Opportunity Knocks When Designer Fashion Meets Luxury Hospitality

As Italy’s Prime Minister Mario Monti draws up an austerity programme with profound belt-tightening implications for most of the population, the new Armani Hotel in Milan might look anomalous, with its daily rate of between €500-11,000. Yet, there will be plenty of high net worth individuals willing to pay for its luxury minimalism. The segmentation concept itself is also a window into future opportunity for trendsetting designer labels. Euromonitor International explains.

The art of luxury segmentation

Having segmented successfully into jewellery, timepieces, eyewear, fragrances and home furnishings, Giorgio Armani, the Italian fashion guru, is trying his hand at luxury tourism real estate. It is a wily strategic gambit at a time when a big chunk of demand for luxury goods is coming from high net worth individuals (HNWI) in emerging markets, many with a penchant for travel and iconic designer brands.

The first Armani hotel opened in Dubai in April 2010, located in the Burj Khalifa tower, the tallest building in the world at 830 metres. It was the opening chapter of a project – in partnership with Emaar Properties, one of the biggest property developers in the Middle East – that will see the development of a cluster of high-end Armani hotels, resorts and residences in key locations around the world.

The Armani Hotel in Milan, the Italian designer’s adopted hometown, is effectively the second stage of the programme, with further hotels earmarked for New York, London, Shanghai and Tokyo over the short to med ium term. In addition, there will be an Armani resort, located in Marrakech, and luxury Armani villas in Marassi, Egypt. The two latter projects are scheduled for completion by 2014 despite regional political unrest.

The fusion of upscale tourism with luxury fashion

It is not uncommon for luxury fashion labels to forge alliances with five-star hotels. Prada, for example, plans to open a 1,500 sq m outlet on the ground floor of a new Hyatt hotel in Vienna in 2013. And there are dozens of upscale boutique hotels in Western Europe where fashion designers have wielded a hand in the interior design. Hat maker Philip Treacy – his clients have included Marilyn Monroe and Queen Elizabeth II – designed, for example, the interior of the G in Galway, enticing a new generation of wealthy fashionistas to Ireland’s West Coast.

Neither is Armani the first fashion house to attach its brand directly to a hotel. For example, there is a Palazzo Versace in Australia, and a new Palazzo Versace Dubai will open soon. There are Bulgari hotels in Milan and Bali, and the Italian fashion house Missoni opened its first hotel in Edinburgh’s Old Town in 2009, and its second in Kuwait this year. Further Missoni hotels are planned for Oman, Brazil and South Africa.

The luxury goods industry has shown itself to be remarkably resilient in the aftermath of the 2008 global financial crisis. But, luxury goods companies are still under pressure to come up with new business ideas to maximise growth prospects going forward. Luxury hospitality is a good fit for fashion houses because hotels, especially boutique ones, tend to command the same fashionable (and aspirational) appeal as luxury accessories.

From a design perspective, the fundamental difference, of course, is that the architecture and interior design of hotels and resorts need to be more enduring than a spring or summer fashion collection. Indeed, the fickleness of fashion could be the biggest long-term challenge for Armani hotels and similar fashion designer hotels that come on stream in the future.

Flying in the face of investment risk

What is striking about the Armani hotel venture is the apparent absence of any risk aversion. Of all the emerging regions, the Middle East and Africa (MEA) currently presents the highest risk for new international investment. The latest social and political instability in Egypt is illustrative of the region’s volatility. Yet, this regional unrest appear s to have done little to derail plans for Armani’s MEA real estate projects.

On the contrary, the designer seems to have a knack for developing his new tourism and real estate business in countries riddled with instability. Specifically, Dubai was in the midst of a debt crisis when the Armani Hotel opened last year, while this year Italy is at the epicentre of contagion in the EuroZone’s debt crisis and Egypt is embroiled in revolutionary upheaval. Even New York, London and Tokyo are on the cusp of a potentially protracted financial crisis. Over the medium term, Shanghai looks like the only safe haven as the global economy tilts toward a new period of recession.

That the core consumer base of luxury goods companies is well insulated from global financial instability is shown, however, by the latest quarterly results of players such as Burberry, Prada and LVMH. And the same insulation principle is likely to apply to the new Armani hotel in Italy, even though the country is, in effect, close to bankruptcy. Crucially, Milan is Italy’s second biggest tourism destination after Rome and is a Mecca for international fashionistas. The MEA ventures are more vulnerable due to the unpredictable nature of the region’s social and political unrest.

A sign of things to come

The Armani brand itself is dripping in the aspiration credentials that HNWIs from the emerging markets aspire to. China’s new cash-rich tourists comprise, for example, a core consumer base for luxury goods. A visit to Harrods, London’s iconic luxury department store, will bear this out. As such, a new business arm that has potential to tap into a dynamic growth area of international tourism, namely emerging market tourists, goes to the sweet spot of opportunity. Armani hotels are also an opportunity to showcase the brand’s other business areas, notably home furnishings.

It begs the question as to whether we will begin to see more hotels branded by fashion houses. A Prada luxury spa hotel or even a Jimmy Choo boutique hotel ought to be able to leverage their trendsetting brand equity without doing any harm to the heritage of the brands themselves. In short, tourism real estate and hospitality could become the next big business area for high-end fashion. Giorgio Armani and a cluster of smaller fashion houses are leading the way. Others are sure to follow.