Shop til you drop

It’s an industry worth a startling $500bn — but Gulf retailers are looking at win even bigger profits in the future
Shop til you drop
Dubai Mall
By Elizabeth Broomhall
Tue 30 Aug 2011 02:25 PM

Owing to its massive oil wealth, popularity with tourists and deep-seated culture of consumerism, the Gulf is thought to provide one of the most lucrative markets in the world for international retailers. Attracting a broad range of businesses, from diamond dealers and restaurateurs, to car salesmen and cosmetics companies, today it boasts some of the biggest and most architecturally significant malls in the world, offering a wealth of prime retail space.

And, despite being challenged by global economic upheaval and six months of political unrest, the region’s massive shopping market only continues to grow. The question now is: what difficulties does it continue to face in the wake of an economic upturn? And what does the future hold for one of the region’s biggest industries?

It is safe to assume that the retail industry is one of the core markets in the GCC, sitting pretty alongside property, energy and financial services. This is evident from the fact that a large number of retailers have continued to make a profit throughout the recession. Indeed, according to a study by accountancy firm Deloitte, retail sales in the MENA region jumped 13.2 percent in 2010, rendering it the only area in the world to post double digit growth. Executives from the firm said emerging markets were the most promising for consumer sales, and the Middle East in particular.

“The thing about this region and the GCC particularly is that disposable income is high,” says Sana Toukan, an analyst with business intelligence consultancy Euromonitor International. “It’s a mall culture, a consumerist culture, that’s what people do in their free time — they go to the malls.”

Certainly this is why some Gulf countries and emirates have so many shopping centres. Dubai especially is unrivalled globally for its designer malls and lavish brands, and remains among the top 50 fashion capitals in the world.

Meanwhile, analysts say Qatar and Kuwait are catching up; Kuwait is reporting strong sales figures and Qatar is set to expand its offerings rapidly in preparation for the FIFA 2022 World Cup. Bahrain and Oman, though, still in their infancy when it comes to retail, are only likely to increase the number of malls and shops in the future.

“The retail sector is quite robust at the moment and the numbers are seen as increasing,” says Stuart Gissing, a retail real estate analyst at property consultants Colliers International. “As confidence returns we will see this further improving.”

As expected, most retailers and analysts would agree that 2011 has been the best year for sales since the recession. Not only has the region seen an increase in the debut and growth of international brands, but also a return to high sales figures for many big names. Among those companies new to the Gulf include Asda, the UK supermarket chain owned by retail giant Wal-Mart which plans to launch its discount fashion label George in the Middle East, and American lingerie brand Baci, which plans to launch ten stores in the UAE by 2016. At the same time, the list of those opening additional outlets in the coming years is endless.

This includes iconic toy store Hamleys, US lingerie line Victoria’s Secret, UK fashion retailer Marks & Spencer, diamond seller Harry Winston and UK coffee maker Costa, to name but a few. Moreover, it is not just the international retailers who are focusing on expansion. Local companies looking at growth include Lulu Hypermarkets, owned by Emke Group, supermarket chain Spinneys and jewellery retailer Ahmed Seddiqi and Sons. Lulu, in particular, said in July it would launch as many as 50 neighbourhood stores across the GCC over the next three years.

“The UAE in particular is right at the top for international brands to expand into, which is clearly evident in the amount of brands that have entered the market over the last five to ten years,” says Gissing. “Today, the market has one of the highest and fastest brands penetrations globally, and this is only set to continue.”

As for sales figures, those recording the biggest increases include car manufacturers BMW and Ford. For the first quarter of this year, Ford posted a 52 percent increase in sales in the GCC compared to the same period in 2010, whilst BMW noted a surge of nineteen percent for the period. According to Gissing, there is evidence to suggest that some categories of products sell better than others, such as premium cosmetics, forecast to rise by five percent in 2011, and Swiss watches, which saw a quick and healthy recovery last year after a recession-induced slump in 2009. “These [kinds of products] may be seen as one of the catalysts or large contributors to the movement of the economy,” he says.

A more subtle indicator of improved growth within the retail sector was the recent change to mall opening times in the UAE. Shopping centres in Dubai particularly said they would extend their opening hours to run from 10am to midnight seven days a week. The Dubai Economic Department also said that restaurants inside malls could stay open until at least 1am, with an option to extend for extra hours if needed. According to research, a key reason for additional growth this year is a return to consumer confidence. Notably, the latest MasterCard survey of Middle East shoppers said that consumer confidence in the region — which is based on five economic indicators (economy, employment, stock market, regular income and quality of life) — has gone up significantly compared to six months ago, soaring to a score of 83.4, from 71.6. The survey also showed how the regional outlook was improving on all five points, and that the Middle East’s aggregate score of 83.4 was substantially higher than that of Asia/Pacific (61.5) and Africa (73.8).

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In the UAE, confidence about the next six months has risen to record levels, reaching a score of 95.6. Not only does this show significant improvement from six months ago (73.6) and a year ago (82.4), but executives at MasterCard say this latest score is at its highest since 2004 and significantly more than China (78.3), Hong Kong (69.9) and India (75.2).

“It is very encouraging to see that UAE consumer sentiment is continuing its upward momentum and is expected to reach a record high in the coming months,” says Raghu Malhotra, general manager, Middle East, MasterCard Worldwide. "The findings are in line with the recent trends that we have observed in the market with retail, travel and hospitality sectors, in particular, registering a significant upturn."

On the flip side, the retail sector does of course harbour its own host of specific challenges, a key stumbling block being the price and availability of real estate. In some Gulf countries, such as Bahrain, Kuwait, Qatar and Oman, space is less of an issue, though there is always a danger that prices could surge with increased demand in the future.

In the UAE, issues vary between the emirates. In Abu Dhabi, many retailers have reported problems obtaining prime retail estate, and have thus faced an uphill struggle when attempting to enter the market. This is in sharp contrast to Dubai, whose retail offering totalled 26 million sq ft at the end of 2010, and is expected to increase to 31.3 million sq ft by 2013, making available retail space per person significantly higher than most global cities.

However, despite having what seems like an abundance of space, it’s the price of real estate in Dubai continues to present a problem. Earlier this year, UAE-based electronics retailer Sharaf DG said rents in prime locations had increased 10-15 percent on average per annum. “It’s just going up and up every year,” says Yasser Sharaf, managing director of the company. “I’ve signed documents and all of them have increased in rental.”

Cosmetic and perfume retailer Paris Gallery agreed, saying that many of its rent agreements are based on a basic rent plus a turnover rate, and that retailers and mall operators needed to work more closely to increase footfall to offset rising costs. “Very rarely shopping management is aware and understands what the retailer is going through,” says Mohammed Ar Al Fahim, Group CEO, “especially when it comes to their prices.”

According to real estate analysts Cushman & Wakefield, last year Dubai ranked 42nd alongside Lisbon in terms of cost of retail space globally, however, the head of the consultancy in Dubai, Hannah Jeffery, told Arabian Business that there should be some stabilisation of rental rates in the second half of this year, and that prices could even decline in secondary malls.

“Although Dubai remains attractive to both consumers and retailers, there is a demand-supply imbalance, particularly in secondary retail locations and we expect to some reduction in pricing over the second half,” she says.

An additional hitch which cropped up this year, at least for UAE-based retailers, was the ban on credit card charges. As of July, a ruling from the country’s consumer protection agency said shops were no longer to charge consumers additional fees on purchases made with credit cards — which were formerly sprung on the consumer at the point of payment and used to cover the cost of processing the transaction. Retail analysts say credit charges in the Arab state were previously among the highest in the region.

Meanwhile, a less recent, albeit equally pressing concern highlighted by some of the international companies, is the country’s outdated approach to promotions and discounts. Under the existing rules, retailers must pay a fee to gain permission to run a sale and must abide by strict rules that dictate how long a sale can run for, and the combination of offers. Retailers say this limit on the number and mix of promotions stores can offer is hampering the growth of discount brands, whose business model is based on super-cheap deals. And, as well as preventing retailers from passing international promotions on to regional shoppers, the rules also make it difficult for companies to clear out and renew stock.

“The system is from the dark ages,” says Hasit Kakkad, retail manager of UK budget fashion chain Matalan. “In the UK, Matalan do ‘three-for-two’ offers on ladies underwear all year round, but we cannot do that here. We cannot have ‘three-for-two’ as well as ‘buy-one-get-one-free’ at the same time.” Dubai’s Department of Economic Development said the city is in the process of overhauling its retail regulations.

Other key challenges tend to vary between for retailers. Whilst fashion chains are calling for more government support to assist them with retail space issues, logistical problems, access to quality materials and input costs for textiles and labour, a key hurdle for supermarkets and groceries this year has been a surge in global food prices.

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In the UAE, the problem has been intensified with a nationwide scheme to fix the price of staple goods. Not only does this create barriers to high profits for firms, but it has seemingly also induced a trend among small grocery stores of bulk buying discounted goods in larger supermarkets and selling them on at inflated prices. Hypermarket chains such as Lulu and the Union Cooperative Society say the problem is impacting on their profits and stock levels, forcing them to ban some shoppers and limit the discounted items customers can buy.

Looking ahead however, the relevant challenges are unlikely to hamper the overall growth of the Gulf’s booming shopping industry. In Saudi Arabia, a recent report by Business Monitor International said retail sales will surge from just under $27bn this year to more than $37bn in 2015 on the back of strong economic growth in the kingdom.

The consultants also noted how retail sub-sectors, such as consumer electronics, (which is one of the largest in the Gulf, accounting for approximately 40 percent of regional spending) are also expected to see high growth rates. “The retail sector benefits from the large number of Muslim tourists visiting the country to take part in the hajj and umrah pilgrimages every year,” BMI analysts said. “Consumer electronics spend will be driven by youthful demographics, a regional economic boom and a buoyant real estate sector.”

And yet, growth will not be the only development. Though the sector has previously been characterised by lavish brands and upmarket designers, analysts report an increasing presence of budget retailers, sparked by the recession. “Everybody loves a bargain,” says Dubai Outlet Mall director Vishal Mahajan. “Value is a very consistent segment. It’s always been there, it’s just that now people are noticing it more because we are passing through the downturn and value is a big thing.”

An online shopping market, though slower to take off, is also expected to emerge in the coming years. In the UK, the number of people buying over the internet is increasing at a rate of between 20 and 30 percent per year, rising to a value of £58.8bn ($79.07bn) in 2010, eighteen percent more than 2009.

And, although at the moment the market remains rather underdeveloped, MasterCard executives say the region continues to move in the right direction. In its latest survey, the credit card firm said the number of people using the internet to make purchases in the UAE in 2010 rose to 42 percent, up from 29 percent in 2009.

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Food for thought: The retail experts speak

Yussufali MA, managing director of EMKE Group, says the future for the retail giant is looking bright.

How has your company performed in the last twelve months?

A very positive result. We closed our business at seventeen percent growth, a very good sign that things are looking brighter post the so-called recession.

What are the key challenges you have faced?

Honestly, this so-called recession never did pose any threat or challenges to our business. In fact, we grew the [most] during the last three years both horizontally and vertically and also entered new markets.

How do you see your business performing in the next year?

The coming years will see the group roll out quite a few interesting food and restaurant options in the regions we operate in and making Lulu Exchange a very serious player in the money exchange and related fields.

Quietly confident

The president of BinHendi Enterprises, Mohi-Din BinHendi, says the recession is forgotten.

As the founder and president of the Dubai-based conglomerate and retail giant BinHendi Enterprises, Mohi-Din BinHendi has been responsible for bringing some of the most exciting British and American brands to the region, and for meeting the consumerist needs of the UAE’s biggest spenders. Speaking at the 4th Arabian Business conference in May, he said much of the current sales in places like Dubai are driven by the tourism trade, and particularly by a rise in visitors from the increasingly wealthy emerging markets.

“The Chinese have started coming here — they come in big groups, and the Russians are still very prominent shoppers, as are the Indians,” he said. Talking about retail space, BinHendi said he thought Dubai had enough malls, but hinted that there could be scope for some specialist shopping centres or smaller, niche malls, such as those dedicated to furniture or hardware.

“I think people have forgotten [about the recession]. Forgetfulness is a virtue sometimes. The rich don’t get affected even in the worst crisis but they get psychologically scared to spend money. I think they’re over this.”

Hungry for growth

Alshaya — led by executive chairman Mohammed Alshaya — is one of the Gulf’s largest family-owned firms, has an extensive franchise portfolio. As well as operating 2,000 stores across fifteen countries, counting brands such as Starbucks, Pizza Express, American Eagle, Boots and Pottery Barn in its portfolio, the company employs around 20,000 people. Earlier this year, the company said it had opened its second Shake Shack burger outlet and plans to open up to eight more across the Middle East by the end of 2012. The opening, whilst marking the New York burger chain’s debut in Kuwait following the launch of a Dubai branch in April, reflected the “huge potential” for growth in the Middle East according to the firm. In June, the Kuwait retail conglomerate also said it had signed a deal to launch American pancake chain IHOP in the Middle East. For this venture, Alshaya said it would open 40 restaurants across the six Gulf states, Jordan, Lebanon and Egypt by 2016, marking IHOP’s first major expansion outside the US. In November last year, the company CEO said he planned to open 1,250 new stores over the next five years, creating an estimated 4,000 jobs.

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