June in Dubai bring two things: Scorching hot weather, and a month-long shopping festival offering discounts on even haute couture fashion brands. Known as the Dubai Shopping Festival, the event has been an annual tourist draw to this glitzy sheikhdom. But this year, Dubai’s public relations machine has been promoting its shopping malls months in advance, and to a very specific clientele — well-heeled tourists from China and Eastern Europe.

According to property firm Jones Lang Lasalle, 214,000 Chinese tourists visited Dubai in 2011, a 50% increase from the previous year. They opened their wallets too — up to 25% of luxury goods sold in the Mall of the Emirates were bought by Chinese tourists, according to Iyad Malas, chief executive officer of the Majid Al Futtaim group, in the International Herald Tribune.

Repeat visitors will find even more offerings. The Mall of The Emirates, best known for its indoor ski slope, recently went through an expansion to add more of the world’s leading high end fashion brands, including Dior, Louboutin and Brioni boutiques. And in time for the shopping festival, the mall added a new Prada boutique — one that happens to be the third-largest Prada boutique in the world.

Despite fears of eurozone instability and continued Arab unrest, the Middle East is a robust market for luxury retailers, and Dubai acts a regional hub, possessing a local market of wealthy Emiratis and expatriates, and a regular churn of free-spending, deep-pocketed tourists. Dubai is now second only to London as the most attractive city for international retailers, according to property adviser CBRE. The metropolis is home to over 25 shopping malls, including the world’s largest shopping center in terms of total area, and retail accounts for 30% of its GDP.

"Luxury has been growing at a rate between 10% and 12% in the Middle East in recent years," according to Frank Pinto, spokesperson for Bain & Company. Many analysts predict the luxury retail industry in the Middle East will remain strong for the foreseeable future. Market experts expect the healthy growth rate to be maintained until at least 2014 in the Middle East. Retail research company Verdict goes so far as to project the amount of spending on luxury goods to actually double by 2015.

Wharton marketing professor Jonah Berger is not surprised. "Regardless of the economy, buying luxury goods has always been a way for consumers to distinguish themselves," he notes. "To show that they are wealthy, to show that they have taste, and to show that they are fashionable. In the Middle East, it is a way for consumers to show that they are worldly and connected to fashion movements around the world."

What Recession?

The Middle East’s wealthy find consider shopping to be an important social activity. A recent survey by Chalhoub Group revealed that 70% of survey respondents shopped with friends and 40% with sisters and mothers. The survey found that having the right logo and fashion brand displayed on handbags or clothes is particularly important. For example, up to 90% of people surveyed in Riyadh, Saudi Arabia, believed it was important to have a prestigious logo displayed on their clothing or accessories.

The global luxury retail industry is expected to exceed US$250 billion by the end of the year, according to a report by Bain & Company and Italian luxury retail consortium Fondazione Altagamma. Approximately 28% of sales for fashion retailers stem from foreign operations, more than any other product sectors, according to a recent Deloitte Global Economic Outlook report.

In the same study, Deloitte found nowhere else could match the retail sales growth in Middle East North Africa (MENA), which posted a hike of 13.2% last year. In addition, the top 250 retailers experienced 41.7% of sales in MENA, the largest share of sales around the globe. It comes as no surprise that the two emerging economic regions also generated the highest compound annual growth rate over the 2005 to 2010 period of any region around the world.

These figures reaffirm what Luxury Movement, an international boutique management advisory firm based in Dubai, has concluded: The "richest countries in the Arab market were not as severely affected by the recent economic crisis than the West." Other retailing groups in the Middle East agree. Abu Dhabi in the UAE, Riyadh in Saudi Arabia, and Doha in Qatar are the Gulf cities showing the most promise, reports the Chalhoub Group, a leading distributor and retailer in the Middle East. Additionally, in spite of the recent unrest, Egypt and Iran are also countries with retail potential due to its young population and rapid growth, according to Luxury Movement.

While the Middle East luxury retail market flourishes, the rest of the world, with the exception of China and other parts of Asia, is experiencing a more deflated growth rate. The traditional home for couture, Europe, is facing more and more monetary challenges. In 2012, the European luxury brand market is growing between 2% and 4% with more expected uncertainty around local consumption, given that the euro zone crisis is still unfolding, according to Bain & Company.

China is clearly the leader in growth in the luxury retail sector, averaging between 18% and 22%, but the country is showing signs of caution. Even with a slowing Chinese economy, it’s still growing four to five times faster than the U.S. and Western Europe. Clearly if you’re a luxury retailer, you’re looking to grow your business in emerging markets rather than mature markets like Europe, America and Japan. (American shoppers in the Middle East usually are hesitant to make a purchase, as items generally retail for higher prices than what they could get back home, particularly from outlet malls.)

"Luxury around the world continues to perform well but I think this region [the Middle East] is special," said David Macadam, regional director and head of retail at Jones Lang LaSalle in Arabian Business. "It goes from strength to strength here. In the last recession, the challenge for some of the lux retailers wasn’t so much lack of people buying, is was lack of product in their shops for people to purchase [after the retailers] decided to slow down production of some of their items. The lesson they learnt there was during a recessions, things don’t really slow down that much."

Key Growth Area

Even in a bearish global economy, luxury retailers can profit if they focus their energies on emerging markets, stated Ira Kalish, director of consumer business for Deloitte Research, in a press release. "The global economy is decelerating with growth in 2012 likely to be slower than in 2011. The most significant silver lining is the long term. Even though the economic environment in 2012 will be difficult, the long-term outlook for the global economy remains good. Despite demographic and structural headwinds, the Middle East offer the possibility of stronger growth as well as new opportunities for the world’s leading retailers."

International retailers have taken different approaches to the competitive and lucrative Middle East market, seeking strategic partnerships and high traffic venues.

British luxury brand Burberry recently set up a joint venture in the Middle East. They’ve also brought their Saudi Arabian stores under its direct control. According to Arabian Business, the Middle East is one of its strongest markets, helping to increase global sales by 30% last year. In 2011, Burberry also opened five regional stores to brace itself against slowing sales in mature markets.

Tiffany & Company, the American luxury jeweler, recently entered a joint venture with Damas Associates, who had previously ran their U.A.E. boutiques and purchased from Tiffany & Company on a wholesale basis.

French cosmetic maker Estee Lauder also reported a sales increase of more than 30%. "Despite the year’s turmoil in the [region], our sales rose as we rolled out more locally relevant products and services," said an Estee Lauder spokesperson in Arabian Business.

Earlier this year, kate spade new york opened its first regional store in the 360 Mall in Kuwait followed by another one in the Dubai Mall, in partnership with Jashanmal Group. Craig Leavitt, CEO of kate spade new york, said in a press release: "We are confident that the Middle East market will be a key growth area for us, and intend to have a meaningful presence in the region."

British fashion brand L.K. Bennett opened its first Middle East store in Dubai’s Mirdif City Centre with franchise partner Jashanmal Group in late 2011. "With Jashanmal, we have the idea of opening two or three more stores in Dubai. We have a plan for Abu Dhabi and we are also looking at Kuwait," said Robert Bensoussan, executive chairman of L.K. Bennett, in a newspaper report. "With another partner we are looking at Qatar, maybe Egypt and we are discussing with a bunch of potential partners for Saudi Arabia and Lebanon," he added. Over the next three to five years, the retailer plans to open up to 15 more stores across the Middle East, according to Arabian Business.

Explaining why L.K. Bennett is expanding internationally from their British base, Bensoussan said: "We have three clusters of foreign clients in London, which are very important; one is European clients, another is a big cluster of American clients, and we have a huge Middle Eastern clientele in our stores buying mostly shoes and bags. So it felt like a natural step to expand in the Middle East."