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Uncertain macros take a toll on luxury market

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The fall in oil prices and the strength of the dollar have begun taking a toll on the region’s luxury market, according to several industry leaders gathered at arab luxury world. Couple this with a dip in Chinese consumption and Russian tourists staying away from Dubai and retailers are openly admitting to a sharp decrease in sales.

“Jewelry and watches is where most of the pain is coming from,” says Adi Hassan Al Fardan, Board Member at Al Fardan Jewelry, one of the region’s pioneering local brands. Fardan adds that several brands did make the mistake of focusing too heavily on Chinese consumers, at the cost of neglecting other markets and that’s begun to hurt now.

But a renewed focus on the local market and the region’s proclivity to spend heavily on luxury items, such as jewelry for weddings, has kept the cash registers ringing.

“What I am worried about is the future…in the short and medium terms, the decline in oil prices will not affect the way local communities buy,” Hassan added.

Others on the panel however argued that with oil prices between $50-65 per barrel being broadly accepted as the new reality, it would only be a matter of time before governments in the region stop spending in the manner in which they have been.

“It would be foolish to expect that the dip in oil will not eventually translate into the resident market being affected,” said Cyrille Fabre, Partner at Bain & Co.

In fact, people have already begun becoming cautious with how they spend their money, reckoned Gary Dugan, Managing Director of Global Wealth CIO and Head of Investment Strategy at National Bank of Abu Dhabi (NBAD).

“It’s gone from shock to absorption to, now, reaction,” he said, adding that there has been some reallocation in portfolios by HNW clients toward more conservative, less risky debt products. And while people are still buying into luxury, they are looking for a better-value proposition.

The growing parity between the dollar (to which the UAE dirham is pegged) and the euro (which has depreciated by nearly 20 percent since July 2014), has also led several buyers of luxury watches to shop in Europe rather than in Dubai.

“The price differential between the euro and dollar is so high that it just doesn’t make sense anymore to buy locally,” said Ludovic Tiberghien, Head of Strategy at Chalhoub Group.

Going forward, there will have to be several realignments in the luxury sector to deal with these disruptions, the panel reckoned. Despite a dip in footfalls, in some cases by as much as 50 percent, retail rents at luxury malls have continued to rise by approximately 40 percent, said Fardan – and that needs to be looked at.

However, it isn’t all gloom and doom, insisted Dugan. “With markets such as India growing at seven to eight percent over the next five years, the middle class there is on the march and will want to consume luxury,” he added. This could have a mitigating impact to the slowdown in China and the region must remain well poised to serve these new consumers.

 

 

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