By Jayant Ganwani
Only retailers who manage their businesses efficiently will flourish when the industry turns around - not before 2017.
Retailers have had an excellent run from 2011-14, but for those that are bold enough to admit it, 2015 has been one of the toughest years for GCC retail. The attrition in like-for-like sales has varied from moderate to severe, depending on the demographic segment the business is catering to, its location and dependence on tourists. What is of concern is that this weakness has still not bottomed out. Retailers are crossing their fingers that when the figures for Q4 and the holiday season come in, we all make up a little of the lost ground, and that we have a record-breaking Dubai Shopping Festival this month.
High-end brands have witnessed the steepest drop as well as, to different degrees, items of durable nature such as automobiles and furniture. Food and basic necessities retailers such as hypermarkets have seen a lowest impact, but even in that segment customers are choosing to procrastinate purchases on non-food items, affecting the average transaction value and the margins these retailers make.
However, the focus of this article is not to be backward looking, but to try and envision what retailers can look forward to in 2016. As we do not possess a crystal ball, the only way we can call 2016 is to give the readers a brief glimpse into the decisions that we are taking for our business and hopefully reading these will result in the best decisions being made for your respective businesses.
Unfortunately, the geopolitical uncertainty and economic downturns in the countries neighbouring us indicate that the weak sales trends we have witnessed in 2015 will not reverse anytime soon. Continued lower oil prices, regional disturbances, a stronger US dollar and low customer confidence all realistically translate into an unenthusiastic outlook for sales going forward. The best-case scenario will be that sales hopefully flatten out in 2016. The burden is therefore on retailers to manage their businesses efficiently to ensure that they are well prepared for the turnaround, which in our opinion will take place only after the first quarter of 2017.
Those that will survive and flourish will be those that have throughout 2015 been cognisant of the trends and have made sure that they have taken a short-term hit on margins, liquidated stocks and been prudent on costs. Those that do not take timely action will probably be forced to consolidate or perish. Whilst there are rumours that some retailers outside the UAE have already announced redundancies, this is not yet something we believe to be the general case. We have never been advocates of this particular strategy of cost mitigation, as customers usually demand even better standards of service and more advertisement and promotion during downturn cycles.
In order to survive this near-term slowdown and to be ready for the next growth cycle, retailers need to look out for and take action on the following matters:
• Cull any ‘old’ inventory no matter what the impact on current margins and keep inventory fresh for the eventual turnaround.
• Keep investing in training, development and customer service, as these are key differentiators whenever a customer decides where to spend money during a downturn and lead to
• Review and shut down locations that are in the red today and have no chance to make money in the future. It’s better to have one good store than several average locations. Consolidate!
• If a legacy brand is no longer profitable, cut the cord!
• Keep frivolous expenses (including unnecessary refit costs) down. Talk to the mall operators and keep major capital expenditures down to a minimum so that the stores look presentable without increasing your depreciation allowance significantly.
• Try and avoid being leveraged. With rising interest rates banks - given their recent loan losses - are bound to become more conservative on lending. Keep your borrowing, if any, to a minimum.
• Finally, don’t expect any sympathy or rental reduction from the malls … after all this is also a demand-supply equation. As long as retailers keep on bidding over each other’s heads to acquire locations in malls, regardless of the resulting rental cost to sales ratio, the malls will keep on taking advantage. Retailers need to stop carpet bombing customers with locations in every mall regardless of poor sales prospects. Sensible site selection will hopefully bring balance to the mall-tenant relationship and, eventually, improve your bottom line.
In conclusion, it’s safe to say that retailers should not expect any miracles in 2016…the time calls for us to remain patient and prudent.
Jayant Ganwani, CEO of Lals Group.
Thank you for the article.
Going through the same, if not tougher situation here in South Africa. As a commodity based economy - the stronger dollar, political issues, investor confidence . . . all having a negative effect on retail. Consolidation and lean management of the business is the approach to weather these tough conditions