How the luxury retail sector in the UAE can stage a comeback

Revenge shopping. That’s what some attributed the $2.7m in sales to that a Hérmes boutique in Guangzhou raked in on the first day that it reopened in April, post the nationwide Covid-19 lockdown in China.

The term referred to pent up demand that resulted in shoppers flocking back to stores the day that restrictions were lifted. But was that moment indicative of the direction – a V-shaped curve – that the rest of the global luxury market was heading towards for the rest of 2020?

Not nearly, according to Patrick Chalhoub, CEO of Dubai-based Chalhoub Group – one of the biggest retailers in the Middle East with over 750 retail outlets spread across over 14 countries – whose brands include Louis Vuitton, Christian Louboutin, Tory Burch and L’Occitane, among others.

Significantly, Middle East personal luxury sales were already in decline even before the start of the pandemic.

“The GCC luxury market is around 3 per cent of the global market. We estimate the peak of GCC personal luxury sales – including beauty, fashion, jewellery, gift, and watches – reached $8.8bn in 2015. But since 2015, it has been quite sluggish. It decreased between 1-3 per cent every year after that, and the lower point was in 2018 when it reached $8.3bn compared to a global worldwide estimated turnover of $299bn,” Patrick told Gulf Business.

Last year, however, marked an uptick in global luxury sales which reached an estimated $312bn. However, while sales worldwide increased around 6 per cent year-on-year, sales in the Middle East climbed marginally by around 1 per cent to approximately $8.4bn.

Then came the Covid-19 tsunami that violently uprooted every informed prediction made for the industry as late as January. “It’s true that in 65 years of our existence, our group has known a few crises – but this is a very big one. Chalhoub Group had disruption of sales in March of minus 40 per cent. In April and May, we saw minus 60 per cent. For 2020, our new estimate is that we would be losing 33 per cent of the business compared to last year,” says Patrick.

His forecast for Chalhoub is in line with similar predictions made by Bain & Company for the worldwide market. The global personal luxury goods market is expected to contract between 22-35 per cent in 2020, says Cyrille Fabre, partner at Bain & Company Middle East.

Luxury brands aren’t banking solely on retailers and are taking control of their own business models. Saint Laurent, for example, said that it was opting out of fashion shows for the rest of the year, while Chanel raised prices of some of its iconic handbags including its 2.55 style by up to 25 per cent, and Gucci said it would limit its fashion shows to two every year, down from about five annual shows it used to participate in annually.

Here in the Middle East, brands have quickly adapted their distribution models. Hermés has begun a complimentary concierge service available seven days a week throughout the region, with no minimum charge, and aims to deliver within 24 hours of receiving the orders either over the phone or via WhatsApp.

But with looming fears of a second wave in some countries and an overall dampener on discretionary spending, is now the time for luxury brands to reduce their visibility? “This is not the time to go dark. More than 75 per cent of consumers covered in a recent survey by Kantar, done during the first two months of the Covid outbreak, said that they still wanted to be marketed to.

But the caveat was that they did not want brands to use the opportunity to be hard selling or profiteering from their interaction. That is what brands need to think about,” says Zaib Shadani, founder and managing director of PR and social media agency Shadani Consulting who has managed communications for brands including TAG Heuer and David Morris.

While it can be difficult to inspire the same levels of confidence among shoppers to walk into a sprawling mall, the Covid-19 crisis has provided an unprecedented stimulus to the rise of e-commerce.

Patrick acknowledges that the luxury business in the Middle East was slower to adopt digital strategies compared to other markets. His group began to embrace a more concerted digital strategy only as recently as three years ago. “In the UAE, e-commerce would be around 5-6 per cent of the luxury business, while at a worldwide scale it is closer to 10 per cent of the business. We had the ambition for it to reach 10 per cent over the next 2-3 years and to 20 per cent by 2025. At the time we had the breakout of the Covid-19 crisis, e-commerce probably accounted for 3.5 per cent of our business,” explains Patrick.

Covid-19 though served as the multiplier effect. “During Covid, the only way to reach our customers was through e-commerce. As a group, we multiplied our e-commerce business by 6, so we went from 3.5 per cent of our business to what would have been 20 per cent if the rest of our business would have been there.

“Earlier, we would take between 9-15 months to create an e-site. However, we managed to create 15 in a month, instead of one in 15 months leading to a big push in e-commerce for our retail and wholesale business. In one month, our target of 2025 has already been reached,” stated Patrick.

Chalhoub’s strides in e-commerce are in line with those made in global markets too. “The crisis is expected to drive a further acceleration of e-commerce in luxury, which was already growing at 25-30 per cent in 2019. Although the digital channel has always been critical in influencing luxury purchases – up to 100 per cent of them – new customers have been converted to e-commerce with the emergence of Covid. Several retailers, both brick-and-mortar and online, have focused their efforts in this period on either going online or making their e-commerce channels more convenient with personal shoppers, enhanced delivery and more payment and return options,” says Bain’s Fabre.

Circling back to China – Bain predicts that Chinese consumers will account for 50 per cent of the personal luxury market by 2025. Brands like Burberry have already moved beyond traditional brick-and-mortar stores and partnered with Tencent to create a ‘social retail store’ merging online and offline technologies at a store which will open in China later this year.

Closer to home, Chalhoub inked an agreement with e-commerce platform Farfetch in 2018 – a partnership which has allowed it to further an altogether new retail tech strategy in the UAE.

“A lot of people ask me what proportion of our sales will be from e-commerce? But ultimately, I shouldn’t care. It can be 80-20 or 20-80 or 50-50. Our ambition is to become a hybrid retailer offering our customers the ability to buy digitally or visit our stores,” states Patrick.

He adds that those who visit the brick-and-mortar stores should be suitably rewarded. “We have to make sure that if our customer is making the effort to come to the mall, we must be able to not only offer them security, but also offer them a meaningful experience through our visual merchandising, storytelling, and exclusive product offerings.”

In May, Emaar’s Dubai Mall unveiled a digital strategy too when it partnered with noon.com to create a virtual store to help its retailers including fashion brands such as SJP by Sarah Jessica Parker and Bape to sell via the e-commerce platform.

Another Dubai-based mall, the Majid Al Futtaim-operated Mall of the Emirates, recently started a Trends at Your Doorstep programme whereby customers can browse the catalogues of some of its top luxury brands from Bulgari, Cartier and Burberry to Vacheron Constantin, Kate Spade and Ted Baker and avail of complimentary contactless home delivery on their selections.

“Traditionally if you look at the way luxury brands have behaved, a lot of them were hesitant when it came to going online because there was this impression that it would dilute their luxury brand image, or reduce the sense of exclusivity, or even the question of control they would have on a third-party website. But right now, the luxury brands that really will survive, are the ones that are bringing a digital strategy into play,” explains Shadani.

There are cautionary tales to be learnt when rolling out digital strategies though. You needn’t look further than high-street e-commerce platform Nisnass. The Al Tayer Group said last month that it had decided to shut the e-retailer, without specifying the reason for its closure.

Also, Dubai-based luxury fashion e-commerce platform The Modist, which raised $15m from London-based Vaultier7 in June 2018 and reportedly had other investors including the Chalhoub Group, Farfetch and Nicola Bulgari, vice chairman of the Bulgari Group, cited the “global crisis” as the reason it had decided to shut down in April just three years after it had begun operations.
With malls across the UAE shut for extended periods during the recent lockdown, some of them rolled out rent relief measures for their tenants.

Dubai developer Nakheel unveiled a Dhs230m relief package in March which included free rental periods for retail and hospitality partners operating at its malls which include Ibn Battuta Mall, Dragon Mart 1 and 2, and The Pointe.

Also in March, the Al-Futtaim Group pledged a Dhs100m fund to offer up to three months’ worth of rental relief to tenants across its malls including Dubai Festival City Mall and the Festival Plaza mall.

“What we need are frameworks that will be helpful to have a more balanced relationship between service providers, clients, developers and tenants and for flexibility in the existing laws between tenants and developers,” says Patrick.

In a boost to malls and retailers within them, Dubai announced that it would permit tourists to return to the emirate starting July 7. But, there isn’t expected to be a deluge of tourists just yet. “Tourism will come back over time. The short-term effect will be partially offset by the potential repatriation of purchases which were typically done abroad in the past, driving greater levels of domestic consumption in luxury,” offers Fabre as an explanation why decreased tourism levels might not spell disaster for the luxury retail industry in the region as it inches its way towards a recovery. “Once travelling routines return, the Chinese middle class is expected to continue driving the overall growth of the market,” adds Fabre.

Lending credence to Fabre’s assertions is news like jeweller Tiffany saying that its retail sales in China leapt 30 per cent in April and 90 per cent in May, year-on-year, with Chinese shoppers currently accounting for 35 per cent of all personal luxury sales around the world.

While driving domestic consumption to offset that of tourists, retailers need to bear in mind the specificities of the Middle East. As Patrick says, watches and jewellery represents around 30-35 per cent of the business in the region, while worldwide it is only at 22 per cent. Perfume and cosmetics meanwhile which account for 23 per cent of the pie is in line with the global average, while fashion and accessories which account for 40 per cent of sales here in the Middle East are lower than the global average – and hence could represent an opportunity.

Fabre says that a “mall-centric culture” engrained in the Middle East is why he expects visiting, shopping, and dining in malls to remain popular activities. That sentiment probably explains why Majid Al Futtaim, for example, recently confirmed that it was pressing ahead with its plans to open the City Center Al Zahia mall in Sharjah in March 2021, expected to become the largest mall in the Northern Emirates.

The retail industry in the UAE will have to reckon with far-reaching decisions though to weather the next few months.

The Chalhoub Group for example has confirmed that it will lay off 10 per cent of its 12,000-strong workforce and will require its employees to take pay cuts too, while also adding that the group will have a “lesser footprint of stores” going forward. “This year will be extremely difficult for our business because we will be unable to reduce our costs by 33 per cent and to reduce our inventory quickly. We will have to survive in 2020, go back to a certain level normality in 2021, and then make sure that in 2022 we rebound – and rebound quite strongly,” concludes Patrick.