Business of Luxury Lessons: Rise of the Middle East and Hope for Sustainability

“The new Hong Kong is Dubai. And next will be Saudi Arabia,” Gildo Zegna, chief executive of Italian luxury group Zegna, told FT editor Roula Khalaf on stage at the Financial Times Luxury Business Summit this week. last.

Zegna, which listed on the NYSE in association with a US special purpose acquisition company in December, and owns both the Zegna and Thom Browne brands, is one of many luxury companies to see a surge spending in the region thanks to higher oil prices, strong economic growth and a return to local purchases. For example, at Richemont, sales in the Middle East and Africa for the year ending March 31 increased 53% year-on-year to €1.4 billion; meaning the region overtook Japan as the group’s fourth largest market.

Although it represents only a small portion of overall luxury brand revenues, the region is one of the “beacons of hope” in an otherwise extremely difficult economic environment, said Neil Shearing, chief economist at Capital Economics, during a panel moderated by the head of the FT. economic commentator Martin Wolf. “It’s the only place where you can indicate that they are doing better than before.”

The Gulf Cooperation Council countries, which include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, are expected to see a 6.1% increase in their gross domestic product in 2022, according to the Mitsubishi UFJ Financial Group.

Zegna chief executive Gildo Zegna talks about opportunities in the Middle East with FT editor Roula Khalaf at the summit © Tim Edwards

Sarah Willersdorf, global head of luxury at Boston Consulting Group, said she has seen “tremendous growth and investment” in the region. This is in response not only to increased spending, but also to a change in retail investment policy in the United Arab Emirates, including Dubai Mall and the wealthy capital city of Abu Dhabi, which allowed foreigners to set up full-fledged businesses rather than minority ones. ownership, prompting some brands to take direct control of their stores and operations.

Dubai not only attracts local customers, but also tourists who may have already purchased their handbags or suits in London or Paris. On any given day, customers from as many as 30 different countries shop at the company’s store in a mall in Dubai, Zegna said. “That never happened in Hong Kong.”

Boom hopes in the United States, recovery in China

The outlook for the two most important luxury markets – the United States and China – is less rosy. Citi analysts recently downgraded GDP growth forecasts for the United States and China, but Thomas Chauvet, head of luxury goods equity research at Citi, believes the effects will be short-lived. term.

He expects China’s demand disruptions to last into the third quarter, in part because of supply chain issues weighing on the recovery, but “the fundamentals are extremely strong for this market.”

Despite rising inflation in the United States, credit card spending has remained at 2019 levels in recent months, according to Chauvet. “In the United States, brands have done a lot to improve the quality of distribution, the quality of the offer, take control of prices and have greater online penetration, so I think [the market] will be pretty solid after a slight downturn,” he said.

LVMH’s Antoine Arnault is confident that spending in China will pick up and is optimistic for the long term © Tim Edwards

Zegna and Antoine Arnault, managing director of LVMH’s Berluti business as well as head of communication, image and the environment for the luxury conglomerate, were also convinced that the luxury boom in the United States would continue and that spending in China would pick up as lockdown restrictions are eased in Shanghai. . “We don’t look at our business there quarter to quarter, we look five years out and we’re very optimistic,” Arnault said.

Not everyone thinks the Chinese market will rebound as quickly as it did when the lockdown restrictions were lifted in spring 2020. “The impact this time is bigger and we expect the recovery take longer,” said Véronique Yang, general manager of BCG China. .

Sustainability goals drive change in materials

Sustainability was also a priority for speakers at last week’s summit. Valentino President Rachid Mohamed Rachid said sustainability was “very, very high on the agenda” for the Italian brand.

Raw materials – from fur to leather to cotton – have a disproportionate impact on the environmental footprint of fashion brands and have become a key area of ​​investment and research for those wishing to achieve their sustainability goals.

“Two-thirds of a brand’s environmental footprint is attributable to the choice of materials,” said Federica Marchionni, chief executive of Global Fashion Agenda, a nonprofit organization that drives the industry to improve its environmental performance. of sustainable development.

To learn more about the FT Business of Luxury Summit and to watch on-demand sessions, go to luxeglobal.live.ft.com

Most luxury brands and conglomerates have moved away from fur, which for the most part accounts for a negligible percentage of sales, but nearly all have stuck to leather, which accounts for around half of sales at Kering, Hermès and Prada. While Marchionni is optimistic about the future of leather in place of fur in the long term, many organic alternatives are still struggling with quality and scale.

“The fundamental challenge at scale is the performance and quality of the material,” said Matthew Scullin, managing director of MycoWorks, whose alternative to fine mycelium leather has been used by Hermès.

LVMH continued to use fur, notably at Fendi, and Arnault said the conglomerate has no plans to phase it out until the company has an alternative that makes consumers feel like “they have the equal value in their hands”. To that end, LVMH launched a two-year research program in April with Fendi, Imperial College London and Central Saint Martins to develop new lab-grown fur fibers for luxury fashion.

Covid-19 outbreaks and lockdowns in China, the cost of living crisis in Europe and rising interest rates in the United States make the prospect of a global recession all too real, but luxury, without discouraged, keep moving forward.

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