Nearly two months of war in the Middle East has weakened a crucial, multibillion-dollar market for brands selling items like crocodile-leather handbags and diamond bracelets.
The world’s luxury brands are trying to mitigate the fallout.
At Zegna Group, home of the high-end Zegna men’s clothing brand, employees have started moving inventory out of the region and into less volatile markets like London and Paris. Executives said they hoped that expatriates who had left their homes in cities like Dubai, United Arab Emirates, and Manama, Bahrain, would keep spending on luxury goods in other countries, and that tourists planning trips to areas now affected by the war would make their purchases elsewhere.
But as for the Persian Gulf nations themselves, where tourism has slowed to a trickle, there is little relief in sight, other than a short-term cease-fire between the United States, Israel and Iran. For brands, there is not much else to do but wait.
“That merchandise has to go somewhere else,” Ermenegildo Zegna, the executive chairman of Zegna, said in an interview. “What we are hoping is to get those important clients, if not there, then in some other part of the world.”
The Middle East had emerged as a vital source of growth for many upscale brands as sales of luxury goods have slowed in Europe and Asia in recent years. These businesses doubled down on the Gulf region, which accounts for a significant share of global wealth, by opening more stores and putting more money into their e-commerce operations.
Luxury brands such as Dior, Ferragamo and Moncler have invested in a deep retail network throughout the Middle East, operating stores in urban hubs such as Dubai and Abu Dhabi in the Emirates and in Doha, Qatar.
European fashion labels have also pumped money into marketing in the region. Last year, Louis Vuitton created a Ramadan pop-up in Dubai, and Prada released an exclusive Eid al-Fitr collection. Zegna hosted a summer fashion show at the Dubai Opera.
In the days after the U.S.-led war in Iran began in February, brands closed many of their stores across Gulf nations. Most have been reopened, but sales have fallen precipitously.
LVMH Moët Hennessy Louis Vuitton, the world’s largest luxury company, which owns upscale brands in categories across fashion, beauty and spirits, said demand for some brands in the region fell as much as 70 percent as the war escalated in March. Management said it was counting on the Middle East’s wealthy elite to continue spending abroad.
“What we see today is still that demand is very much down,” Cécile Cabanis, the chief financial officer of LVMH, told investors on a conference call this month. “What we know is that the wealth has not evaporated.”
LVMH said it “remains vigilant” when it comes to earnings this year because of the geopolitical uncertainty.
Kering, which owns fashion houses such as Gucci and Saint Laurent, said it had activated a crisis unit to manage its business in the Middle East. Its retail network in the region is back up and running, but revenue fell 11 percent last quarter despite a fast start to the year.
“In the Middle East, it’s tourist flows that are suffering more than the locals,” Armelle Poulou, the chief financial officer of Kering, told investors this month.
But tourism problems are also developing outside the Middle East, especially in places that Gulf residents often visit.
Hermès, known for its leather handbags, said some of its stores across Europe were seeing fewer shoppers from places like the Emirates, Kuwait and Bahrain. Sales at its stores in Paris have been particularly weak.
“We can see in Europe a drop in the number of tourists from the Middle East,” Eric du Halgouët, the chief financial officer of Hermès, recently told investors. “We see it in Switzerland, in the U.K., for example, but also in Italy.”
Hermès has also had to stop or postpone deliveries to its third-party-run stores in Qatar, Bahrain and Kuwait, the company said. It has had difficulties sending goods to stores in airports in Asia as well, because those items often transit through the airport in Dubai, which has been disrupted throughout the war.
Luxury executives still see the Middle East as a long-term growth driver, as long as the tourist hubs can again attract travelers eager to spend and expatriates return. Before the war, annual sales were growing as much as 8 percent, according to estimates from Bernstein Research, an equity research firm.
Foot traffic to Brunello Cucinelli stores, known for their cashmere knitwear, in the Middle East fell 50 percent in March, though all of the brand’s stores remain open and operational. But company executives still have big plans for the Gulf region.
The brand’s founder, Brunello Cucinelli, who is also the executive chairman and creative director, told investors that company leaders would be traveling the world to present a documentary this year, culminating with the trip to the Middle East to court customers in December, if possible, despite a “painful and unexpected” war.
“It’s difficult to accept it for our modern times,” Mr. Cucinelli said this month. “For me, I’m a lover of history. We know that war is a part of our story all the time.”
Kim Bhasin is a business reporter covering the retail industry for The Times.
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