Chalhoub Group, one of the Arab world’s biggest franchise operators of luxury brands, expects its partnership with UK-based Farfetch to help it secure a larger slice of the Middle East’s $8 billion luxury retail market, where less than one per cent of sales are conducted online, its chief executive said.
On Thursday Chalhoub, whose portfolio of brands include Louis Vuitton, Christian Dior and Fendi, said it had entered into a joint venture agreement with Farfetch that will allow the Dubai-based company to feature some of its brands on its partner’s online platform. Farfetch, a luxury fashion retailer launched by Portuguese entrepreneur Jose Neves in 2008, will also open an office in Dubai to service the Middle East region. As part of the agreement, Chalhoub will share its distribution and marketing services with Farfetch’s e-commerce platform and curate content in Arabic. Both companies declined to disclose the value of the partnership.
“Probably less than half of one per cent of the luxury business into the Middle East are being done through the digital platform, so the opportunity is huge and the gap is huge,” said Patrick Chalhoub, chief executive of the group, estimating the overall Middle East luxury retail market to hover around $8 billion. “Gradually we will try to move as much as we can of our retail spaces into the Farfetch platform.”
The retail market in the Middle East is heating up in the wake of Amazon's $580 million buyout of Souq last year and the $1 billion launch of e-retailer Noon, a joint venture between a group of investors led by UAE businessman Mohamed Alabbar and the Public Investment Fund, the sovereign wealth fund of Saudi Arabia.
Alabbar is also an investor with Farfetch rival, Yoox Net-a-Porter, in which he holds a 4 per cent stake. In 2016 Alabbar said he would bring the Milan-based online luxury fashion retailer to the region, through his 40 per cent ownership of the €130m joint venture with Ynap. The joint venture is expected to launch this year, with its full range of products expected in early 2019, Ynap’s chief executive, Federico Marchetti said in May last year.
Mr Neves, who received last year a $397 million investment into Farfetch from China’s second-largest e-commerce player JD.com, dismissed the competition in the Middle East.
“The Middle East was the one market in the top ten where we didn’t have a localized process,” said Mr Neves. “With Chalhoub group’s incredible foot print in the region, which is 750 retail stores, this means that we will be absolutely unrivalled in terms of range of products.”
The luxury fashion retail market saw sales dip between 2 to 5 per cent in 2017 from 2016 but is expected to stabilise this year, according to Mr Chalhoub.
“Our feeling for 2018 we'll have a stable market, hopefully a little bit plus but we really need to make sure we are attractive to the younger generation and the younger generation ….is perhaps more digitally connected and digitally savvy [than the older generation],” he said.
A high internet penetration rate, a young population and high per capita income particularly in the Arabian Gulf region is helping fuel the move to online purchases.
"Convenience, attractive pricing, and wider product selection," are the main factors driving online fashion sales said Diana Jarmalaite, an analyst with Euromonitor International. "In addition, the increasing banking population across the globe and MENA region, influence the online market growth.”
Overall, Middle East and Africa online and offline fashion sales are expected to pick up this year, growing 5-6 per cent year-on-year, versus a global sales growth of 3.5-4.5 per cent, with an expected uptick in online sales, according to McKinsey & Co.
“Digital-first e-commerce companies are continuing to raise the bar and providing a better and better customer experience online along the full customer journey (from search to delivery and return), compelling more consumers to purchase online,” said Sara Kappelmark, a partner at McKinsey.