Mongolia, the next Qatar? Luxury retailers look for untapped markets in the economic recession

When I heard that Louis VuittonLouis Vuitton was opening a store in Mongolia’s capital, Ulaanbaatar, last month I was completely intrigued by this unexpected announcement. So I decided to research and came across some interesting information that has shed light not only onto Louis Vuitton’s decision but the luxury market as a whole.

The economic crisis has hit the luxury goods market hard. Houses such as Versace closed stores in Japan and Louis Vuitton shelved its Ginza, Tokyo opening. Moscow also saw brands such as Stella McCartneyStella McCartney, Alexander McQueenAlexander McQueen, and Lanvin close. With spending on luxury goods down across the world, luxury brands are increasingly looking far beyond New York, London or Paris for revenue to less familiar locales such as Almaty, Kazakhstan; Shenzhen in China’s Guangdong province and Ulaanbaatar, Mongolia. These countries are generating revenues from energy and manufacturing, and thus have small communities of people with extreme wealth. Therefore, these luxury brands are targeting these pockets of wealth.

Louis Vuitton followed this trend by opening its store in Ulaanbaatar, the capital of Mongolia, on October 23. Mongolia is an Asian country of 2.7 million people with extensive mineral resources but has only an average per capita annual income of just over $1,800 USD. Ulaanbaatar had a 2008 population of just over 1 million. Most of its young residents are the first generation of their family to be born or grow up in the city.

Yves Carcelle, chairman of Louis Vuitton, illuminated their decision to open in Ulaanbaatar by stating "The desire for luxury is more and more universal so the luxury sector has to reach its clients around the world".

So why target these new markets? As the economic recession worsens for the commercial real estate sector, especially in the west, luxury brands have to find new ways to survive and thrive – either through targeting new markets or adding new concepts. It appears they have chosen to target new markets.
A recent study by Bain & Co showed luxury sales this year will drop by 16% in North America, 10% in Japan and 8% in Europe compared to last year. In the rest of Asia however, sales are set to grow by 10%. Of the 300 luxury store openings in 2009, 15% will be in China, 25% in other Asian countries, 30% in the Middle East, and 15% in Eastern Europe and the Middle East. In contrast, just 15% will be in Western markets. However what the study does not show is that many of these opening are a result of several years of negotiations and leases with large termination fees. The true indicator of the luxury industry health will come in the next few years as the commercial real estate industry continues to deal with the economic recession ramifications.

Besides the major cosmopolitan cities, most of Asia has been untapped by luxury markets; partly due to accessibility and development. Much of Central Asia was isolated from these western luxury brands until the early 1990’s when Communism fell.

The digital revolution has also enabled luxury brands to enter the lives of new markets and consumers. In essence, the internet and media with it global reach has “increased demand by acting as a catalyst for markets” explained Bruno Pavlovsky of Chanel.

While it seems odd that luxury and European stores would be well adapted to Mongolians and their lifestyle, Mongolians have a long history of embracing other cultures. For instance, the Mongol army not only conquered the better part of the known world at the time, but they also embraced and developed the cultures they came across. Under the Mongols, new technologies, various commodities and ideologies were disseminated and exchanged across Eurasia.

Already Mongolia has an impressive number of international brands with Adidas, Mercedes Benz, Dior, Esprit, Swarovski, BMW, Land Rover, Lavazzia and many more. A Hilton and a Shangri La hotels are scheduled to open in the next few years. Additionally, Salvatore FerragamoSalvatore Ferragamo is also looking into opening a branch in Mongolia.

2010 will see the opening of other luxury brand stores, including Hugo BossHugo Boss, Ermenegildo ZegnaErmenegildo Zegna, Emporio Armani, Burberry and Versace. Gucci has already started advertising its new scent on TV, so perhaps a Gucci store is in the works.

While these brands have very different target consumers in their more developed markets, in Mongolia they may have to compete for the same handful of customers who can afford their products and are brand-conscious enough to purchase them.

Apparently, there seems to be sufficient number of high-net-worth Mongolian individuals for the luxury brands. Likewise, the LV store is another additional vote of confidence in the dynamic growth of Mongolia that some predicted could become the next Qatar. The internet is already filled with companies offering luxury vacations to Mongolia.