ALMATY, Kazakhstan — High above the smog of Almaty stands the 37-story Esentai Tower, providing unparalleled views of the snowcapped Tien Shan mountain range that borders Kazakhstan’s most populous city.
Central Asia’s tallest building, which sits in an area often rocked by earthquakes, reflects both the ambitions of real estate developer Capital Partners and the country’s thriving market for luxury goods. The tower was designed by Skidmore, Owings & Merrill, the American architects behind the Burj Khalifa in Dubai.
The mixed-use Esentai Park complex has brought an unprecedented level of opulence to the former Soviet city, from the Esentai Mall and its gleaming Louis Vuitton, Prada and Dior stores to the year-old Ritz-Carlton, Almaty hotel, not to mention the luxury condominiums that sold for $15,000 a square meter, rivaling real estate prices in the most coveted neighborhoods of Paris.
The mall, which celebrated its second anniversary late last month with a glittering party, is about to undergo a further upgrade as the battle for the local luxury customer heats up against a backdrop of economic uncertainty in neighboring Russia.
Capital Partners, which has invested $1 billion in the tower and mall so far, plans to spend an extra $30 million to increase its offer of luxury brands and upgrade key elements of the mall, which is anchored by a Saks Fifth Avenue store.
Spaces that previously housed more accessible labels, such as Mango and Promod, have been boarded up as the mall prepares to welcome a cache of fresh luxury brands. The project also includes a new ground-floor jewelry and watch area with its own VIP entrance.
“We realized the mall is not big enough to accommodate two different concepts: luxury and mass market,” explained Vladimir Sarybekov, general director of Capital Partners. Plugging extra cash into a retail project at such an early stage is unusual, but the developer is taking a long-term view and counting on the advantages of being the prime mover.
“What you get, you’re going to get alone. You don’t have to compete, but of course the risk of failure is quite high. That’s where you really have to be very professional, to identify the strategy, the project parameters and the timing. It’s quite a challenging business, but we are in it for the long run, and so far we have been quite successful,” said Sarybekov.
“Maybe another two, three years is what we need to make this project 100 percent complete from the concept perspective, from the cash-flow perspective, profitability and the operation,” he added.
Kazakhstan would appear to be fertile terrain for luxury players. The world’s ninth-largest country by area, it possesses huge reserves of fossil fuels and abundant supplies of other minerals and metals, such as uranium, copper and zinc. Though it has a population of just 17.3 million, the number of high-net-worth individuals is rapidly growing. Defined as people with wealth of $1 million or more, this group totaled 8,100 in 2013, up 77 percent versus 2007, according to WealthInsight, which provides data on the world’s richest individuals.
The number of ultra-HNWI individuals, or those with wealth of $30 million or more, also jumped 77 percent, to 179, during this period, it said. The country’s five richest citizens are all billionaires (see table), including Dinara Kulibaeva, the daughter of President Nursultan Nazarbayev.
Yet 2014 has brought with it a number of challenges that likely will dampen sales of high-end goods such as watches and handbags. The price of Brent crude oil has fallen by a quarter since July, impacting the economies of all oil-producing nations, while the Russian ruble has weakened, triggering a 19 percent devaluation of the closely linked Kazakhstan currency, the tenge, in February. These events led to the sight of street demonstrations by disgruntled citizens — a rarity in Kazakhstan, which has been ruled with an iron fist by Nazarbayev since 1991, when the country gained its independence from Russia.
“Kazakhstan has experienced slower growth and higher inflation in 2014,” the World Bank said in a recent report. Gross domestic product growth slowed to 3.9 percent in the first half of 2014 from 6 percent in 2013 as a whole “due to internal capacity constraints in the oil industry, less favorable terms of trade and an economic slowdown in Russia,” it added.
Industry sources predict that, after posting increases of around 20 percent in the past two years, luxury sales will register single-digit growth in 2014, with some segments, such as luxury jewelry and watches, set to remain flat.
“We believe that this segment of the market — jewelry and watches — has almost achieved maturity” in Kazakhstan, explained Andrey Kopytin, deputy director general of the Viled Group, the country’s largest retailer of luxury jewelry and watches with brands including Cartier, Tiffany & Co., Van Cleef & Arpels and Harry Winston.
“This means that, from a demand point of view, we do not have a lot of room to grow, but it will be smooth growth over the next several years. The key word I use here is ‘growth’ because I don’t think that a lot of people right now in Kazakhstan or in our part of the world use the word ‘growth’ at all — because of the recent political problems between Russia and Ukraine and the sanctions,” he noted.
Viled launched into fashion retail in 2012 through its subsidiary Viled Fashion, which is the licensee for the Saks Fifth Avenue store and also operates boutiques in the mall for Gucci, Dolce & Gabbana, Ralph Lauren, Giorgio Armani and Loro Piana.
Kopytin said the group initially thought the devaluation of the tenge would cause it to miss its 2014 target for fashion retail sales, but its results are now ahead of expectations.
“Of course, it has had an impact on us, but not as much as we expected several months ago,” he said, noting that, to limit sticker shock, Viled passed on price increases to consumers over a period of several months.
“Here in Almaty, we believe that this year will bring around 5 percent to 7 percent growth for fashion retail. Maybe next year, it will be between 5 percent and 10 percent, which is not bad compared to what is happening in some other neighboring countries. Of course, it’s not easy because the competition is growing, even inside of our group. We have a lot of brands, which creates a nice brand matrix, but at the same time, it creates better competition, better selection of the products,” Kopytin said.
He added that, in line with expectations, watch and jewelry sales would be flat, despite a rise of 10 percent in 2013; but growth is set to resume over the next three to five years. Customers are gravitating to brands with a strong heritage, such as Cartier and Van Cleef & Arpels for jewelry and Breguet for watches, he noted.
On the fashion front, the Kazakhstan customer has a few surprises up her sleeve, according to Elena Kudina, general merchandise manager at Viled Fashion.
“The specialty of the market is that ready-to-wear is much more important in terms of volume in comparison with accessories,” she said, noting that, in the U.S. and Europe, aspirational customers often will splash out on a designer handbag.
“In the case of Russia and other [Commonwealth of Independent States] countries, we almost don’t have a middle class. We target a superlimited number of customers who can afford both ready-to-wear and handbags, and, obviously, they don’t need as many bags as ready-to-wear,” she said.
Shortly after it opened, the Louis Vuitton store, the largest in the mall at 7,965 square feet, was number-one in the world in terms of rtw penetration, she said. The boutique, which has a circular VIP salon inspired by a traditional yurt, is one of fewer than 50 worldwide to carry the brand’s latest arty collaboration: monogram handbags dreamed up by the likes of Cindy Sherman, Frank Gehry, Karl Lagerfeld and Rei Kawakubo.
“Here, from the beginning, we’ve had customers with supersophisticated taste,” Kudina said. “I didn’t expect this, frankly speaking, when I moved from Moscow. Moscow customers and Kazakhstan customers are really different. Local [Kazakhstan] fashionistas are much more sophisticated and are much more well informed.”
She said the best-performing brands at Saks are Céline and Azzedine Alaïa, but even lesser-known brands are getting snapped up. A recent order of MSGM shoes has sold out, and now customers are clamoring for Mark Cross handbags. “I think they follow Anna Dello Russo’s and other opinion-makers’ Instagram feeds,” Kudina said.
Her customers are evenly split between men and women — the latter mainly wives, daughters and other relatives of politicians and businessmen who work in the natural resources sector.
Robert Burke, chairman and chief executive officer of Robert Burke Associates, which worked closely with Capital Partners and Viled Group on bringing brands to Esentai Mall, said Kazakhstan clients were particularly interested in exclusive and limited-edition pieces.
“It’s really the top luxury customers on steroids. I mean, it’s really amazing how much the luxury customers spend there,” he said, noting it was not uncommon for men to buy 10 made-to-measure Kiton suits at once.
“While this market was new and relatively untested, some brands did not open freestanding stores when the mall first opened. Now, because of the success of the mall and Saks, the interest is very high, and we are expecting many luxury brands to join the project throughout the upgrade phase,” Burke said.
According to Zhanybek Alkeyev, general director of Capital Partners Retail Almaty, local consumers dedicate a greater portion of their budget to luxury goods. “Compared with European people, Kazaks don’t have this huge habit of saving money. They really like good brands and want to spend money for luxury and pleasures,” he observed.
“Even people with relatively average incomes tend also to purchase luxury brands, even if they have to save up for it or wait for discounts. They want to be in line with world fashion trends,” said Alkeyev, who manages the Esentai Mall.
Kudina cautioned that the arrival of a second wave of luxury brands would further crowd the playing field at the mall, especially since a majority of her customers are local.
“The population [of Almaty] is only 1.5 million. Consequently, there is a limited buying power, and the brands will just share this limited market capacity. It’s not unlimited, definitely. There is a demand, but we need to work hard in order to reach the targets,” she said.
Sarybekov was sanguine, saying, “The trend we have seen is, the more luxury or premium brands we have pooled together, the more sales they have. So, they work in synergy, and there is no cannibalization between the brands. We see from the traffic that people are traveling a lot from other cities in Kazakhstan just to come shopping.”
Indeed, developing the tourism industry is seen as crucial to the future growth of the luxury segment. Capital Partners operates the Shymbulak ski resort, which is near Almaty and attracts high-profile visitors such as Britain’s Prince Harry. The company is mulling the creation of a big ski resort for international clients.
Almaty is competing with Beijing to host the 2022 Winter Olympics and stands to get a big visibility boost if it is selected in July.
“We see people from neighboring countries [and] people from China and India shopping in our mall, which was not really happening even two, three years ago. We’ve built up this whole shopping experience to a different level where people can really find service comparable to international big cities,” Sarybekov noted.
“We expect that [by] doing this renovation of the mall [and] including more brands of an international level — [this] will drive a lot of traffic even within Kazakhstan because there are still many people that are shopping outside the country,” he said.
Prior to the opening of the Esentai Mall, luxury retailing was mainly in the hands of concept stores such as Four Rooms, Bureau 1985 and Armonia, which are scattered across town — a disadvantage in a city where temperatures can drop to 22 degrees Fahrenheit below zero in winter and top 105 degrees in summer.
On Gogol Street, the city’s unofficial luxury thoroughfare, brands such as Rolex, Brioni and Canali have stores on the ground floor of Soviet-style block buildings.
Liliya Rakh, founder of Sauvage Group, is widely credited with establishing the local luxury market through her multibrand stores, buying up huge stocks of Alexander McQueen rtw before Kazakhstan had registered on anyone’s radar. Recently, she teamed up with new partners to open the Mediterranean-style Villa dei Fiori complex opposite the Esentai Mall, which houses stores for Tom Ford, Saint Laurent, Chloé, Etro and Bottega Veneta, among others.
Luxury brands also work with a handful of other licensees, such as G&G Glamour, which operates the Fendi and Sergio Rossi stores in the Esentai Mall, and Feru Group, which handles Lanvin, Stella McCartney and Marni.
In the past, wealthy Kazaks did their luxury shopping abroad, favoring destinations like Dubai and Moscow when they were not in Paris, London and Milan. Back home, prices were set by local retailers — with wildly varying outcomes — and old-season merchandise was sold at full price alongside the new.
Things have changed with the retail boom in the country, though. Viled Group now compares its prices against those overseas, while most rich residents prefer to spend their money at home.
“We try to always have fair pricing policies. Of course, we can’t match Milan or Paris because of the transport and custom duties, but we are not going to be too pricy, in order to draw purchases here,” said Kopytin, noting as other key factors outstanding customer service and a broad assortment of in-season merchandise.
As the domestic offer has grown, a vibrant local fashion scene has sprouted, with the Esentai Mall at its epicenter.
The country now has two official fashion weeks: Kazakhstan Fashion Week, founded in 2003, and Mercedes-Benz Fashion Week Almaty, which held its second edition from Oct. 17 to 19 and drew some 6,500 guests to the Ritz-Carlton ballroom.
Zhanel Bertayeva, cofounder of Mercedes-Benz Fashion Week Almaty, said it was the first to invite foreign fashion editors and photographers. For the latest edition, the Kazakhstan Fashion Institute organized a series of popular lectures at Esentai Mall on topics such as blogging and street-style photography.
“Our mission is to introduce Kazakhstan designers to the world,” said Bertayeva, who runs the event with Zhamilya Abilova, publisher of Boulevard magazine, and fashion photographer Yan Ray, founder of EAT Models, under the supervision of Daria Shapovalova, creative director of Mercedes-Benz Kiev Fashion Days.
This season, featured brands included Mechanical Piano, Leonid Zherebtsov, Aigul Kassymova and Khan Kuchum. The shows ran concurrently with Kazakhstan Fashion Week, which took place Oct. 16 to 18 in Almaty and Oct. 23 to 24 in the country’s capital, Astana, though Bertayeva brushed off any suggestion of conflict.
“We don’t see a problem in this because we chose an international calendar and our shows start at 2 p.m. Kazakhstan Fashion Week starts at 7 p.m.,” she said. But she agreed the local market was too small to sustain two competing showcases. “I think, after five years, maybe there will be only one fashion week left,” she mused.
The fashion media is also expanding, thanks in part to the opening of the local branch of Buro 24/7, the fashion and lifestyle Web site founded by Russian socialite Miroslava Duma. Its launch party last November featured a fashion show by Mary Katrantzou and a performance by A$AP Rocky.
Meruyert Ibragim, founder of Buro 24/7 Kazakhstan, credits the site’s arrival with prompting some key changes in the way local fashion operates. “We made it more disciplined,” she said.
For now, Kazakhstan lacks homegrown “It” girls, but she is working on that, too. “This year, we tried to work with different people, and now we have a base of people who are really stylish, who are good people that we can feature in photo shoots,” said Ibragim.
One of these is Nadira Arapova, a.k.a. @nani_bakyt, who has more than 33,000 followers on Instagram and who appeared in a shoot featuring Nicolas Ghesquière’s debut collection for Louis Vuitton. She also happens to be Ibragim’s sister.
This kind of overlap is common in Kazakhstan, where fashion players usually have fingers in several pies. A case in point: Ibragim is also the financial backer for Khan Kuchum, whose designer, 17-year-old Danilo Kuchumov, started out as a contributor to the social pages of Harper’s Bazaar Kazakhstan, making his own outfits for events.
“I wanted to make something different, and the only option I saw was to start making clothes myself. So, I visited my grandmother [and] found a lot of Soviet books about cutting and sewing, about construction. The first thing that I did were these shirts that looked like a skirt in front,” he said.
“A lot of Soviet women were sewing things for themselves because there wasn’t anything here,” he added. Known for its graphic sportswear, Khan Kuchum is being touted as a brand to watch, and Kuchumov plans to take part in international design competitions to raise his profile.
For the first edition of Vogue’s Fashion Night Out, held in Almaty on Oct. 25, he did a trunk show for the label. Aika Jaxybai, cofounder of Aika Alemi, another rising fashion brand, screened a short film she directed, which special guest Diane Pernet promptly promised to feature on her blog, A Shaded View on Fashion.
Jaxybai, who jettisoned a career in international finance to devote herself to filmmaking and fashion design, symbolizes the blend of tradition and modernity that characterizes the generation of Kazak designers. Born in Shymkent on the Silk Road, she uses traditional techniques with a twist, like felt applied on silk to create lightweight but warm dresses.
“That’s how I started to create, because I was just in love with the nomadic culture — not just in love because it’s a cool thing to do but because, during the Soviet Union, basically it was a story of suppressed identity. We didn’t know our history. We didn’t know where we come from,” she explained.
“So, for me, it was a rediscovery when I came back to Kazakhstan — a rediscovery of my language, the roots, the decorative arts,” she continued. “My clothing is very nomadic but also very modern. I’m a global traveler, and I think [my clothing] has a global, international feel to it, as well.”
Sauvage’s Rakh was the first to pick up her line, now in its third season and also carried by multibrand store Viola in London. Jaxybai hopes to add more international stockists soon.
Indeed, there is a feeling in Almaty that anything is possible.
“It’s an interesting market because it’s new and it’s fresh and it’s empty. You can put something here, and it grows because we’re really hungry. We have this hunger for luxury, [and] we have a hunger for fashion. Historically, we were trapped in the U.S.S.R. for more than 70 years. We were not allowed to go abroad. We were in shortage of everything, from bread to jeans,” said Buro 24/7’s Ibragim.
“Now, people are earning money. We can get visas for every country, so we can go abroad. We can study anywhere we want. So, now, we can have it all. That’s why the appearance of all these brands here works,” she added. “I’m just wondering when Chanel will open.”
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