Deluxe

by Dana Thomas

  At first, wealthy Russians spent their wealth overseas. They bought the Côte d’Azur’s grandest villas, Ferraris by the dozen, French couture by the collection. So many wealthy Russians have settled in London, Europe’s primary financial center, that it is sometimes referred to in the British press as Londongrad or Moscow-on-Thames. The chic neighborhood of Chelsea has been dubbed “Chelsky” and the luxury department store Harvey Nichols is now known as “Harvey Nicholsky.” When I asked a Dior employee at the avenue Montaigne store in Paris who were the best customers, she told me without hesitation, “Russians.” They came in regularly and dropped $10,000 to $20,000 in an hour. The salesgirls who speak Russian were among the store’s busiest. At many of Armani’s ready-to-wear stores, Russians bought more than Americans and Japanese.

  Now luxury brands are bringing their wares to Moscow, taking advantage of the extraordinary baroque architecture erected when luxury last flourished in the Russian Empire, during the Romanov period. Outside of Moscow and Saint Petersburg, there is no wealth—Russian’s minimum wage was about $27 a month in 2005, and wage arrears in 2004 were $820 million—and therefore no luxury market. But there is enough money in Moscow to make luxury tycoons rich and happy. After the 1998 financial crisis that led to the collapse and disappearance of most banks, Russians hoarded an estimated $50 billion in cash, much of which they now spend in luxury brand stores in force. Merrill Lynch analysts have called Russia “a young consumption economy unwilling to save.” Pambiamco Consultants, a top fashion marketing and strategy firm in Milan, stated in 2004 that the luxury market in Russia was about $600 million, with an annual increase of 6 to 8 percent. According to AT Kearney, a Chicago-based consulting firm, Moscow was the most attractive emerging market for retailers in 2003 and 2004, and second, after India, in 2005. By 2009, analysts believe Russians will account for 7 percent of all luxury brand sales.

  Across Red Square from the Kremlin and Lenin’s Tomb is GUM, the historic nineteenth-century galleria that, during the Communist era, was the State Universal Store. It sold government-issued clothes and food to locals and matryoshka nesting dolls to tourists, and was known for its empty shelves and grumpy personnel. Today it is a luxury mall. Among the tenants along the marble walkway are Louis Vuitton, Dior, and Moschino. For the Dior opening in October 2006, actress Sharon Stone cut the ribbon with Christian Dior’s own scissors. Then the company hosted a lavish cocktail party for 600 and, later, an intimate dinner of Beluga caviar, roasted lamb, Belvedere vodka, and vintage Dom Perignon for 250 at Turandot, Moscow’s new gold-encrusted imperial Asian restaurant.

  Nearby, Mercury Group built a one-hundred-thousand-square-foot arcade-like mall in an old cobblestone street called Tretyakovsky Proyezd (Tretyakov Drive). There you’ll find wildly rich Russians cleaning out dozens of luxury brand boutiques, including Gucci, Prada, Dolce & Gabanna, and a three-floor Armani spread, replete with a VIP salon. In the evening, they return to Tretyakovsky Proyezd in their darkened-windowed Mercedes SUVs, dressed in their luxury brand purchases, to dine at Mercury’s haute-priced haute cuisine restaurant, Tretyakov. “We are building Via Montenapoleone,” Mercury’s vice president and retail director, Alla Verber, said, referring to the luxury shopping street in Milan. “We deal only in luxury, luxury, luxury. That means luxury cars, luxury fashion, luxury jewelry, luxury food and luxury home products. We are a luxury empire.”

  A thirty-minute drive from downtown Moscow is Crocus City, a gigantic 690,000-square-foot luxury mall that opened in 2002 and has 180 boutiques, including Armani, Pucci, Céline, Chloé, Versace, and Gianfranco Ferré. “Before we designed Crocus City, we went to Bal Harbour [in Miami] and Short Hills [New Jersey], and we visited luxury malls across Europe. Then we combined everything we liked together in one vision,” Crocus International co-owner and commercial director Emin Agalarov said. “Crocus City is a place where you can walk in on a cold day and find yourself in a tropical paradise where you can shop, relax and be entertained. There’s a huge swimming pool with professional synchronized swimmers who do shows every three hours. There’s a river that streams down the limestone hallways.” It is in the midst of expanding, adding another 120 boutiques, a thousand-room hotel that Agalarov said will be like “the Venetian or the Bellagio, with Russia’s biggest casino, and…Russia’s biggest movie theater with 20 to 25 screens.” When finished in 2010, Crocus City will encompass 10.8 million square feet.

  The Russian expansion is working. Christian Dior reported sales growth there of more than 50 percent in 2004, and said that its Moscow flagship was the fifth most profitable of its 170 stores. Louis Vuitton CEO Yves Carcelle said that the company sells more ready-to-wear in Moscow than anywhere else in the world. No wonder Christian Lacroix took his haute couture collection to Saint Petersburg in 2005. “And it sold very well,” a Lacroix spokeswoman told me cheerfully.

  “IF YOU THINK CHINA is something,” Yves Carcelle told me, “wait until you see India.”

  Unlike Russia or China, which both underwent communist periods that all but erased the social and economic class system and cultural heritage, India has always had a wealthy elite that lived well. The maharajas often shopped in Europe and patronized luxury companies, including Louis Vuitton, Chanel, and Cartier, which established the names back home.

  What has changed in India in the last few years is the economic rise of the Middle Class. Companies around the world have outsourced to India, creating jobs and an economic boom. In 2005, analysts estimated that twenty-two million Indians join the middle class each year. For them, just as for middle-market Americans, Japanese, Chinese, and others, logo-covered luxury brands are symbols of their new prosperity. “People have the money and they want to spend it, not save it,” said Rachna Mehra, account executive for business development for Nicole Miller in India.

  And luxury brands have flocked to India to meet the new demand. By 2006, Louis Vuitton had two stores there, one in the Oberoi Hotel in Delhi and another in the swank Taj Mahal Hotel in Mumbai. Chanel inaugurated its first boutique there, designed by Peter Marino, in April 2005 at New Delhi’s Imperial Hotel. The French press reported that its supply of No. 5 sold out before the store even opened for business. Fendi opened a store in the Taj Mahal Hotel in November 2006 with accessories designer Silvia Venturini Fendi—mother of the Baguette bag—cutting the ribbon, followed by a gala dinner at the Taj Mahal Palace. Versace arrived in June 2006; Armani, Valentino, Ferragamo, and Hermès all have plans to expand there.

  According to banking analysts at Merrill Lynch, India has about five million luxury customers and is about ten years behind China in market development. As in China, the potential growth for the luxury sector in India is boundless. Both countries have more than one billion people and, combined, account for nearly 40 percent of the world’s population. Both have explosive economies and a new class of wealthy entrepreneurs who want to embody Western ideals and an emerging middle market with—as luxury executives like to say—aspiration. There are more than four hundred million with the means to spend on luxury and high-end goods, and says Mehra, “this 400 million is ripe to shop.”

  A study by Bain & Company consultants reported that luxury business in India increased by 25 percent in 2005, second in growth only to China. “The growth of luxury in India should be four times higher than the world average in the next five years,” Bain & Company reported in 2006. “The number of households with revenues higher than $230,000 a year should nearly triple between 2005 and 2010.” In 2006, India shoppers bought $434 million worth of luxury clothing and accessories, and that figure was expected to double to $800 million by 2010. Goldman Sachs reported that over the next fifty years, India will be the fastest-growing major economy in the world.

  What makes India easier for luxury brands to crack than China is its culture and its knowledge of Western luxury: it never closed its doors to the world. The most coveted luxury brand in India in 2006 was Gucci, followed in descending order by Armani, Dior, Versace, Vuitton, Ralph Lauren, Y
ves Saint Laurent, Chanel, and Prada, according to an ACNielsen study. “In just the last year, our client profile has definitely been expanding,” said Karen Wilson Kumar, of Louis Vuitton in India. “We still have a customer that travels widely and shops abroad. But we’re now seeing a new wave of clients that are young, upwardly mobile, double-income couples with expendable money. We’re also seeing a young generation that looks for the fashion side of Louis Vuitton—the new looks, brighter colors and latest bags. There are a lot of youngsters buying the pochette as their segue into Vuitton.” There is also a love and tradition of jewelry in India, particularly gold. Analysts at McKinsey & Company believe that sales of branded jewelry such as Cartier and Boucheron will increase by 40 percent annually, to more than $2 billion by 2010.

  The only hitch seems to be infrastructure. “The chance of an avenue Montaigne developing in India is very low,” said Prasanna Bhaskar, India retail manager for Louis Vuitton. “We do not have the kind of roads and promenades here that customers could easily walk down.” India does not have shiny, newly renovated cities like Shanghai or Moscow either. As Valentino Fashion Group CEO Michele Norsa noted, “When you come out of [Mumbai’s Taj Mahal Palace & Tower] or a store in New Delhi, the streets are congested and filthy.”

  Local developers are hoping to change that, or at least offer luxury brands an alternative. State governments are offering tax breaks and discounted loans to help developers fund the construction of malls across the country: more than 375 malls are slated to be completed by 2008. The finance ministry reported in 2006 that the country would receive $150 billion over the next five years for infrastructure improvements, and private construction companies have been busy building a $38 billion network of new roads. That said, analysts and luxury brands see India as a long-term market. “If you ask the firms that are already there, business isn’t that great,” Hermès International CEO Patrick Thomas said in 2006. “But the potential is there, and it will become an important market.”

  DOWN A SHORT, nondescript street just behind La Scala opera house in Milan is the epicenter of what’s next in luxury branding: the Bulgari Hotel. Housed in a former convent that had been bombed to bits during World War II and rebuilt in the charmless postwar style of public housing, the Bulgari has become, since its opening in May 2004, the preferred gathering place for the city’s chic and fashionable. There are only fifty-eight rooms, done up by renowned interior designer Antonio Citterio, with perks that were once de rigueur in luxury hotels: superthick doors that make the room truly soundproof, four-poster oak beds with feather bedding, oak-paneled walls, big bathrooms, and walk-in closets with beechwood hangers. There are modern touches, too, like a motion sensor in each room that lets housekeeping know when someone is there and a spa with a lap pool with gold-leaf tile steps. The Bulgari brand has a discreet presence: a catalog on the coffee table, Bulgari toiletries in the bath, Bulgari green tea candles on the bedside tables, which housekeeping lights for turn-down service. “It’s a PR machine for the brand,” Bulgari CEO Francesco Trapani said in 2005. “We do not expect that this will be a huge moneymaking venture. It’s more of an image thing.”

  Trapani is one of luxury’s most savvy executives. When he was hired by his uncles, Bulgari president Paolo Bulgari and vice president Nicola Bulgari, to become CEO in 1984, Trapani decided, like his fellow luxury tycoons, to take the one-hundred-year-old jewelry company that his great-grandfather Sotirio Bulgari founded to a broader market. He introduced lower-priced jewelry, watches, and perfume; made ad campaigns more accessible; revamped the vaultlike shops into airy, less intimidating spaces; expanded into new markets; and stuck prices next to items in window displays to show middle-market passersby that they, too, could afford Bulgari. In 1995, he listed 32 percent of the company on the Milan stock exchange. Two years later, he launched Bulgari leather goods, followed by boutiques dedicated solely to the new line. By 2005, accessories made up 8.4 percent of all Bulgari sales. In the ten years since Bulgari went public, turnover has increased four times, to more than $1 billion a year, (€919 million in 2005), and profit has risen five times, to $154 million (€116.4 million). “When I took over, we were not part of the big game,” Trapani says quite frankly. “Today we are.”

  Hotels were the next logical step. After all, tycoons like to boast that their companies aren’t brands, they are lifestyles, and their creative directors/designers are today’s ultimate arbiters of taste. If they can dress you and your home, why shouldn’t they envelop you on vacation, too? In 2000, Versace and the Australian property developer Sunland opened Palazzo Versace, a 205-room, 72-condo resort on the Gold Coast of Australia, with three restaurants and a private marina. The place is a temple to the Versace aesthetic, with neoclassical furnishings, parquet floors, and vibrant rococo-print drapes, bedcovers, sheets, and throw pillows. In late 2006, Versace and Sunland signed a deal to roll out another fourteen Palazzo Versaces in the next fifteen to thirty years, starting with Dubai in 2009. “Our hotels aren’t for business,” Versace CEO Giancarlo Di Risio said. “They’re luxury.”

  Giorgio Armani announced a licensing agreement with Dubai-based Emaar Properties in 2005 to develop a dozen Armani hotels and resorts. Armani himself will handle the design and decor; Emaar, which is investing $1 billion in the project, will manage. The first will open in Burj Dubai, the world’s tallest building, and the second in the Emporio Armani complex in Milan, both in 2008. Ferragamo has a handful of boutique hotels in Florence under the Lungarno brand, and Italian brands Missoni and Byblos are reportedly working on hotel projects. Miuccia Prada told me that she had been approached to do a Prada hotel but declined. “For me, doing decoration of a chain is not enough,” she told me. “We have to have something to say.”

  In 2001, Trapani signed a deal with Marriott: Bulgari would do the decor and Marriott’s Ritz-Carlton group would handle management. They opened the Milan hotel three years later, followed in 2006 by a plush resort in Bali. “We believed it was an innovative yet legitimate way of leveraging our brand and enhancing its awareness in the luxury market,” Trapani told me. “A hotel gives us the opportunity to serve our clientele better with a complete lifestyle experience.” In 2005, the Bulgari in Milan generated about $17.5 million (€15 million) in revenues. Bulgari’s 65 percent share—€9.6 million—was consolidated into its financial statements. Other projects include boutique hotels in London, Paris, New York, and Tokyo, and by the end of 2005, Trapani was in talks with Handel Lee to open a Bulgari hotel in Lee’s British consulate project in Shanghai.

  ON A FRISKY FRIDAY night in September 2004, Paris’s hip set flocked to the rooftop restaurant of the Centre Pompidou to celebrate fashion’s coolest new collaboration: Chanel designer Karl Lagerfeld and H&M, the Swedish low-priced retail chain. Like his work for Chanel, Lagerfeld’s H&M clothes were slick and savvy: skinny black pantsuits, crisp white shirts, mod shifts, and chiffonlike cocktail dresses. Unlike his Chanel pieces, however, they were all priced under $150—and most under $100. Lagerfeld wanted to prove that cheap can be fabulous, too. In the end, good fashion isn’t about price, he said, “It’s all about taste.”

  Since luxury broadened its reach to the middle market, it has encountered something it had not counted on: serious competition from “fast fashion” companies, such as H&M, Zara, Target, Mango, and Topshop, which produce trendy new clothes and accessories year round and ship to their stores weekly. Their secret weapon is computer technology. Zara uses data from its 426 stores to spot new trends and offers ten thousand new products a year. Topshop generates up to three hundred new designs a week. The shelf life of a garment has fallen from six months to a couple of weeks, creating what Vogue editor Anna Wintour calls “a seasonless cycle” for fashion.

  To compete with luxury fashion, fast fashion has enlisted the help of top designers. Target hired Issac Mizrahi; Topshop has had Hussein Chalayan and Sophia Kokosalaki; H&M brought in Lagerfeld, Stella McCartney, and Viktor & Rolf. Fashion darling Roland Mouret, who quit his ep
onymous London-based firm in 2005 after a dispute with its owners, designed a capsule collection for Gap, and in 2006, former Chloé designer Phoebe Philo was reported to be quietly consulting for the company, too.

  One snowy winter morning in 2006, I visited H&M’s marketing director, Jörgen Andersson, at the company’s modern Stockholm headquarters, to find out how luxury fast fashion works. Hennes & Mauritz—or H&M as it is known now—is a Swedish phenomenon. It started out in 1947 as a single store owned and run by an entrepreneur named Erling Persson in Västerås, a town about an hour’s drive from Stockholm. In the 1970s, Persson’s son Stefan joined the business and expanded it; in 1982, he became CEO, in 1998 executive chairman. The company was listed on the Stockholm stock exchange in 1974, and is one of the country’s top-performing companies, along with Ericsson. In early 2006, there were 1,193 stores in twenty-two markets with plans to expand to Dubai and Kuwait. H&M’s business is based on high turnover. New garments are delivered to stores every day, which draws customers back regularly. More than 750 people work at the Stockholm headquarters, including a hundred designers who churn out collections nonstop, fifty-five patternmakers, and a hundred buyers for the company’s stores. “We usually work on designs a year ahead but we can turn something out in two to three weeks if something hits fast,” Andersson explained.

  Everyone I met there was young, beautiful, and fashionably dressed in groovy clothes from the new H&M collection by Stella McCartney. Andersson—a tall, handsome Swede, just like you’d imagine—told me that he and the company’s creative director, Jan Noord, came up with the idea of inviting luxury designers to do capsule collections for the brand. “We wanted to do a big campaign for Christmas, something different, and we asked ourselves, ‘What would be the ultimate gift to women that would exemplify our motto of fashion quality at the best price?’” he explained. “And we started to talk about Karl. Women admire him, and he has constantly proven to be innovative. We called Karl and he loved the idea. He said, from his point of view, H&M is deciding what’s in fashion as much as Chanel does, that fashion is created by big fashion houses, but trends are set in the street by how people wear clothes. We came up with the idea of a limited edition, a tight collection, to combine mass distribution with exclusivity: ‘massclusivity.’ We want to be democratic, but you have to be there on a special day. You could never find Karl on sale.”