BUSINESS - 20 September 2016 - by BlogLux
2185    2

Middle-East: An opportunity for the luxury market

Major chunk of revenue is coming from tourists than residents

The Middle East, led by strong growth in the UAE and Saudi Arabia, represents a big opportunity for premium brands as the global luxury goods sector is expected to grow more slowly in 2016, at a rate many retailers may find disappointing, said a report by a leading global consulting company.

Deloitte said while the growth rate is slowing in important markets such as China and Russia, some markets continue to perform well and there are pockets of opportunity across the globe.

"India and Mexico for example are growing quickly, and the Middle East offers further growth potential," it said in its annual report entitled 'Global powers of luxury goods 2016 disciplined innovation'.  

"The Middle East represents a big opportunity for luxury brands. Luxury malls in Abu Dhabi and Dubai have helped put these cities on the map for the industry, and the UAE as a whole continues to enjoy strong growth," said Herve Ballantyne, partner and consumer and industrial products leader at Deloitte in the Middle East.

"Well-established big-name brands perform well in the region, and tourism is a major driver of sales in Dubai. Although the region is likely to feel the impact of political unrest as well as global economic uncertainty, but further growth is expected overall."

Tourists vs residents
According to Cyrille Fabre, partner at Bain & Co, the UAE and Saudi Arabia were the top-performing markets in the region with major chunk of revenue coming from tourists than residents.

The luxury goods market in the UAE has grown from $3.18 billion in 2004 to $8.98 billion during the decade. "With the entry of global brands, the GCC became a sizeable and one of the main growth markets globally. For retailers, particularly in the luxury and premium segments, the period between 2004 and 2014 were their golden years," said Fabre.

The Deloitte report examines and lists the 100 largest luxury goods companies globally, based on the consolidated sales of luxury goods in financial year 2014 (which we define as financial years ending within the 12 months to June 30, 2015). 

Ballantyne said as Saudi Arabia seeks to diversify its oil-based economy, retail is a sector that is likely to benefit given the expected growth in religious tourists over the next decade and ongoing private sector planned investments such as the recent announcement that the Majid Al Futtaim group would add approximately 112,000 sqm of retail space in Riyadh.

The world's 100 largest luxury goods companies generated sales of $222 billion in financial year 2014, 3.6 per cent higher year on year. The average luxury goods annual sales for a Top 100 company are now $2.2 billion.

"There is a shift in the luxury path-to-purchase," said Ira Kalish, chief economist for Deloitte Global. "Empowered by social networks and digital devices, luxury goods consumers are dictating increasingly when, where and how they engage with luxury brands. They have become both critics and creators, demanding a more personalised luxury experience, and expect to be given the opportunity to shape the products and services they consume."

According to the report, the luxury goods sector has now passed the mid-point of the 'decade of change.' The first half was characterised by the Chinese consumer and the explosion in the use of digital technology. The second half of the decade is expected to be characterised by discipline.

The report noted that the external environment is likely to change in a number of crucial areas: an evolution in consumer buying behaviours; the merging of channels and business model complexity; an increase in international travel; the growing importance of the millennial consumer; and the continued impact of the global economy. All these factors create opportunities for the luxury goods sector.

Sales for the world's 100 largest luxury goods companies continued to grow despite economic challenges, although the rate of growth was less than in previous years. Profit margins were higher than the previous year and the polarisation of company performance was greater, with more high performers achieving double-digit luxury goods sales growth and profit margins, and also more companies experiencing double-digit sales decline, said the report.

Italy, with 29 companies in the Top 100, has more than double the number based in the US, which has the second-largest number. However, Italian companies account for only 17 per cent of luxury goods sales in the Top 100 - these predominantly family-owned Italian companies are much smaller, with average luxury goods size of $1.3 billion, compared to $3.1 billion for US companies, said the report.