Do you know if it's real?

The Middle East is a lucrative market for luxury products but the industry faces its fair share of challenges, most notably the issue of counterfeiting

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By  Massoud Derhally Published  March 10, 2002

|~||~||~|The luxury goods market in the Middle East has traditionally been a lucrative market with Saudi Arabia at the forefront given the purchasing power 25 million people and an average per capita income of US$7,500. That said though the year 2001 has brought mixed results for retailers, distributors and manufacturers alike. The economic downturn in the U.S. and subsequently the September 11 attacks triggered a slowdown in the world tourism and travel markets.

In general, according to Generation Group's Jan Nygren, Middle East duty free sales have seen the highest rate of growth in the world last year. Middle East duty free sales doubled their rate of growth in 2001 reaching US$748.1 million, an increase of 6.2% on 2000. Global sales of Middle East duty free markets should double to 8% by 2010, according to Nygren.

Of the merchandise sold in Middle East duty free markets, luxury goods come in second after tobacco products, according to Generation Group. But its not just duty free markets that illustrate the scale of the luxury goods market in the Middle East. One could mention the cosmetic and perfume market, which have traditionally topped US$800 in sales, or the eyewear market, which is estimated by some to be worth US$2billion. Out of the US$1.6 billion worth of Italian exports to the UAE, jewellery and gold account for US$376 million.

According to the Italian Trade Commission in Dubai, "The total turnover of the Italian jewellery industry amounted in year 2000 to about 7 billion US dollars, of which 4.5 billion was due to the export markets; the main destination of our sales abroad being USA, followed by the U.A.E., which has recently become the second market in order of importance, overtaking Switzerland and Hong Kong." The UAE has imported jewellery from Italy ranging from 433 billion Italian liras in import in 1995 to 788 billion Italian liras in the year 2000 (approximately US$400 million dollars), according to the commission.
Yet in terms of general sales in the luxury goods market, the Middle East could have performed better, according to conglomerates that are engaged in retail. Moreover, the issue of counterfeiting remains to be a sticky issue that manufacturers, retailers and distributors would like to see dealt with once and for all.

The Rivoli Group, a Dubai based company that has expanded its operations to include Qatar and Bahrain has been affected by last year's events. The year 2001 was going to be a good year in terms of year over year growth for the group that has 28 Rivoli stores today and 39 other affiliated stores it has branded as Hour Choice shops. "We had a large number of outlets that we were rolling out, additional product categories that we were getting involved in and we were also looking at sizeable growth organically within the key brands that we carry," says Ramesh Prabhakar, CEO of Rivoli group.

According to Prabhakar, the group was online in the first quarter with the incremental business that it aimed for in 2001. But the company was pretty flat from April to July 2000, and that was because of a global economic downturn, and the anxieties that prevailed with the September 11 attacks. The group dropped even further in its sales from the period of September 11 to December 31, according to Prabhakar.

The "September 11 event and the subsequent quarter only further deteriorated our overall business achievements," says Prabhakar, and, "yes we did take a double digit beating in the UAE in particular and also in the rest of the Gulf. We should have grown in 2000 but we were down around 15-18%." According to Prabhakar, that decline was a result of the Rivoli's product categories, like Mont Blanc pens or Cartier frames which are primarily servicing international business or leisure travellers that come to Dubai for a holiday or a convention.

However, for Raymond Weil, the watch company that recently re-launched its boutique in Dubai's City Centre, the story is a little different than Rivoli. The company, which has a deep-rooted relationship with the region and the UAE, was affected by September 11. However the tide turned in its favour towards the end of 2001, according to Olivier Bernheim, president and CEO of Raymond Weil. The company, which was established in the UAE in 1976 a year after being founded, partnered with al Futtaim Watches and considers the UAE market as an important outlet for its line of merchandise.

"The Middle East makes up 25% of Raymond Weil's sales worldwide. We have always evolved in relation to our roots and in the UAE we have faithful customers," Bernheim told Arabian Business. "Dubai is a niche for the whole region. The big difference between 1975 and 2002 is that you have now an important affluent young local clientele that look at buying for themselves an attractive product such as the new and contemporary Othello watch we recently introduced," explained Bernheim. High margins and high visibility are elements that are needed in order to invest substantially and be able to attract the end consumer, according to Bernheim.
If Raymond Weil's sales from the Middle East seem surprising, they shouldn't be. According to the Federation of the Swiss Watch Industry, the Middle East as a market accounted for 5.3% of the world watch market in 1999 and 2000. The UAE and Saudi Arabia were among the top 15 countries to which Swiss watches are exported with the UAE accounting for 1.7% and KSA 1.4% of the total.

Success, of course, breeds envy and a major challenge that the luxury industry faces is counterfeiting. The Middle East market like other markets in the world has its share of fake Rolex, Cartier and Longines watches, Louis Vuitton bags, and Levis and Calvin Klein jeans. Yet, according to the London based Al Hayat newspaper, Saudi Arabian businesses that act, as agents for foreign merchandise are missing out on potential sales of SR1 billion because of counterfeits. Moreover, according to 40 percent of all consumer goods on the local market are counterfeit, and 10-15% of all imports reaching Saudi markets are believed to be carrying fake trademarks.

"We have to fight and oppose counterfeiting and often in the Middle East and with no doubt in Saudi Arabia we are confronted with an absence of legal protection for the manufacturer and this opens up the region to counterfeiting. I believe that if the region looks at us as investors then the rulers should look at protecting the manufacturer against counterfeiting in the GCC and in Saudi Arabia in particular," says Bernheim.

Aside from infringing on intellectual property rights and not adhering with laws of the World Trade Organisation (WTO), counterfeiting results in a loss of direct sales. The consumer who buys a branded product believing it to be genuine will naturally blame that brand manufacturer when it fails. The producer thus loses both reputation and future sales potential.

The Middle East is a large market for famous jeweller Cartier. Yet according to its Middle East headquarters in Dubai, "Counterfeiting is an issue for us, we see it happening with our watches and leather goods." "We have had cases whereby people come to our store thinking they have a real Cartier watch-and we see that it is not. Or it has parts inside that have been tampered with or are not from Cartier. This is an issue that Cartier is trying to handle on an international scale, as it is very common in the Asian markets."

But the problem is not just prevalent in the Middle East. It extends to Europe, North America and the Far East. Take, for instance, the web site, which offered a variety of imitation products that were knock offs of brands like Cartier and Mont Blanc. Had Cartier itself not hired private investigators, and taken legal action its reputation would have suffered and it would have forgone sales as a result of the fake watches.

According to Prabhakar, counterfeiting is growing problem that has always existed in one form or the other. Whereas, for a long time it was small and people ignored it, today the problem is fairly sizeable. "It is available far more widely and the copies and fakes are far better and the process of counterfeiting has become more refined. The problem is much bigger currently than say three or five years ago and the principals and manufacturers are also aware of this problem," says Prabhakar.

However, governments in the Middle East, have been receptive and proactive to complaints on counterfeiting, and the legal framework to tackle counterfeiting by protecting trade marks, copyright, designs and patents is now in place in the most of the GCC countries, following the TRIPS agreement (Trade Related Aspects of Intellectual Property Rights) in the World Trade Organisation. But their still remains room for improvement on the enforcement front.
"There is a distinct focus in the UAE to rectify the situation," says Prabhakar, "because there is a lot of contraband here." Mohammed Hilal Muroushedi, the director of commercial compliance at the Dubai Department of Economic Development (DED) told Gulf News that, "Counterfeiters of goods were given grace periods to get rid of fake goods. There were over 70 violations of brand names last year, with a 40 percent drop expected this year."

According to Prabhakar, the Federation of Swiss Watch Industry (FSWI) was in Dubai a few weeks ago talking to the municipality to determine how to deal with the issue of counterfeiting. Francois Habersaat, the FSWI president, highlighted the importance of the UAE market to the Swiss watch industry, with Dubai alone importing 50 million pieces per year.

According to the Consulate General of Switzerland, Switzerland exported US$109 million in watches to the Middle East in 2000 and US$106 million in 2001. According to Khaleej Times, Hamad Fadhi Al Mazroui, acting director general of Dubai Customs, said that Dubai Customs had destroyed over 51,000 counterfeit watches, which included 17,000 fake Rolex and 9,000 Omegas.

More importantly, there is a move by producers to actually have a representative office here of Swiss watch manufacturers, in the hope that they will actually police the operations. Prabhakar says, "We as a company are hit in several brands: the biggest is Longines followed by Mont Blanc and other brands and the greater the brand the greater the opportunity for the range of models that are counterfeited." -by Massoud Derhally

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