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- [00:05]
A
Hello and welcome back to the Glossy Podcast. I'm your host, senior fashion reporter Dani Parisi. And I'm here with our international reporter, Zofia Zviglinska. Hello, Zofia, how are you doing?
- [00:15]
B
Hi, Danny. Very well, thank you. It's a very interesting episode we have today.
- [00:19]
A
Yes, there is a lot to talk about. We are going to be talking about the situation in the Middle east and how it's affecting the global fashion and luxury industry. It has been just about a month since the US And Israel launched surprise airstrikes on Iran. War broke out in the region already. It has brought a lot of instability. And in the last month, nearby nations like Bahrain, Kuwait, Qatar, Saudi Arabia and the UAE have all been pulled into the conflict, as have European allies of the US And Israel, including the uk, France and Germany. The situation has changed very rapidly from day to day. Just for reference, we're recording this on March 24th. By the time you hear it, it'll be a couple days later. Who knows if there have been chapter changes since then? Zofia, you and I have both done a lot of reporting on this. Is there any other setup you want to give for our conversation here? And could you also introduce our special guest?
- [01:09]
B
Yeah, absolutely. So obviously the luxury space in particular is one that has been impacted in a bigger way in the Middle East. It's one of those few growth areas for the sector. Some of the other areas have been lagging. And the Middle east, in terms of both tourism, but also the local population, had a high number of VIPs, a lot of customers with a lot of wealth in that sector. And some of that has now been redistributed. So it'll be interesting to talk a little bit about how that's affected luxury and also luxury brand activity in that area. And today we have someone here who can talk about it in a lot more detail than I can. And that's Akeem Berg, who's previously the senior partner at McKinsey, expert on luxury and head of the fashion and luxury think tank and advisory called Fashion Sites. Welcome, Akim.
- [02:02]
C
Pleasure to be with you. Thank you for the invitation and thank
- [02:07]
A
you for being here. We have a lot of questions to ask you. The first one, I want to talk about kind of broader view of the impact that war is having on kind of the world and business in general. And then we can zoom in on fashion. But I have seen some experts describe the last month as the most severe disruption of the global supply chain since the energy crisis of the 1970s. Wondering, do you agree with the. No hyperbole here, right? This is having a really, really big impact on a lot of different industries, not just fashion and luxury. Right.
- [02:37]
C
I think that is, without any doubt, it's big. I think, frankly, we don't know how big it really is and how big it's going to be. But without any question, it already takes longer than we all had hoped for, and we somehow thought it would. So we are on day 25, and it's still escalating, and there's signs of, you know, of change, maybe, maybe not. So it's very volatile. It's highly unpredictable. And that's also how it all started. And I think that's why the industry, the macro economy is impacted and why also the fashion and the luxury industry are taking a hit.
- [03:24]
A
Yeah, absolutely. And as Zofia said, the Middle East, I think, has been a real growth area for fashion and luxury in the last decade, maybe more. A lot of the brands that we typically talk about on this podcast, a lot of the big European luxury houses, have put a lot of investment into opening stores in Dubai, opening offices and businesses in Doha and all sorts of other places in the region. What's your sense on how the brands are thinking about that investment in the big European? European companies? They've spent years putting investment and effort into building up their presence in the region. And it's not like there has never been conflict in the Middle east in that time. So I don't know, is there anything particularly different about this moment from the fashion perspective?
- [04:12]
C
Well, I think, first of all, we should acknowledge that the region has made big progress in the last 20, 30, 40 years. And I think in particular, if you think back to Covid, which is now six years ago, pretty much started now six years ago. The Middle east and the GCC and UAE in particular were the winners of that pandemic in a sense that they provided a more liberal framework, they made heavy investments, and they built the Middle east into a safe haven and into a tourist spot. And on the back of that development, on the back of the growth, on the back of the wealth that has moved to the Gulf, the luxury industry was making heavy investments together with local entrepreneurs. That is now shaken, to say the least. And as you said before, luxury was somehow hoping on GCC because It represents between 5 and 10% of global revenues, depending on which category we were talking about, but different to pretty much the rest of the world. It was a growth region. It was growing at 6% last year. It was expected to grow around 6,7%. This year I think the outlook was also positive. So we've seen quite a bit of investment into the region. One of the few areas where investment have not been scaled back. We've seen a lot of marketing dollars going into the region. We've seen a lot of investment into real estate. And I think that is now threatened. And it's very hard to say even after 24 days of conflict whether we've seen the worst, whether it's going to further escalate. But it's quite obvious that the safe haven and tourists tourist value proposition that the region has built is clearly under
- [06:18]
B
severe pressure in terms of the potential of this area. I was fortunate enough to be in Abu Dhabi in January and I think it was quite interesting, I guess to be there right before the conflict started. I had the opportunity to see the shopping malls there. The kind of level of investment that was put into the luxury brand presence there. It does feel like the tourism as well as the kind local sector really responds to this mall environment for luxury. And I think that's quite a unique setup. It's not something that you typically see in Europe, uk, I don't think even in the US you have a strong luxury presence in these malls. But obviously with missiles striking, those environments are now essentially under threat. How has that kind of foot traffic effect been with the luxury brands? Is that something that could affect things for a while to come still?
- [07:14]
C
Well, I think we've seen the impact already and we just had Ramadan and we now have aid and it's actually one of the seasons that is quite important for retail and for luxury retail in the region. I think they're talking to some of my friends in the region. Traffic is significantly down. If you look at at the hotel's occupancy rates, it's somewhere between 10 and 20% depending on the hotel. So it's basically 80 to 90% down to what it used to be. And also the traffic in the malls is down. Some of my friends compared that a bit to Covid actually because they said those categories that need to be replaced. So more on the consumption side, they do relatively better. So beauty, for example, is doing better than fashion and luxury, which is not considered that necessary. In particular if you also reduce your entertainment habits and the frequency of your restaurants and event visits. But what I hear is because it was Ramadan and because it was EID and there is occasions and reasons to purchase it is not as bad as some had expected. So I hear anything between 40, 60, 70% down on the revenue side, which we can all assume is a massive hit also on the bottom line. And I think the question now is what does it mean going forward? If this continues, we will not see the tourists coming back. And to a certain extent some hotels are already preparing for that and just skip the pre season that is quite active, normally directly move to the summer season where occupancy rates are anyway down and hoping for the autumn. And I think the question is how will the local, the local consumers now behave? I think there is more opportunity on restaurant sides. A lot of places that were very booked are now available. Ramadan and I is over. So I think the big question mark is will consumers adapt? Will consumers change their behaviors? Will they go for travel in order to avoid the current restrictions? So while there's a certain normality in dealing with those challenges, I think the question mark is how will that continue if the conflict continues? And I think that is the big
- [10:05]
A
question in my reporting. Even just the first few days after the first airstrikes, I spoke to an owner of a luxury boutique in Dubai and he was saying basically instantly you could see foot traffic dropping even before there were any strikes in Dubai or in the UAE at all before any of that. And Dubai still is not even a central point in the conflict, but immediately he was seeing a little bit of reduction in foot traffic. And there's a lot of data that's coming out. But I also think it might be a little bit before we can get really solid information about the effects right away. But yeah, it's interesting. I think you're right, Achim, that it may be a little while before we can see the full effects. There's immediate effects and there's long term effects. Is there anything else you're looking at more longer term that, that you think that there's not a good answer to right now, but maybe in a couple months we'll be able to have a better vision of.
- [11:07]
C
Well, I think if you, if you look at the region, I think the industry, the luxury industry is kind of a collateral damage. Yeah. So I think the collateral damage is decline in footfall, the decline in conversion, decline in activity in the region. And I think they probably have expected they wouldn't get attacked. And we've seen quite a lot of missiles targeting the UAE and this would need to stop because without the safe haven effect, which is based on security, is based on convenience, is based on a certain tax regime, I think the locals and those who've moved there will just spend less time and we will see potentially wealthy people moving to Another spot. I think capital is fluid and will find its way. The second part is tourism. Tourism also here. It's the weather, it's the security, it's the convenience, it's obviously also the retail that is offered. All of that is distracted with just one missile every few weeks. So I think in order for the region to return to the role it played just six weeks ago, you would need to find stability. You would need to find the end of the war or a ceasefire or at least an agreement between the different parties that brings peace and stability and significantly less volatility to the region. The secondary effect of that is that I think a lot of the locals were actually traveling. They are very important tourists to all parts of Europe, but also to Asia. And the estimates are here. This is probably another couple of percentage points of spend that is likely lost if those high net worth individuals are staying home. On the other hand, they could also be motivated to leave and to live a different life overseas, but probably not in the volumes that would be required in order to lead to that spend. So in that sense, luxury is currently receiving a double hit in the region with all the prospects we had. I think, Sophia, you were referring to that. All the real estate investments, huge opportunities also in opening up Saudi Arabia. That is the one side of the coin. The other side of the coin is the international travel of locals that will likely also be impacted and people will very closely watch the developments. And I think we can assume even if the conflict would start, stop tomorrow, it will still have some repercussions on those two sides of the coin.
- [14:22]
B
Yeah, and I've got some interesting data points here from Zegna. For who The UAE is the biggest market in the Middle East. Their stores have remained open and operating. They closed down a little bit at the beginning of the conflict. But they have mentioned in their earnings that happened this week that there is left stage traffic in the region and also kind of less energy. Customers are clearly down. They don't think that their attitude is the same as it was before towards luxury spending. And many of the locals are now suggesting on your point, Akeem, that they're buying in other parts of the world right now. So perhaps they did manage to leave the area and either have relocated to London or other areas where they have a bigger kind of community. I think they've mentioned that Altaya is Zegna's brand partner in the region. And while Charl Hub Group works with Tom Ford and they continue to support the partnerships with merchandise and the kind of local promotions, all of the existing collections for spring, summer 26 have already been delivered. And the issue, if anything, would be sitting on stock in the coming months and potentially not being able to sell through that. But because the rents are variable, apparently they're still pushing into store openings for later this year. So they're keeping optimistic. And I'm kind of interested, I guess, to see if this is sentiment that they will maintain if this does end up dragging on for a little bit longer.
- [15:52]
C
I think you make a great point. There is some flexibility in that system, but there's also very different retail franchisee licensing agreements in place. So the dynamics are probably different for different local players and different international brands. But we've also seen that there are some store closures. I think Apple has closed their stores in Dubai and I think in the end it's retail if you need a certain traffic and a certain conversion to make the retail formula work. And if that is not the case, I think retailers will prefer to close the stores, at least for a while. So again, it all comes back to how does this play out? Does it further escalate? Does it drag into a long war? I think from a macroeconomic point of view, and obviously I'm not a politician and what do I know about geopolitics, but the macroeconomic hit across industries is massive because we're talking about a significant producer of energy with oil and gas. We've seen that the price for oil has already spiraled up. Not exactly at the rate that we've seen when the war in Ukraine started, but pretty close. Gas is even more expensive. We've seen that jet fuels are already significantly more expensive and that airlines will increase their fares. And we know that if we think about the fashion industry, I think Pakistan is 99% dependent on gas from Qatar and Bangladesh in the high 90s. So there is rippling effects for the broader fashion industry from this. But there's also just broad macroeconomic effects. I think the likelihood of the Fed reducing the interest rate in the autumn is significantly lower by now. And this could lead to a similar development we've seen in 22, which means inflation, higher energy cost, interest rates going to go up, and it could lead to another cost of living crisis. And that is not good for the broader economy. And it's definitely not good for fashion and also not good for luxury. And I think there is a misconception that says, oh, rich people will always have money and will spend on luxury. That is true for the high net worth individuals and the ultra high net worth individuals, but it's not True for the aspirational customers that are a very important cohort for luxury because of the democratization of luxury that we've seen over the last 30 years.
- [19:00]
A
Yeah, and Achim, you bring up a million great points there. But I think you're right in mentioning that the high net worth customer, like you said, is always going to be a little more insulated. But there have been a lot of crises in the last few years. You mentioned Covid tariffs. I've heard people talk about kind of in the same tones as they talked about an act of God in its unpredictability and need to be navigated. But a lot of these crises, and when we've been covering them for glossy, people say the same things. Well, the luxury industry and the high net worth customer will be a little more insulated. But if you have multiple of these crises happening in a row or simultaneously, and more and more fashion and luxury companies are leaning on this small but wealthy top percentile. There's only so much these brands and these companies can compete for a smaller and smaller group of customers that are not insulated. Do you know?
- [19:57]
C
No, absolutely. And I think the rich might be able to stabilize the luxury goods industry. They will definitely not help them to grow. And I think the effect is broader. One of the reasons why we are in the crisis in the luxury crisis is because consumer sentiment is down. There's a macroeconomic effect, there's recession in larger parts of the world and there is just, you know, there is a fatigue which is more, you know, due to some of the industry's behaviors. But there's also a reluctance to spend money on luxury goods. And luxury always benefits when the mood is great, when people celebrate achievements, when things are going well and when the purse, you know, opens a bit more easily, that is clearly not the case. And to be fair, that was not the case before it started. But this conflict is the opposite of what the industry would have needed. The industry was hoping for an end of the conflict or the war in Ukraine. It was hoping for an end of the war in Gaza. And it's the opposite. We get an additional conflict and now a big scale conflict at the Gulf. And that will definitely postpone the recovery of the luxury goods industry and it will extend the crisis we're currently in.
- [21:37]
B
And actually just on that point, in terms of the kind of luxury briefing that we wrote about, she spoke to a personal shopper, Gab Waller, who kind of sources things for VIP clients. And even she said that collections which are as high sought after as Chanel and The Matthia Blasi collections are ones that these VIP clients in the Gulf are taking a pause on just because they don't know if these purchases will one, get to them and two, if they will be still interested in them, if they're moving around. So I don't know if they'll be delaying these purchases, but when I spoke to her, it seemed like the interest in those things, even if it is huge from a kind of cultural perspective, might not be enough to actually transfer through to conversions in the luxury space.
- [22:26]
C
Yeah, and I think it's also, I think the one thing is, obviously, if you're occupied with your personal security and with missiles that get intercepted, it might not feel you might not feel like it, but it also might feel inappropriate. On the other hand, you typically also need events, you need dinners, you need parties where you can wear those pieces. And I hear, I think there is social life is resuming, but it's probably not boiling. I think it's not that you would need to rush from one party to the next. And I think that is very obvious in the Middle East. But we will see the same effect around the globe. Again, it's the opposite of what we need. I think we would need a certain we would need stability. We would need a certain level of deregulation. We would need macroeconomic recovery. We would need all of those points. And what we currently see is the opposite.
- [23:28]
A
Well, Haim, you bring up a lot of good points. There's one thing I want to say just quickly. I mean, like we said, there's a lot of immediate, obvious impacts. Foot traffic to luxury shopping centers in the Middle east is an obvious, immediate one. There's lots of downstream effects that we won't see for a while. There's also an immediate humanitarian impact, which we should mention. It's obviously people's lives are lost, their homes are destroyed. And also the luxury and fashion industry employs a lot of people in the region, so it's their livelihoods, too. I just wanted to acknowledge that, just so it's not all business, even though that is what we're focusing on here. The other thing is, I think the unpredictability of specifically this conflict, but also several of the other crises that we talked about in the last couple years, Covid and tariffs especially. I have heard from a few people in the industry that brand fashion brands, luxury brands in general, are slightly more accustomed to pivoting on short notice, being adapting to unpredictable, both natural disasters and unpredictable political situations. I mean, from the US Perspective, I can say we have Been getting very mixed messages from our political leadership in terms of the rationale for the war, the timeline for the war, negotiations surrounding the war. Sometimes even in one speech you will get multiple contradictory points being made. I want to ask you from your perspective, do you think that unpredictability or instability always a factor in business, but do you think the fashion world is maybe a little more acclimated to things like that from the last few years? Do you feel like there's more decision making structures in place or more nimble. That's not a word I was going to say. Nimbility, more agility with handling things that pop up like this. Are you seeing that?
- [25:22]
C
Well, I think we can see a significantly increased level of volatility and pretty much for the last 10 years, and I recall when we started writing the State of Fashion Report, that volatility was one of the first terms and it somehow repeated every year because there was another crisis followed by another crisis. So I think to a certain extent, I would argue that management, not only in fashion and luxury, but definitely in fashion and luxury, have found ways to deal with the increased levels of volatility. And we had plenty, and I think we've survived a pandemic and we thought it would take five years and, and it was two and a half. We had a war in Ukraine or we still have a war in Ukraine and have the Red Sea crisis, which led to rerouting and led to changes in supply chain. I think in general, supply chains, in particular for mass market products, have been tested on many, many occasions in the last few years. And I think the positive thing is companies find ways to deal with that. Management becomes more flexibility. But it also means that you need to keep some buffers, you need to keep cash for those situations. The other effect that comes with it is volatility is not a good basis to do long term investments. And I think we've seen that with the whole tariff chaos over the last 12 months. That was not necessarily inviting the fashion and luxury goods industry to make investments in the United States. If you don't know whether your product will be X percent more expensive tomorrow and it could have been changed already the week after, that is not a good basis to invest into DCs, into stores, into local offices, or even into local production. Yeah, because you cannot even bank on the fact that the tariff will stay in place, which the Supreme Court just recently has proved. And I think this climate of volatility, of unpredictability, is not good for the industry. And we should also assume this Costs the industry a few percentage points of growth and probably also of bottom line every year. But in a way that's the new normal. It's not only the us, it's also other regions. It's also happening in the production countries. If you think about Bangladesh and the political changes we've seen there and it's also in some of the destination markets. Think about China, think about India. That was supposed to be the big growth engine for this year. Was it already for last year? We've probably already forgotten that. So in that respect I think it has become much more challenging and more demanding. And I think plans that used to be five, six, seven years are now one to three years. And that is a challenge in itself
- [28:49]
B
from my side. I think the most interesting thing here is I guess the long term effects. I'm not even touching on the fact that with 20% of the global oil flowing through the Strait of Hormuz, is there going to be an impact on polyester production? How is that going to be affecting fashion brands? So much of the product is made out of that material nowadays and that hasn't even been scratched in surface. And all of those stock levels could potentially increase the price of the product too, which is happening at the same time as there is a cost of living crisis globally I'd say and most people are not willing to pay more than is needed. So I'm really interested to kind of see the way that this kind of plays out both from a kind of geopolitical perspective but also how it will affect fashion long term. Because every time that there is another crisis it does end up is changing the way the industry operates.
- [29:47]
C
No, and I fully agree. I think, and that's a bit what I wanted to say earlier. I think we've only seen first order effects. There's second and even third order effects. It could be man made fibers. I think we clearly already see the impact on logistic costs. Air freight is already up. It also going to have an impact on shipping rates. And I think the energy crisis in some of the production countries will also have an impact impact if we lose capacity in those places. So this is all happening on the supply side. You said it. I think the demand side is also unclear. And I think an interesting question to have is what would happen if. Let's assume it ends tomorrow and it ends in five days. And I think even then we will see some effects on the energy prices at least what I read, what I hear is I think it could stay higher than the $60 a barrel we had before it started. That could have a negative impact on GDP growth, production, cost and all the effects. Not probably not as bad as if it drags on and continues. I think that's the one side of it. And I think for the gcc, assume there's a ceasefire, there's a peace deal, there is stability and I think that's really the prerequisite. I think the worst thing is that the insecurity prevails, that you have one or two rockets a month. All of that, that would be really, really bad because I don't think that people in particular tourists don't get used to to interceptions and anything like that. But let's assume we would get that stability. I think the region will do a very good job to bring back investors, to bring back consumers. We've seen them doing that during COVID right after Covid. They have the funds to do it. They clearly have a motivation to do it. So I think that is what keeps me positive to a certain extent. And I think that is also what I hear when people say, oh, I think probably the pre summer and summer are gone as a business season, but let's hope for the autumn I think we probably will see that the airline carriers will have special deals to fly to the Gulf, we will have all the hotels that will make an effort, we will have the different countries making their individual efforts and events and all of the activation. So I think if we get to that point, and I think also from a very human side of things, ignoring the fashion luxury problems here and we should all hope it comes to an end very quickly and we see some of that magic coming back because that would be very good for the region, for the people and it would also be good for fashion and luxury.
- [33:11]
A
I was going to ask you a wrap up summary kind of question, but I feel like that was a great way to end it. So maybe we just stop right there. But Achim, thank you so much for being here and for answering all of our questions. I know this is, I mean it's hard to predict the future, you know, with any topic but war in particular, even more volatile than many of the other crises that have affected the fashion and luxury industry in the last few years. So I appreciate you sharing your insights and thank you for being on the Glossy podcast with us.
- [33:41]
C
Thanks a lot for having me.
- [33:47]
A
And thank you for listening to the Glossy podcast. Don't forget to give us a rating and a review on Apple Podcasts or Spotify, wherever you listen to this, because that helps us out so much. And don't forget to subscribe to the Glossy podcast to hear interviews with industry insiders, and we can review segments where we break down the news. The new episodes come out every Friday. Until the next time. Thanks for listening.