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Mon 8 Dec 2008 04:00 AM

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Capitalise on the crunch

Retail News investigates how industry players in the Middle East plan to fight off the economic downturn.

Retail News investigates how industry players plan to fight off the economic downturn.

As retailers across some parts of the globe are battered by the financial turmoil, Middle East retailers are showing their resilience by investing in strong, differentiated brands.

The consumer goods industry is less susceptible to economic cycles and market disruptions than many others, according to Yassin O Al-Attas, external relations general manager, Procter & Gamble Gulf FZE, as consumers will continue to require and purchase staple products from toilet paper to detergent.

The company's investment innovation during these challenging economic times is predicted to result in an improvement of its overall value scores, leading it to "emerge from this economic cycle stronger than ever".

Forward-thinking, homegrown retailers recognise that this tougher market poses the opportunity to strengthen their talent pools, thus emerging stronger from a downturn.

"P&G has witnessed "no material impact from the recent events in the credit markets," Al-Attas comments.

"We have been accessing the credit markets without issue and remain comfortable with our cash flow and liquidity," after completing seven consecutive years of growth at or above annual target levels, 4% to 6% sales growth, double-digit EPS growth, and strong cash flow, with at least 90% of earnings converted to free cash flow".

"We expect some short-term market share volatility as we are leading pricing in many categories, as the category leader. Competitors in general are raising prices as well. They are facing the same cost pressures as we are. We are confident that our market shares will recover as price gaps return to more normal levels," Al-Attas comments.

Developing markets now account for about 30% of P&G's total business, with developing market sales growing at approximately 6%-7%, with the US accounting for about 40% of its global sales. Western Europe, Canada, Japan and South Korea make up roughly the remaining 30%. Al-Attas says that the 170-plus-year-old company pays "very close attention to the price of P&G products, relative to both branded and private label competition."

"we closely monitor the value ratings of our brands versus all competitors. We are also continuing to innovate, which provides consumers with new reasons to keep trying and trusting P&G brands".

This focus on innovation-driven trade-up has been fruitful, "as we see premium-priced products such as Gillette Fusion, Venus, Clairol Perfect 10, and Olay Regenerist grow market share. P&G's financial model is to deliver consistent, predictable results for the long term, even in today's more volatile environment," Al-Attas adds.

Sheeraz Siddiqui, national sales and marketing manager for Emirates Macaroni Factory says that in the short term, the retail industry as a whole will not be as adversely affected as some Western countries

Masafi CEO Ashraf Abushady says that because it offers "items that are more or less in the essential category, our volumes have remained the same. Hence, our growth prospects have not been hampered, especially with mineral water."

Consumers have started to change their choices to suit their convenience and comfort, he says, and "the only things that they spend on as before are on essentials and consumables. Fortunately for us, our core offering has not been affected."

The current buzz phrase is ‘cautious optimism', he says, because of the global downturn and the optimism in view of the region's fundamentals.

"We would rather say that across sectors, it's a wait-and-watch strategy. If you see international investors, there has thankfully been no flight of capital or interest. They have just postponed plans and not cancelled. This more or less summarises the general mood."

Looking at prospects for next year, "we have factored in the current situation in our plans and are realistic about the path ahead. We have not ignored worst-case-scenarios into our strategy that would determine our ability to adapt.

The downturn seems to be a temporary, albeit protracted, phase, he says, and "we are fortunate that the Governments in the region have accorded priority and are allocating significant resources for this to tide over."

HR talent remains the best sustainable competitive advantage in tough times, yet this must be coupled with operational efficiencies and control over the supply chain, with a strong need for a hedge mechanism.

The manufacturer: Impact on luxury before basicsSheeraz Siddiqui, national sales and marketing manager, Emirates Macaroni Factory says that in the short term, the retail industry as a whole in the Middle East will not be as adversely affected as Western countries because of the higher economic growth this region is witnessing.

Demand is still strong due to increased household incomes and rising migrant populations to support the high economic growth. Although, if the current economic downturn continues for long, and large Western economies go into recession then this region will certainly feel the heat.

There could be a negative impact on demand for luxury and high value items first, percolating down to basic items later, resulting in job losses and slower economic activity.

As far as food production industry in this region is concerned the immediate impact of the current credit crunch is very limited or minimal. The companies that are heavily dependent on credit from banks are facing problem in getting easy credit resulting in negative impact on expansion plans.

One of the positive effects of this turmoil is that the prices of almost all of the raw material has declined in recent months from abnormally high prices about three months back resulting in lower production cost for many food items like edible oil, wheat based products, rice and dairy products.

Companies importing raw materials, such as ours, have gained in terms of exchange rates due to lower world currencies in comparison to US dollars. Many companies have either passed the lower cost advantages to their customers or are in process of passing them on in the near future, resulting in increased saving for customer as a whole.

"The biggest challenge that the industry faces is the rising cost of raw materials. Masafi is addressing this by being present or by being in control of the supply chain. One thing that we realised is to adopt non-conventional tools, such as marketing budgets which are the most sensitive during a downturn," Abushady says.

"The traditional approach was to either do away or drastically slash it. This is more knee-jerk and has not helped any one, least of all the company. We rationalised the choices and in addition to traditional mediums looked at opportunities that were previously not considered," he adds.

This gave the company the first-mover-advantage, softened the effect of the crunch on its marketing resources and still helped it to maintain presence.

Consumers have started to change their choices to suit their convenience and comfort, and the only things that they spend on as before are on essentials and consumables.

Sales of products in the core business, such as water, have not been affected by the credit crunch in recent months. "On our other products, we have not seen any significant trend that would imply that sales have been affected," he says.

Easa Saleh Al Gurg Group has built up its robust retail presence in the UAE over more than four decades, representing concepts including fashion brand United Colours of Benetton, furniture store chain ID design and Better Life, which carries some of the world's best appliance brands.

Ajai Dayal, general manager, Retail and Marketing, says that "we may see the entry of new retail players wanting to come to this market.

"It still remains one of the few areas, where growth is expected in the next couple of years, though the forecast for 2009 seems to have been drastically slashed to below 3 % by analysts.

"So we can expect a lot of pressure from overseas companies that are going to try and make up for their declining fortunes in Europe and the US by coming to this region, which also means dropping prices and greater competition," he adds.

Inflation will provide the greatest barrier to the entry of new players, he says, which has created an interesting paradox as "on the one hand, the high growth of the real estate sector is a key driver of the overall growth of the economy.

However, it is also one of the key drivers of the high rentals, which is the greatest contributor to the inflation. This will be a major obstacle to further inflow of new people, who get scared when they see the increasing costs of operating here."

AbdulAziz A. Bin Othaimeen, director of Hemaya Board, at Saudi Arabia's consumer protection organisation Hemaya Universal says that the reluctance of banks to lend to major companies has meant it is "unclear where that leaves most of the International Brands and retailers who might be attracted to our region.

"I think some of these ambitious international plans will be shelved this autumn. It might even be that some schemes already announced are quietly put on the back burner."

"Arab businessmen and women are understandably concerned about what the tightening of global credit will mean for the GCC. Part of the problem globally is that nobody is entirely sure who has suffered most from exposure to US sub-prime mortgage bonds, and this is also an issue in the Middle East," he adds.

According to Bin Othaimeen, in the long-term GCC businesses must be worried about the wider "contagion of the credit crunch in the industrialised world. "The knock-on effect into the real economy could well be a recession."

Although the global credit crunch had no immediate impact on demand for staff in the UAE, speculation has indicated there could be a slowdown on hiring in the future, according to Prakash Chugani, general manager, HR Outsourcing, at Dubai's DULSCO HR Solutions.

The company has profited from the rise in international retailers moving into the region, particularly with the opening of the Dubai Mall.

Is this crunch time or boom time for human resources? "This depends on the industry, if it is dependent on the global market, then there is a definite crunch, otherwise things are running smoothly, though slightly slowed down."

The downturn will mean a squeeze on HR budgets and it will "surely create a challenge to HR professionals. We are well aware from news and market information that benefits are getting slashed down.

"Retailers are seeking out employees who will need less time on the learning curve and are ready to hit the ground running. This has always been the need. However, it is difficult to get ‘ready made' people who can get going from day one. This surely has more importance in the current scenario," he says.

Homegrown retailers recognise that this tougher market poses the opportunity to strengthen their talent pools while competitors face cost pressures, thus emerging even stronger from a downturn, according to Adnani.

"Their [local retailers] dependence on the global economy is much lower than that of multinational companies, hence it is a good opportunity for them to consolidate their position in the local economy," he adds.

IMES MD: Market hit in three phasesDavid Edwards, managing director of IMES Consulting Group believes the impact of the global economic downturn on the region's retail sector will be predominantly negative, but felt in phases.

In the first phase, there will be lots of people denying that the region will notice any impact at all and as most consumers will not really have felt any direct personal effect, as they still have jobs, are getting paid and most do not have significant investments, so it will largely be business as usual.

However, in the second phase, as the World sinks deeper into recession, remembering that neither the US nor the UK are formally in recession yet, local consumers will become increasingly influenced by the negative sentiment reported in the media.

This will cause a loss of confidence in future prospects, a greater tendency to save rather than spend and the result will be delays in purchasing high ticket items and general down-trading to cheaper alternatives.

In the third phase, factors such as lower oil prices, investment losses and falling tourist numbers will begin to feed through to the real economy in the Gulf with projects delayed and contracts not renewed, for example.

Although it is unlikely that the region will experience a recession, it will feel a bit like one after the giddy growth of recent years. This will be the bottom of the cycle and after this stronger growth will return.

Haiyan Mujarkech, CEO of Dubai Retail says the global credit crunch "has not been as profound here as in other parts of the world. Although many businesses around the world have been influenced by the instability in oil prices, increasing transportation and production costs, Dubai's retail sector remains strong."

"Concurrently, the latest statistics indicate that Dubai's non-oil direct foreign trade has increased 54% in the first half of 2008 from the same time last year, reaching AED296.6 billion. This robust growth is significantly contributing to the development and expansion of trade and retail sectors in Dubai and opening up prime investment opportunities," he adds.

With the recent launch of The Walk at the Jumeirah Beach Residence in the city, Dubai Retail has received a highly favourable response from regional and international retailers.

In terms of consumer spending patterns, the UAE's strong economic performance cascades into its retail sector, registering solid demand for both high end and low end consumer goods, he explains.

"Using this indicator as our benchmark, we have not perceived any tangible shift in consumers' shopping patterns; a fact that is even further substantiated by the steadily growing number of retailers across diverse sectors," he says.

"Dubai remains a strong market and retailers are experiencing great sales and tremendous return on investment by choosing to do business in this vibrant emirate," he comments.

The retail sector in the region, especially in Dubai, presents a spectrum of opportunities for international retailers as a highly lucrative business market, enticed by the UAE's economic and political stability, including favourable business legislature that permits retailers to operate with tax free exemptions, constructive SME business legislation, great logistical infrastructure and favourable trade agreements.

The overall political stability accompanied by the investor-friendly trade and business legislations are vital for the retail sector to flourish.

"Consumer spending remains strong in all retail sectors and as long as this trend continues to prevail, Dubai will continue to attract new retailers," he says.

"At the same time, the growing tourism and business sectors in the emirate are impacting a significant effect on the ever-expanding retail sector. With a great portfolio of leasable properties, we expect Dubai Retail to outdo its own growth targets in the near future," he adds.

To become the leading retail consultancy and retail space provider in the region, employees are "the core differentiator in the retail market and talent retention is imperative to building a sound organisational and operational structure".

Landmark Group CEO Vipen Sethi admits that the global credit crunch has impacted its business, particularly in October, "more so, because it followed a high for Eid during September".

"We have noticed that the overall spend and footfalls have softened as consumers have become a bit cautious. This is more evident with retailers of high-end offerings. The softening in demand has not been acute particularly in the value segment, where the demand is fairly inelastic," Sethi says.

Shopping patterns have not changed but they are expected to be affected, if the credit crunch continues, according to Sethi. "Consumers will now actively seek value for every unit of money that they choose to spend."

The Middle East's retail industry is currently an attractive one for global players to open stores in, due to its young population, large presence of expatriates, the familiarity with high-end, international brands, relatively high spending and purchasing power and the affluent consumption patterns.

"Such diversity creates a consumer base drawn from broad social and cultural catchments. This scenario creates a demand for a wide range of products and services from heterogeneous markets.

"One also needs to remember that the Middle East retail industry has matured only in the last few years. Therefore, the growth here is driven at a quicker pace than other economies, which makes it attractive for global players," Sethi stresses.

The company's budgets for the year ahead are "aggressive. However, with the economic downturn, the budgets will need to be revisited in line with market conditions," he says.

Alongside HR talent, the most competitive advantages are the products and the value to customers.

To fight inflation, Sethi says the first key challenge in the sector to face is the increasing costs of logistics and materials. "We are addressing that by widening our spheres of control on the supply chain mechanisms."

Landmark group CEO: Spending already hitLandmark Group CEO Vipen Sethi admits that the global credit crunch has impacted its business, particularly in October, "more so, because it followed a high for Eid during September".

"We have noticed that the overall spend and footfalls have softened as consumers have become a bit cautious. This is more evident with retailers of high-end offerings. The softening in demand has not been acute particularly in the value segment, where the demand is fairly inelastic," Sethi says.

Shopping patterns have not changed but they are expected to be affected, if the credit crunch continues, according to Sethi. "Consumers will now actively seek value for every unit of money that they choose to spend."

In the retail business, the region remains the most attractive and profitable market for any retailer, whether local or international, he says.

"The regional markets have felt the impact of the global credit crunch but have not been affected as adversely as those elsewhere. Overall, the interest in the region remains the same. The only thing that has changed is the level of commitment that international retailers are willing to make. This has more to do with their own business policy rather than market considerations," Sethi comments.

He believes that international retailers are just following through with the decisions which were made some time ago as most of these decisions have very limited exit clauses.

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