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Qatar and High Fashion Are a Good Fit

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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The acquisition of Balmain, the Paris fashion house, by Mayhoola for Investments, a Qatar-based fund, is the latest sign of Middle Eastern investors' appetite for luxury goods. The spree makes sense: That region's market is probably the best suited to the industry's business model and culture today. 

Mayhoola, which is reportedly buying Balmain for about 500 million euros ($565 million), already owns Italy's Valentino, acquired in 2011. The fund is linked to Sheikha Moza, the mother of the Qatari emir, but its name means "Unknown," and it doesn't disclose its owners. Qatar itself, however, has also invested heavily in the luxury business through its sovereign wealth fund, buying 1 percent of the French holding LVMH, 38 percent of UK accessories brand Anya Hindmarch, 11.3 percent of Tiffany & Co., and controlling stakes in the French department store chain Printemps and the equally iconic Harrods of London.

The Qataris are not the only high-profile Persian Gulf investors in the fashion industry. Investcorp, the Bahrain-based fund that bought Gucci at the end of the 1980s and took it public in 1996, is reportedly close to acquiring the Italian menswear brand Corneliani. In April, Dubai-based Alabbar Enterprises bought into the upscale online fashion retailer Yoox Net-a-Porter.

The affluent residents of oil-rich Gulf states have always craved European luxury. They are among the biggest shoppers in the U.K. and Germany. Half of Middle Eastern visitors to France spend more than $6,600 a day. A 2014 white paper on the peculiarities of luxury consumption in the Gulf nations showed that a big local luxury retailer, the Chalhoub Group, explained the origins of this love affair: A tradition of defining a person's place in society through luxury consumption and the emergence of malls, where people from a culture "dominated by private spaces and prescribed behavior" can show off their individuality, the cultural importance of trust that helps create strong brand loyalties. 

Qatar has the highest per capita gross domestic product in the world. That affluence feels natural to its younger generation. "Generation Y, under 30 years of age, have been brought up in the dawn of the region's economic ascendancy," the Chalhoub Group wrote. "They perceive luxury as their playground."

Western millennials prefer to spend on experiences rather than products. To quote Jeff Fromm of the marketing consultancy FutureCast:

In the past, affluent consumers marked their affluence with luxury products (think Rolex or Hermes). However, as we are seeing the shift towards experiences grow among the affluent millennial population, that mindset is changing. Why buy a $10,000 bag when you can book a trip to Thailand or get front row seats to your favorite concert for the same price (if not less)?

The conventional wisdom holds that an East-West shift in demand is taking place in the luxury industry. The corruption crackdown and the economic slowdown in China and Russia's harsh currency devaluation have shut down growth in those once promising markets, while the U.S. and Western Europe have provided reliable growth. Millennials or no millennials, Balmain is a profitable company whose young chief designer, Olivier Rousteing, knows how to play the game. The collection he designed for budget retailer H&M sold out in a day last November, with mob scenes at stores from Seoul to Berlin.

Last year, the Middle East accounted for just $9.1 billion of a total of $280 billion in personal luxury goods sales, according to Bain & Co. Yet the region showed the highest growth rate after the U.S.:

US and the Gulf: Shared Values
Growth in personal luxury goods sales, percent, 2015
 
Source: Bain & Co.

The growth in Middle Eastern luxury consumption is understated. Travelers from the Gulf states are likely responsible for some of the sales increases in Western countries, and European and American consumers aren't doing much shopping for clothes in Doha or Abu Dhabi. So the fashion industry is probably more dependent on Middle Eastern consumers than the numbers indicate.

That dependence is likely to grow if the "experience spending" trend holds in the West. There is nothing the luxury industry can do to align itself with a shift away from conspicuous consumption. The Gulf states' welcoming embrace is positive for the fashion brands; their long-term future may well depend on this quirky but affluent market.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net