Understanding the real potential of Azerbaijan’s luxury market

With less than 2,000 HNWI luxury consumers of which 70% make their purchases of luxury branded goods abroad, especially Milan, London and Dubai, less than 5% affluent incoming tourists who shop for luxury goods and services, Azerbaijan’s seemingly booming luxury market needs to be put in perspective, thus understanding the real potential of the local luxury market.

The fact that only one major international luxury brand, Christian Dior, operates directly in Azerbaijan is also an indicator of the dominance of the two local luxury retailers who operate over 34 luxury mono-brand stores in the capital of Baku, the only notable absentees being Prada, Hermes, Chanel and Ralph Lauren.

Given the current structure of the local luxury retail market, which reminds me of Moscow 10 years ago, the transition from franchised mono-brand stores to direct operations seems may equally hard, at least not justifiable financially for the next 3 years away. The two local luxury retailers command a monopoly not only in terms of logistics but also they also control key real estate locations, making it impossible for potential newcomers (direct operations) to secure prime locations.

Having spent over a week in Baku, interacting with key luxury industry players I also understood how artificial the actual operations of existing stores is. Local retailer may pay the merchandise they ordered, yet over 30% end up in outlet shopping or even abroad through grey channels.

A key factor hindering a feasible development of the luxury market is pricing, luxury good being on average at least 30% higher than those in Milan or London. At first glance, such a price difference should not have such an impact, considering both existing local luxury retailers paying minimal rents. Salaries of luxury sales personnel are also lower than abroad, hence another reason for maintaing the

DIOR store Baku

pricing level.

Future  luxury retail developments such as the island on Baku Bay or the shopping centre at the Fairmont Baku seem entirely unjustified and unfeasible, already some of the existing luxury brands operating more than one location considering the total sales of the 3 mono-brand stores in Baku hardly reaches the 2011 yearly turnover of one mono-brand of the same brand in Kiev, and is 20% lower than in Istanbul.

Over-saturated luxury brand present is prediominant in fashion, with Gucci, Armani,  Dolce & Gabbana each operating more than 2 franchised mono-brand stores, within a radius of less than 10 km. Best represented fashion brands for ladies (DIOR), for men ISAIA. The luxury menswear segment in Azerbaijan is probably the most feasible and successfull, with all major specialized menswear luxury houses present. There is afterall, a constatly growing segment of affluent men (entrepreneurs, politicians, officials, top executives in multintionals) who are patrons of these stores, and in many cases, due to their size specifics prefer to buy locally.

The second most saturated luxury sector is hospitality, with 4 luxury openings of hotels just in the past 3 years (totalling over 1,200 rooms) and an additional 1,000 luxury rooms expected to be delivered within the next two years. The lack of real tourism, this has been generating very low occupancy rates and the opening of the additional hotels putting even more pressure on operators. InterContinental, Swissotel, Kempinski (second one) Ritz Carlton are among the hotels joining Four Seasons, Fairmont, JW Marriott, Jumeirah, Kempinski.

The countryside and climate could, with a sensible tourism strategy attract directly paying tourists, and not the present corporate or conventions/fairs attendees whose participation is paid by the organizers, in most cases a government body. Instead of aiming for Qatar’s model, Azerbaijan should aim for the nearby Georgia example, which lax visa (Azerbaijan’s visa still needs at least a week to process) , competitive pricing in hotels, restaurants, excellent air-infrastructure (Azerbaijan still keeps a close lid over liberalization of flights. Instead of aiming for European visitors, Georgia attracts a large number of the wealthy Iranians, Armenians and Turkish.

Luxury lifestyle events such as performig arts, gala events, charity events remain scarce, threfore, leaving little motivation for consumers to show off their attires. There are very few fine dining events and few lifestyle sports such as polo, golf etc.

The most developed luxury sector in Azerbaijan is luxury cars, locals being avid for their luxury SUV. Among the best selling luxury car brands: Bentley, Porsche, Audi, BMW, Mercedes Benz etc. However even the luxury cars sector is being affected by the grey market, with individuals placing bespoke orders abroad for certain clients, and importing the cars as a private entity. Although, there could be a price difference of up to 20%, such grey orders have began to lose steam, as consumers are more drawn to purchasing their cars from authorized dealers who would provide warranty and after sale.

All in all , Azerbaijan is on a positive path and I could notice many changes at governmental and political levels, driven at boosting the majority poor class, the country having silently learned from conflicts such as Turkey, Syria or even Bahrain. The estimated total value of Azerbaijan’s luxury market in 2012 is estimated at 120 million euro (excluding hotels) and projected growth rate is just under 5% for 2013

Oliver Petcu in Baku