Capturing fashion’s growth potential in the Middle East

Most fashion executives responding to the BoF-McKinsey State of Fashion 2023 Survey cited the Middle East as a region with greater promise in 2023 than in 2022, as they scanned the globe to identify growth opportunities in the year ahead. in the Gulf Cooperation Council alone reached around $4.2 million in 2021, a 39 percent increase from 2019 levels. Future growth in the region is linked, among other things, to the return of international tourists and the acceleration of e-commerce.

Capturing growth in the region will require brands to double down on localization and personalization strategies, according to Patrick Chalhoub, CEO of the Chalhoub Group, a Dubai-based luxury retailer and distributor founded by his father in 1955 and now the regional distribution and franchise partner for hundreds of global fashion and beauty brands including Dior, Tory Burch and Yves Saint Laurent along with joint ventures with LVMH, Christian Louboutin and Farfetch.

While growth prospects are robust across the GCC region, Saudi Arabia, where luxury sales have recorded double-digit growth, stands out for Chalhoub’s top executive. He sees the fashion industry playing a role in the country’s comprehensive Vision 2030 program which aims to modernize and diversify the economy.

BoF: As a veteran fashion executive in the Middle East, you will have witnessed many economic and social changes affecting the fashion market over the years. What is of great importance today?

Patrick Chalhoub: We live in very interesting times in the Middle East. Because the current economic development is unlike anything we have seen in many, many years, there is a lot of wealth thanks to additional income from oil. The Middle East, and the GCC in particular, is becoming an international business destination, but also an international tourist destination, with initiatives such as the Red Sea Project [on Saudi Arabia’s west coast] which will add thousands of hotel rooms by the end of this decade.

What the fashion industry needs to do is make sure we maintain relevance to our local customers. Consider that historically – prior to 2020 and 2021 – two-thirds of luxury spending by GCC customers occurred overseas because they might not get the experience, service, choice or journey they wanted when shopping locally. We need to make sure that we don’t reduce the amount they buy outside the GCC, but increase the amount they buy locally. [We need to] be there to fulfill what they want more.

BoF: There are well-established consumer markets across the GCC, but what about, for example, Egypt, where the government is investing in the development of new cities and major infrastructure projects?

PC: There is certainly movement in Egypt in terms of economic development. All these projects happening along the Red Sea – with all the new hotels opening – are a big part of this effort to become a more attractive destination for tourists from all over the world.

But this comes with its own short-term challenges which are probably more complicated than in other countries. Energy is expensive, inflation is high, the exchange rate is difficult [with the Egyptian pound weakened substantially against the US dollar in 2022]. In Egypt, there are still many heavy administrative ways of doing business, often for the wrong reason or reasons inherited from the past that tried to limit imports to help local production develop. I’m not sure measures taken 30 years ago are still relevant today, but changing them is still complicated there. So Egypt is there to develop, but it is something that must be gradually built up and developed in our field of activity [in the luxury fashion market].

BoF: Localization seems to be a big theme for global brands around the world, with consumers increasingly buying local brands steeped in local culture and heritage. How do you see this playing out in the Middle East?

PC: It is a movement in the Middle East, but not a movement of national pride like in China. We want to buy local … and we have seen a proliferation of local fashion designers, but we need to continue to develop them. We are just getting started with that.

Our group has been actively involved in helping local early-stage disruptor brands. We recently created the Fashion Lab, an open innovation platform. Our regional incubator has assisted start-ups from Dania Shinkar [handbags] to Nom’s Life [lifestyle brand] and Kaf of Kaf [ready-to-wear] for cones and bars [eyewear].

BoF: What can global brands do to ensure they are in tune with their Middle Eastern customers?

PC: It helps brands to reassess and rethink how business is done and the kind of experiences that are relevant to the Middle East. We already see that. For example, the end of the fasting period in Ramadan is very festive and we see many specific collections made for it. Probably 60 percent, 70 percent of the brands have created a cruise collection just for that specific celebration.

We see that brands are much more interested in doing specific or personalized events and activations. I have never seen so many global luxury brand-led events resonate with GCC audiences as I did in 2021 and 2022. Brands such as Chanel, Hermès, Louis Vuitton, Cartier and Tiffany have worked on local strategies to attract consumers in the region through collaboration, dedicated gatherings and immersive events at iconic locations such as Al-Ula in Saudi Arabia. However, a lot of personalization is needed in this region. Middle Eastern customers will build trust in big brands, but they need to [brands to provide] points of differentiation.

BoF: How are customers in the region different today than pre-pandemic or during the height of the pandemic? What will the new consumer profile look like in 2023 in terms of demographics and purchasing decisions?

PC: [Generally] we see more self-confidence among our consumers. The younger the consumer, the more we see it. They are still linked to branding, but to a lesser extent. They also have more curiosity, and are therefore more eager to try a new brand, even a local fashion designer, rather than a global one. We also see that customers are mixing brands and products more and more, because of this self-confidence when it comes to expressing themselves. They do not feel that they must necessarily be dressed from head to toe in one brand.

In terms of product categories, there is a big increase in jewellery. I hear this is not just in the Middle East, but all over the world. Jewelry has always been extremely important in the Middle East, but not branded jewelry, as it is now. It helps brands become more and more creative.

The customer journey also adapts. People often like to go into shops in [groups], with family and friends, so they need more areas for seating, more space, and not just at a counter for people in a hurry. We really need to make such adjustments.

BoF: Unlike in other parts of the world where e-commerce growth is returning to pre-pandemic levels, e-commerce appears to be accelerating in parts of the Middle East. What is driving it?

PC: The story behind it is that we are quite late compared to other regions in terms of the proportion of sales made through digital channels, for various reasons. For example, the content may not have been relevant or there were not enough choices. All of this is getting better: the customer experience itself, the availability of products, the relevance of content. That said, what we have seen in 2022 is that there is greater growth in bricks and mortar than e-commerce.

There is another aspect of brick and mortar that I would like to mention. For developing countries, property development is often a challenge. When there is an increase in demand for property – as we saw in 2019 and again in 2021 and 2022 – you have a lack of supply, which not only increases prices, and any new project will take five to seven years to complete. Now we are in a cycle where there is much more demand in some cities, such as Riyadh [Saudi Arabia] and Doha [Qatar], than others. We really need to be more dynamic and creative about how to resolve this tension, because there is a scarcity of locations, and perhaps this requires a different way of thinking about different consumers.

BoF: Chalhoub Group recently announced that it is acquiring a majority stake in Threads Styling, an online, personal, chat-based luxury fashion and jewelry retail service. How does this fit into the group’s overall strategy for developing digital capacities?

PC: We are getting into the digital world quite late. Before the pandemic, e-commerce accounted for around 1 percent of our turnover; today it is about 10 percent.

The group represents and operates over 80 e-commerce sites and apps for partner and joint venture brands in [Middle East-North Africa] region. And since 2018, we have had a joint venture partnership with Farfetch in the GCC and the Levant [Egypt, Jordan and Lebanon], which includes a website in Arabic. But we have a lot to learn to be closer to the digitally native consumer… which is what we think is amazing about Threads Styling. It’s really about clientele, taking care of our client, and connecting with them, and keeping the human touch, even though we have all the digital devices.

This interview has been edited and condensed.

This article first appeared in The State of Fashion 2023an in-depth report on the global fashion industry, co-published by BoF and McKinsey & Company.

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