8 to 10 percent in the near term.

Courtesy Photo

DUBAI — Dubai’s ambitions for tourism are as steep as the Burj Khalifa: almost doubling annual visitors to 20 million by the year 2020.

This story first appeared in the May 12, 2014 issue of WWD.  Subscribe Today.

No wonder luxury brands and fashion chains are paying more attention to this metropolis in the desert, whose annual retail sales growth Bain & Co. forecasts to grow at an 8 to 10 percent clip for the foreseeable future.

Signaling the important potential, several large industry players recently exited franchise arrangements to exert more control over a market that offers strong top-line growth and profitability.

Last year, Yves Saint Laurent established a joint venture with Dubai-based Al Tayer Insignia, and Gucci set a joint venture with Taleela Co. WLL to directly enter the Bahrain market. In a similar vein, Swatch Group took control of its retail partner, Dubai-based Rivoli Investments LLC, and Shiseido established a Dubai-based joint venture with its existing Middle East distributor.

Indeed, luxury executives have an upbeat view of the market, which on Tuesday will see Karl Lagerfeld and Chanel stage a cruise show here — with a large contingent of international media in tow.

“Retail is a national sport in Dubai,” said Jean-François Palus, group managing director at French group Kering, whose brands include Gucci, Bottega Veneta, Sergio Rossi and Puma. “We are enjoying a good momentum in the area, particularly with the local clientele.”

Except for a drop-off in Russian tourists in the wake of the political crisis over Ukraine and the weaker ruble, Palus spied few clouds on the horizon, citing double-digit growth in the Middle East region in the first quarter of 2014 as increasingly sophisticated consumers gravitate toward more upscale leather goods and ready-to-wear.

The move away from franchise arrangements is part of Kering’s broader strategy to “reduce the share of wholesale with our business. We want to control and operate directly as much as we can,” Palus explained. Calling Middle Eastern countries “really developed in terms of retail, so as soon as the law permits, we want to be in charge,” he added, referencing the limits on foreign ownership of retail in Dubai, where the law requires overseas brands to have a local partner.

On Sunday, Kering-owned boutiques at The Dubai Mall were being groomed meticulously in anticipation of a walk-through today by group chairman and chief executive officer François-Henri Pinault.

Signaling the importance of Dubai as a retail showcase, Puma is to unveil a new format store there in November as the brand, under new management, adopts its “Forever Faster” business slogan.

“The mood in Dubai is really positive,” concurred Sebastian Suhl, chief executive officer of Givenchy, citing high-double-digit growth, including for rtw. “For us, the business has been growing really fast and that proves the market is strong. We can do much, much more.”

Givenchy is in talks to open a boutique in the Mall of the Emirates in mid-2015, adding to a franchise location in The Dubai Mall, whose guide declares “Welcome to Everything.” In addition, the brand is improving assortments in Harvey Nichols and Bloomingdale’s in Dubai and plotting shop-in-shop presentations in those department stores.

Elsewhere in the region, Givenchy is to open a unit at Saadiyat Island, an upscale mixed commercial, residential and leisure project in Abu Dhabi. The brand is already present there in Etihad Towers.

“It’s a region where the brand has a strong notoriety historically,” Suhl said of Givenchy. “We see the Middle Eastern client accounting for a reasonably good portion of our sales in Paris and other markets.

“Dubai itself is quite the hub for entertainment for the entire region,” he added. “It’s a super-diverse, sophisticated market.”

Suhl sees upside in Dubai, Saudi Arabia and Kuwait, at present Givenchy’s most important market in the Middle East.

Designers in the affordable luxury segment are also eying the region.

Karl Lagerfeld BV recently inked a five-year pact with Chalhoub Inc. that calls for 10 concept stores and 15 shops-in-shop to open in the Middle East by 2018.

“Dubai is the key priority for us, and we are in conversations for store locations,” said Karl Lagerfeld BV president and ceo Pier Paolo Righi, characterizing the emirate as a “key destination” for the whole Persian Gulf region.

“There’s a lot of energy and consumers out there,” he said, concurring that the city has put the real estate crisis that impacted its economy from 2007 to 2010 behind it. “People want to move on and go further and invest and do things.”

Robert Burke, chairman and ceo of retail and luxury goods consultancy Robert Burke Associates in New York, said the game of one-upmanship with malls in Dubai is dazzling, with most retail developments moving toward the oceanfront, and planned on ever-larger scales. For example, The Dubai Mall, already billed as the world’s biggest, plans to add 100 new stores by 2015, part of a 1 million-square-foot expansion.

“It’s like shopping on steroids” is how Burke, who has been traveling to the region for almost a decade, describes the retail panorama in Dubai, still the chief “window market” for the region and usually the entry point for most foreign brands given its “tourist friendly” qualities.

“It’s very impressive,” enthused Dutch design duo Viktor Horsting and Rolf Snoeren, who visited Dubai earlier this month for the launch of their new scent, Bonbon. “It’s incredible to see how important Dubai is in the region. It really seems to want to set an example, not just in terms of shopping, but also in projecting a certain way of life.”

Replying to questions by e-mail, they added, “Everything is new, everything is big and it is incredibly hot. The overall newness of everything creates a sense of surrealism, and the design of many buildings makes them look like toys that have been scattered in a playground. You cannot really go outside because of the heat, and being inside air-conditioned spaces all the time creates an eerie feeling of sci-fi distance to the outside world.”

As for their observations of local fashion tastes, they offered, “Dubai definitely likes a bit of bling!”

According to Burke, the challenge for malls will be dealing with the logistical problems of scale — parking and navigating the giant complexes — and also the “shelf life” of each attraction as newer, bigger complexes come on the market. Regional megamalls tend to be anchored with leisure amenities such as bowling, cinemas, ice rinks or even indoor skiing.

Burke noted that most of the enduring shopping destinations offer a mix of luxury and popular brands, along with hypermarkets and multiple food and beverage options. Malls that are “too rarefied” can frustrate locals in particular, who congregate at shopping centers with the entire family, requiring attractions that tickle all ages, he noted.

Cyrille Fabre, partner at Bain & Co.’s Middle East branch, said Dubai rebounded quickly from the 2009 economic crisis and the collapse of its real estate market, with growth resuming in 2011, fueled by the euphoria of the Arab Spring and surging tourism.

Dubai International Airport recently usurped London’s Heathrow as the busiest airport for international passengers, handling 18.4 million passengers in the first quarter, many of them transiting to other destinations, versus Heathrow’s 16 million.

Fabre said he expects Dubai to maintain its dominance in the Middle East region given its substantial head start in airport, airline and tourism infrastructure, plus a host of entertainment attractions including nightlife.

Other drivers in Dubai include a healthy economic climate and continued high oil prices, which encourage local investments, providing jobs and more disposable income, Fabre said.

He characterized Dubai as entering a more mature development phase, given that it already boasts the largest mall in the world and a strong presence of foreign retailers, excepting a few large American ones.

According to a recent market survey by real estate service firm CBRE, Dubai was second only to London in the number of international brands represented in the market at 53.8 percent. By comparison, the English capital boasted 55.5 percent, Paris 44.2 percent and New York and Moscow were both at 43.9 percent.

Tourists account for about 60 percent of luxury sales in Dubai, compared with 40 percent for lower-price stores, according to Fabre. Visitors to Dubai cite shopping as the third most important reason for visiting the emirate, and they mean it: Retail represents the number-one expenditure per tourist, ahead of accommodation costs, according to Bain.

“Tourism drives fashion, and fashion drives tourism,” Fabre said.

Middle East clients are known as big consumers of beauty products, and fashion sales are also slightly skewed toward leather goods and shoes more than rtw, reflecting local dress customs in which many women wear enveloping abayas.

Burke described international brands as king, especially premium and ultrapremium ones, but “now there’s an interest in contemporary and more broadly distributed brands, too.”

Accessories represent a high ratio of sales, particularly to Gulf nationals. “They are extremely tuned in to status handbags and shoes, plus jewelry and watches, too,” Burke noted. To wit: Chalhoub Group in 2012 opened the Level Shoe District, which spans 96,000 square feet and showcases some 350 footwear brands.

Louis Vuitton has said its Dubai locations rank among the top three or four globally, Fabre said.

He noted the Dubai market is becoming increasingly segmented, with “supermalls” targeted mainly at tourists and “community malls” becoming more popular among locals.

Nearby — and even wealthier — Abu Dhabi is now aggressively vying for a piece of the retail and tourist pie, with a slew of cultural and retail attractions under construction. These include desert branches of the Louvre and Guggenheim museums, a performing arts center by architect Zaha Hadid, and such megashopping centers as the Yas Mall, slated to open later this year; Capital Mall in Mussafah, and Sowwah Center, expected to be ready in 2017.

According to CBRE tallies, Abu Dhabi has some 8.4 million square feet of new retail space in its development pipeline, and in 2013 delivered almost five times more shopping center space than Dubai.

At present, many Abu Dhabi residents make the short trip to Dubai — about 90 minutes away by car — for shopping and dining.

Bain estimated the market for luxury and premium brands in the Middle East at 5.6 billion euros, or $7.2 billion at average exchange, in 2012, with the United Arab Emirates accounting for 2.6 billion euros of that, and Dubai’s share of that at least 70 percent, signaling very high sales density in its large malls.