The allure of a yet untapped colossal market waiting patiently under an umbrella, like the BRICs a decade ago, keeps the industry second-guessing. A more realistic view points in the direction of a diffuse global approach.
LONDON – There’s no denying that across the bulging BRICs, the luxury goods market has been rattled by the crisis — in some countries more than others. But, by anyone’s account Brazil, Russia, India and China remain a formidable engine for future growth. Whatever cracks might appear on the road ahead to make the ride a bit slower or bumpier than expected, these four countries are still poised to deliver many of the promises analysts predicted a decade ago. By the time the big rewards are ready to be reaped, however, the BRICs will have stopped “emerging” and it will be too late to start grooming “the new BRICs”. So now more than ever, the burning question is: where next?
The truth of the matter is that the notion of “the new BRIC” is a red herring. The sheer scale of the BRIC markets, their pace of economic development and their wealth demographics simply cannot be matched by any other group of four emerging economies (or eight of them for that matter). Four years ago, Goldman Sachs tried to address this by identifying the N-11 (the next eleven most promising emerging economies) but several of their parameters were based on general investment criteria and related more to the potential to shift volumes of fast-moving consumer goods in markets with vast populations than to luxury goods. Hence, Bangladesh, Nigeria, Iran and Pakistan all made it on the list — clearly none of which are a priority for the luxury industry — alongside South Korea, which most luxury brands would already consider a maturing market. Many other market researchers, investment banks and management consultancies have endeavoured to neatly package “the new BRICs” in one form or another, with little success.
However, a picture is coming to light of the industry’s next focus — based on an appraisal of the number of affluent consumers, political stability, wealth forecasts, the current extent of market penetration and investment earmarked by several key luxury brands, as well as on anecdotal evidence provided by luxury experts. What is clear so far is that these smaller market contenders are a much more diffuse bunch than the BRIC heavyweights, meaning that breaking them in will probably require a lot more effort for comparable ROI than in four big uniform countries like the BRIC where a more singular strategy can be employed. Perhaps the best way to organise the next round of emerging luxury markets into a coherent group is to view them as distinctive satellites around a regional luxury hub. In each of the three major upcoming regions, there is typically one fast developing market that is followed by a steadily developing one and by a frontier market with a higher risk/reward ratio.
MIDDLE EAST – Gulf Countries, Egypt, Turkey (GET)
“The Middle Eastern market remains one of the most auspicious in terms of growth, and the current economic slowdown offers the opportunity to consolidate and strengthen all the gains acquired these past years,” says Patrick Chalhoub , joint CEO of Chalhoub Group , one of the leading luxury conglomerates in the region and local partner for a host of European luxury brands.
Patrick Normand , managing director of Cartier Middle East and South Asia, is even more bullish. “The Middle East is the next region with the highest potential to have significant growth in the luxury industry after China,” he says.
Despite its recent contraction, Dubai is still unrivalled as the regional luxury shopping hub thanks to its mesmerizing overnight transformation and grand ambitions. Among the GCC markets, those less dependent on the tourist dollar that cater to an underserved local luxury clientele are attracting a lot of attention. Short-term growth opportunities include both new luxury fashion retail developments in Qatar (such as The Pearl Qatar’s massive Porto Arabia monobrand complex and a branch of Villa Moda) and Bahrain (Moda Mall BWTC, Saks Fifth Avenue and a branch of Al Othman) as well as expansion out from Saudi Arabia’s capital Riyadh into urban centres like Jeddah and Al-Khobar/Dammam in the western and eastern provinces, respectively. Chalhoub also suggested that Dubai’s neighbouring emirate Abu Dhabi could amount to a stable, substantial market given some time.
Abu Dhabi – The Emirates Palace
As the first markets in the region a number of luxury brands penetrated through multibrand stores, Kuwait and Lebanon are undoubtedly more saturated. But many observers believe that Beirut could become a monobrand retail destination if brands were assured of political stability. Damien Vernet, general manager for Louis Vuitton Middle East and India, recently told Forbes that they are in the “final stages” of putting a flagship down in Lebanon and that the company was looking into Egypt, Jordan and Syria as well. Harvey Nichols evidently sees further potential in Kuwait too as it plans to open a department store there in 2010 with franchise partner Alshaya.
Longer term, there are the highly-populated, lesser-developed markets with extremely stratified societies to consider. While Turkey has seen an influx of brands following the rush to enter booming Istanbul, Egypt is the wild card of the region.
“Cartier has one boutique in Istanbul and of course, once the economic situation improves, we will be there taking advantage of the great opportunities the country has yet to offer,” says Normand. “As for Egypt, the country [still] implements high import duties on luxury goods. However, we do see room for development and believe that the time will come soon for us to invest more in Egypt and reach out to wider audiences.”
Elsewhere in the MENA region, Galeries Lafayette announced it is opening in Casablanca next year through a Moroccan franchisee, Groupe Aksal. Many French fashion and jewellery brands already count boutiques in top hotels in Marrakech and Casablanca, whereas in Tangier, Gulf property moguls are planning mixed retail/hospitality luxury developments.
SOUTH EAST ASIA – Vietnam, Indonesia, Thailand (VIT)
In many ways, Singapore followed a pattern to development not unlike Dubai over the past couple of decades and is now positioned as a more mature luxury and retail hub for the South East Asian region. Singapore continues to extend its offer for even larger flagship formats, counting two new luxury malls opening this year (Ion Orchard and Mandarin Gallery) and another next year (Knightsbridge). Affluent shoppers from neighbouring Malaysia and Indonesia have grown accustomed to having the full range of luxury goods available in the city-state, prompting brands to enter Kuala Lumpur and Jakarta in order to cater to growing demand in those capitals.
Indonesia is the fourth most populous country in the world with 230 million people and the largest economy in the region. Besides a rapid increase of HNWIs, it is the staggering growth in upper-middle class consumers that is driving the luxury market there. According to Euromonitor International, in just five years between 2002 and 2007, the number of households with an income in excess of $75,000 more than doubled to 212,000. Harvey Nichols opened there last year with franchisee PT. Mitra Adiperkasa Tbk, bringing niche luxury names like Alexander McQueen, Stella McCartney and Viktor & Rolf to a market where many bigger brands already have a respectable footprint.
Enjoying the same growth rate of newly affluent households as Indonesia, since 2000, Thailand has also witnessed a scuttle by luxury brands. However, it is now suffering more than other economies in the region.
“Thailand has been embroiled in political and economic problems for the last three years thus affecting sales,” says La Perla’s managing director for Asia-Pacific, Andrea Bonardi , who also noted that future prospects hinge on whether it can pull out of the current crisis. “For us, the Thai market is very dependent on tourists since the locals represent only 40% of our customer base.”
Bangkok – View from The Dome, lebua’s rooftop restaurant
“The concrete signs in south east Asia are in Vietnam, where customers show a strong hunger for new luxury brands. Other markets in the region have been exposed to luxury and have been open economies for much longer and are already set in terms of luxury growth perspectives,” he added.
Vietnam ranked as the world’s sixth most attractive retail market according to this year’s AT Kearney Retail Development Index right after three BRIC countries and two Gulf states. Across the luxury goods spectrum, brands are scurrying to put down roots in Ho Chi Minh City and Hanoi as the country blossoms into a free market and young entrepreneurs get rich quickly.
LATIN AMERICA – Mexico, Argentina, Chile (MAC)
Covering a much larger land area than the other two emerging regions, Latin America lacks a central shopping hub. Consequently, luxury brands are spreading their efforts across the three capitals with the most promise. Both Louis Vuitton and Hermès have established boutiques in Mexico City, Buenos Aires and Santiago to give wealthy Mexicans, Argentinians and Chileans an alternative to shopping in Brazil, Europe or the US. The number of moderately wealthy households in these three countries has increased to almost 1.3 million from 740,400 in the same five-year period (Euromonitor International).
Armani has opened either Emporio or A/X stores in all three of these capitals as well as in Caracas, targeting the moderately wealthy with its diffusion lines. Venezuela is the fourth most attractive market in the region but prospects are overshadowed by the current regime’s isolationist and leftist leanings. Meanwhile, Panama City has been gradually positioning itself as Central America’s luxury destination, with greater hospitality and retail infrastructure.
Burberry has plans to aggressively target the entire region after restructuring its subsidiaries. “Once the South American business is fully integrated with our strong US regional operation, we know it will be one of the strongest growth markets for Burberry in the future,” said Angela Ahrendts, the brand’s CEO.
El Palacio del Hierro in Mexico
After Brazil, Mexico appears to be the most alluring in Latin America. Salvatore Ferragamo’s CEO Michele Norsa recently told Bloomberg that the brand’s most substantial sales growth among major economies has been in Mexico this year, noting a 30% uptick.
Saks Fifth Avenue launched in Mexico City a couple years ago and many luxury firms are very optimistic about the capital region as more Mexicans now shop at home. Furthermore, upmarket department stores like El Palacio de Hierro bring luxury brand concessions to its branches outside the capital in cities like Monterrey and Guadalajara, while luxury retail development is taking place in resorts like Cancun, Los Cabos and Acapulco.
Any sightings of a “new BRIC” on the horizon will be nothing more than a mirage; that said, the Middle East, South East Asia and Latin America will present attractive opportunities in the coming decade. Luxury brands will need to anchor themselves with efficient logistical, operational and distribution networks tailored to each region and initiate individual marketing strategies for each national market. Not least, they will have to cautiously assess the most suitable approach to take, be it a joint-venture, wholly-owned subsidiaries or franchise investment model. And as always, the timing and pace of entry, penetration and wider diffusion into these wildly diverse markets will be the lynchpin to sustained demand — essentially making or breaking them.
Robb Young is Managing Editor