By guest authors George Arnett, Annachiara Biondi from Vogue Business
The luxury sector urgently needs wealthy shoppers in Russia, India and the Middle East to spend more at home. It’s a mixed picture.
A tough call just got even tougher. As Europe braces for a second wave of Covid-19, any of the few remaining wealthy travellers from developing markets planning a European spending spree will be cancelling their flights. The solution is to encourage them to spend at home. That’s worked out just fine in China. Luxury brands have been relatively successful in convincing Chinese consumers to shift what they would have typically spent on luxury abroad to the domestic market. Spending by Chinese consumers is forecast to be down by just 8 per cent in 2020 compared to 2019, according to Deutsche Bank projections.
However, the task is an uphill struggle in developing markets. Sales to consumers in Russia, India and the Middle East, most of whom share the Chinese propensity to spend more when abroad, have been hit harder, with heavy drops in overall sales forecast for 2020 of 44 per cent, 80 per cent and 30 per cent respectively.
All three markets are facing more significant economic difficulties than China. India has been hard hit by Covid-19, recording the largest GDP drop of any major economy over the past quarter. Meanwhile, the slump in the price of oil to its lowest level in over a decade has impacted Russian and Gulf state finances. The feel-good factor in these markets has gone, notes Deutsche Bank analyst Francesca DiPasquantonio. Residents of these three markets are still expected to be high spenders in the coming years, but the short-term picture is grim.
Reducing store counts in these developing markets is unlikely to be a priority for major luxury brands, given the already limited presence that most players have. Jefferies analyst Flavio Cereda says that retail overexposure in Europe is now much higher on the agenda in the face of the second wave of Covid-19. In the Asia-Pacific region, Hong Kong is also a likely target for store closures, with the mainland Chinese city of Shenzhen the most obvious beneficiary.
Tourism-dependent Middle Eastern markets hit hard
Consumers in the Gulf are not travelling to Europe, but they are also not travelling within the region. Shoppers from Saudi Arabia and Abu Dhabi are staying away from the consumer hotspot of Dubai, according to Dana Salbak, head of research for the MENA region at real estate services firm JLL.
A glut of oversupply of retail space, which has been evident since before the Covid-19 pandemic erupted, continues to depress the market. Average retail rental rates in Dubai and Abu Dhabi were down by 17 per cent and 20 per cent respectively in Q2 2020. A number of major retail construction projects are expected to be delayed.
During the early months of Covid-19, luxury spending in the Middle East stayed relatively consistent year-on-year, according to Bain figures. And when borders to European shopping destinations opened, wealthy shoppers from the Gulf states (who are among the highest spending on a per capita basis in the world) grabbed the opportunity to resume their old habits. DiPasquantonio says that a lot of “pent-up pounds” were spent in London over the summer.
To boost spending locally, luxury Swiss watch manufacturer IWC is working on reducing the difference in price positioning across regions to make location of purchase irrelevant for customers. “Overall, there is a drop in immediate turnaround, but we are growing extremely fast with our local clientele, slowly compensating for that drop,” says Mehdi Rajan, brand director for IWC Middle East and India.
India continues to evolve, but challenges remain
Indian luxury retailers say that overall local spending is maintaining momentum, despite lower footfall in physical stores. Amit Pande, brand head of The Collective and International Brands at Aditya Birla Fashion and Retail, says that walk-ins at The Collective (selling luxury and premium brands such as Alexander Wang, Mulberry and Michael Kors) are currently at between 35 and 40 per cent of pre-pandemic levels, but sales have already recovered to near 80 per cent of pre-pandemic spending. “Whoever is coming in, is buying a lot more deeply,” he says.
India’s high-net-worth individuals are not going to slow down or reduce their luxury shopping habits, says Abhay Gupta, founder and CEO of brand management company Luxury Connect. Local players like Le Mills, which primarily stocks international labels like Saint Laurent, Chloé and Balmain, seized on the pent-up demand from these consumers when businesses reopened in June.
Co-founder Cecilia Morelli Parikh believes travel shopping will become less of a priority for consumers going forward. “The pre-pandemic shift towards travelling for experiences [rather than shopping] is going to be even more acute and that means that consumers are going to shop much more domestically than before,” she says.
The acceleration in the adoption of digital by Indian brands and retailers during the pandemic may be driving a long-term shift in spending patterns. “The confidence of buying luxury goods on e-commerce will stick,” says The Collective’s Pande. International brands looking to expand their presence in India should invest in digital marketing as long as the physical retail scene remains “far from settled”, he says. Beyond traditional e-commerce, WhatsApp, which has 400 million users in the country, has been an important tool to engage consumers and drive transactions during the pandemic. “WhatsApp is almost always the getaway to transactions,” says Morelli Parikh.
When conditions permit, high-net-worth Indian shoppers will still travel overseas to luxury capitals again. DiPasquantonio points to the limited presence luxury brands have in India. “India is still a market which needs time in order to evolve and mature and become a real opportunity for the luxury sector,” she says.
Analysts confident Russian spending will continue to be fine
Russia has lost lots of high-spending Chinese tourists, but local retailers believe they can make up at least some of that from their domestic customers. “I don’t want to give the impression that they are spending more than they normally do. But it’s not that bad,” says Jefferies analyst Cereda.
According to Euromonitor International forecasts, luxury sales in Russia will be hit harder than those of India or the UAE in 2020, but rebound much more strongly in 2021. Equita analyst Paola Carboni says that while shoppers from both Russia and the Middle East have a preference for spending abroad, Russians are more ready to buy luxury goods at home too.
Alexander Reebok, managing director of the Mercury Group, which owns historic Moscow department store Tsum, says he is confident that the store can make up for the loss of revenue from international spenders by growing its local consumer base.
Marketing strategies at luxury boutiques have shifted to appeal to Russians, including, in some cases, renewed emphasis on local rather than international brands. Moscow luxury boutique store KM20 is planning to launch a separate space for Russian designers in 2021. In future, international brands may need to pay closer attention to Russia’s key cities of Moscow and St Petersburg to ensure they retain a prominent position in local shoppers’ spending plans. In the meantime, the luxury sector keeps its fingers crossed that the buoyancy of China continues.