The International Herald Tribune recently reported on a partnership between Dubai-based real estate developer Emaar and Italian fashion designer Giorgio Armani.
DAVOS, Switzerland: The Italian fashion designer Giorgio Armani and Emaar Properties, which is based in Dubai, plan to triple to as many as 30 the number of luxury hotels they develop because of greater than expected demand.
Armani's company last year granted Emaar the right to build at least 10 luxury hotels and resorts during the next decade for about $1 billion. That amount is expected to triple.
"If we can do 25 or 30, somewhere around that number, that'll be something we can work with," Emaar's chairman, Mohamed Ali Alabbar, said in an interview in Davos on Saturday. Demand for the Armani brand "is something that the customer is very keen on," Alabbar said.
Armani's spokesman, Robert Triefus, said: "There is scope to expand our agreement. We are at the beginning of a long program, which is also dependent on finding the right locations for the hotels in the most important cities."
The agreement with Emaar, the world's largest property developer by market value, is a new line of business for Armani, which is benefiting as the luxury-goods industry rebounds from its worst slump in three decades. Armani will provide furnishings and amenities for the hotels and oversee the venture's design aspects.
The first hotel under the venture, the Burj Dubai tower, is under construction in Dubai and is expected to be the world's tallest residential and commercial building.
The hotel is to have more than 175 rooms. The project includes 160 apartments to be designed and furnished by Armani, who is creating an exclusive collection under the Armani Casa business for the project. It is expected to open in 2008.
Analysis: Focus on Barriers to Entry
If firms can enter and exit an industry with little or no cost or effort, then entry will happen and profits will decline. The term Barriers to Entry refers to any number of factors that individually or in conjunction with others serve to increase the cost and decrease the rate of entering an industry.
Some barriers lie within the boundary of the firm and can be raised at the firm's discretion, though not without cost or effort on their part. Other barriers have their center of gravity outside that boundary. Either way, the logic and the goal are the same: in order to maintain profits, incumbents must take actions to discourage new entry.
One of the most important barriers to entry is Government Policy or Regulation. Although the government plays a large role in regulating firms and industries to ensure that the competitive playing field remains level, governments can also overtly tilt the filed in the direction of one firm or industry at the expense of another. One manner by which this is achieved is through the granting of monopolies. For example, in industries like utilities, it has been been shown that greater efficiency exists when only one firm is allowed to provide these services.
Another manner by which government may favor one firm or industry over another is through government ownership. When a government has a large stake in a firm or sector of economic activity, it is very unlikely that the government won't act in a manner that keeps barriers higher rather than lower.
One way that this can be accomplished is for government to supply a firm with capital to finance growth and development. It may also grant exclusive access to land or other natural resources. Or it may make those factors available on highly favorable terms. To the degree that this happens for one firm or sector and not all others, then privately-owned firms, be they foreign or domestic, face additional and higher barriers to entry and a serious competitive disadvantage.
Emaar, which is 32.5% owned by the government of Dubai, undoubtedly benefits from a relationship like this. Although the article does not say so directly, it is possible that the Emaar-Armani partnership was granted the prime piece of real estate and the right to build it because of just such a relationship. It may further be the case that such a relationship is what allowed Emaar to proceed to build on this plot of land the world's largest commercial and residential complex.
None of this is a bad thing. But if you believe, as I do, that building a high fashion hotel in Dubai that is also the highest building in the world of its kind, then it inconceivable that the government of Dubai will allow any other builder-designer to erect a taller one in Dubai. Other luxury hotel builders with eyes on Dubai will have to differentiate their product and services in another way.
No wonder, then, why Alabbar and Armani are smiling ear to ear in every picture I see of them together. The sky is not only the limit on this project, literally and figuratively, it is also a little more limited, I suspect, for some than it is for others.
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