By Sara Hamdan
As the global retail industry suffers a slowdown, Gulf developers are building more shopping centres.
As the global retail industry suffers a slowdown in consumer spending, Gulf developers are building more shopping centres than ever before. Sara Hamdan reports on the regional retailing phenomenon that could be worth US$500bn by 2015.
The global retail industry is hurting. Declining consumer confidence is encouraging shoppers around the world to tighten their purse strings in anticipation of a slowdown.
But across the Gulf, the region's largest developers plan to pour billions of dollars into the industry as the surging price of crude oil helps to keep spending confidence high.
Nakheel plans to invest billions of dollars in new mall concepts that will cater to all wallet sizes, as part of a strategy to ramp up its retail offering.
Retail spending figures made for depressing reading in April as sales fell across the largest economies in Europe, and sentiment among Japanese retailers fell for the second month running. That loss of confidence shows no sign of repeating itself in the Gulf, where there are plans to deliver around 150 new malls by 2015.
"The retail market overall is still underserved, especially if you look at the different segments where we have a lot of luxury consumption on top; over time, this will change and we will get more people coming in serving the mid-market," explains Anders Moberg, the CEO of the Majid Al Futtaim Group, the developer of projects that include Bahrain City Centre and Dubai's Mall of the Emirates.
But while brash mega-malls complete with ski slopes, ice rinks and water parks may characterise the current retail development craze in the Middle East, the next wave of development could be more about ‘niche' developments catering to particular tastes and products.
Retail analysts agree that generic mega-malls may soon start losing out to more focused developments.
"Instead of mixing low to high-end retailers all in one mall as used to be the case in the early days, the amount of retail space now available in Dubai means that malls can be individually positioned as single entities catering for a particular segment of the market or niche," says Simon Thomson, a consultant with UK-based Retail International.
Even some of the region's first shopping mall developments have repositioned themselves over the years as the retail market has matured, including Dubai's BurJuman Mall.
Initially, BurJuman only had a mid-range supermarket. Now it boasts an entire section for upper-end retailers including Etoile, Bvlgari and Chanel.
Consultant John Ibbotson of Retail Vision agrees that this market positioning is necessary.
"Most malls [in Dubai] are very similar with a basic offering of clothes and coffee," says Ibbotson, emphasising that a change in approach needs to take place as the market matures.
Gone are the blueprints for large-scale malls that cater to everyone and anyone.
Retailers are forging ahead with ambitious expansion plans by developing separate shopping malls that cater to the luxury market, the low-cost value market, mall concepts that target the large Indian expatriate community and others for the sizeable Chinese community - and any other niche group that is large enough to tap and attract investor interest.
The Majid Al Futtaim Group is planning to develop 30 distinct shopping malls by 2015, while the Nakheel group has an ambitious 100 retail ventures scheduled for completion within the same timeframe.
Nakheel, the UAE-based developer of the Palm and World islands, plans to invest billions of dollars in new mall concepts that will cater to all wallet sizes, as part of a strategy to ramp up its retail offering.One of Nakheel's primary ventures will be the Palm Mall, a luxury shopping centre on the Palm Jumeirah that will cater to an upscale market.
The developer's next venture is a low-cost, value mall near International City that plans to host the largest furniture retailer in the region to target the growing population of the UAE.
Nakheel's other ventures include smaller shopping centres in all of the developer's residential communities to ensure that no customer needs to drive more than five minutes before they come across a mall.
In Dubai, malls will ultimately be differentiated by price points and consumer lifestyles. This could entail luxury, tourist, discount and ethnically focused developments.
"We are very demand-driven on all our projects," says Graham Dreverman, head of Nakheel's retail division. "There's a direct relationship between the amount of retail we build and the residential communities that we are putting them in.
So we won't reach a saturation point in our own developments because we can trail the release of retail floor space that matches our residential and commercial communities."
Nakheel also plans to cater to the untapped market for Indian and Chinese expatriates in the Gulf as part of the developer's expansion plans. The UAE-based developer has already found success with China-themed Dragon Mart, the largest Chinese wholesale trade centre outside of China.
Nakheel's next move is to tap into the large Indian expatriate community by introducing an Indian wholesale section to Ibn Battuta Mall, and doubling the size of the kilometre-long shopping centre, increasing floor space to 3 million sq ft.
"The Gulf's proximity to two of the world's fastest-growing emerging economies is a factor that will assist the regional retail market when the rest of the world is suffering from economic downturns," says Deloitte's chief global economist, Dr Ira Kalish, who believes that catering to the Indian and Chinese communities in the Gulf could be the golden key for the region's retail market.
"There's such strong economic growth in India and China which is causing a big increase in the number of middle class consumers in those countries, and that means that the tourist and retail market in the Gulf can simply keep growing," explains Kalish.
"In Dubai, malls will ultimately be differentiated by price points and consumer lifestyles. This could entail luxury, tourist, discount and ethnically focused developments."
As a distinct middle class emerges in the UAE, retailers are quick to insist that the market is still under-served.
"Nobody questions whether there are too many casinos in Las Vegas or theme parks in Orlando, yet based on local demographics arguably there are.
These are destination cities, however, offering themselves to a global market and this is what is happening with Dubai in terms of its retail offer," observes Thomson, who notes that the Gulf's retail market has the potential to top US$500bn by 2015.
"This will not avoid eventual saturation, however, because there is a finite limit to the number of shops of whatever kind that any market can fully absorb," he adds.
With a fast-expanding population in the region, the regional tourism sector is also booming, with Dubai International Airport preparing to handle more than 11 million passengers in the next three months alone, and a new airport in Jebel Ali currently under construction.
And shopping has become one of the pre-eminent attractions for visitors to the UAE, according to real estate broker Collier's International.About 80% of Middle Eastern tourists to Dubai list shopping as their single favourite holiday activity, while shopping centres in Dubai derive up to 55% of their revenues from visitors, according to Colliers research.
As well as an undoubted strength, the Gulf retail industry's popularity with tourists may also be a potential weakness. Should tourism numbers decrease for any reason, the retail industry could be adversely affected.
"It's not a good thing to have a retail industry that's excessively dependent on the tourist trade because that tends to be cyclical," warns Kalish at Deloitte.
"In Dubai, tourism has a much higher share of retail sales than in other markets in the world," says Nakheel's Drevermen. "If tourism numbers were to go down, it would definitely have a negative effect. There aren't actually any opportunities for tourism numbers to go down though, as the only thing stopping tourism here is airport capacity and number of hotel rooms."
While the regional tourism industry remains robust, inflation is emerging as one of the most significant threats facing the industry.
"Inflation is the biggest worry for us," admits Shahram Shamsaee, head of Majid Al Futtaim's retail department.
"It's not just about the commodity prices, it's about labour costs, the cost of management, significant increases in land costs and high construction costs. So the margins for error become less and less."
However, it may not be enough of a problem yet to deter investment into the retail sector.
"This part of the world has been resistant to the economic pressures in the developed world," insists Dreverman.
"Retail sales, which are like litmus tests for the strength of the economy, are normally among the first sectors to nosedive during an economic downturn as consumer confidence is low, which is clearly not the case in this region."
The rising price of crude oil is insulating the region from the decline in other markets. "The recipients of much of this increased oil revenue are the oil-producing countries of the Middle East which either directly or indirectly are reinvesting surplus revenues locally," says Thomson at Retail Investment.
"So long as this continues and the cash continues to roll in, it seems unlikely that GCC retail developments will be hampered or delayed."
It is also an opportunity for Gulf economies, which pump almost one fifth of the world's oil, to diversify their economies.
"In Abu Dhabi, they have amassed a huge portfolio of assets to secure a strong overseas income even if oil declines," notes Thomson. "So it seems that diversification is working and could be a very positive thing for retailing."
In the meantime, the car parks of the region's mega-malls will continue to strain under the weight of visitors.
"It means that trading is taking place at an absolute maximum," says Drevermen. "So as long as car parks are always full, it means that we need more product."