What does the Amazon-souq.com deal mean for traditional retail?

Comment: The deal has fired an e-commerce boom in the GCC, but it is not the only problem facing malls
What does the Amazon-souq.com deal mean for traditional retail?
Destination Dubai Mall has 12.1 million square feet of retail space.
By Courtney Trenwith
Sun 02 Apr 2017 09:08 AM

The Amazon-souq.com deal last week sparked great anticipation for the region’s e-commerce market. But what about bricks and mortar retail?

There is several million square metres of retail space existing and under construction in the UAE. About 260,000 square metres of new retail space was added in the emirate in 2016 alone, the highest volume since 2010, according to consultants JLL.

Retailers are already reporting lower revenues and rents in malls in Dubai and Abu Dhabi are stagnant, according to JLL, and likely to decline in secondary locations as even more new supply comes onto the market.

In Qatar, there are at least ten new malls either recently opened or due to soon. They were all announced prior to the economic downtown and many have been revised. When Mall of Qatar — the biggest in the country — launched in December after several delays, only half of its retail stores opened.

Retailers are battling a higher US dollar, which erodes any price advantage, particularly for tourists, and a weaker economy. But while retailers specifically may be hit the unique purpose of malls in the Arab world means operators will have a better chance of surviving the increasing influence of e-commerce.

The air conditioned centres serve as entertainment destinations just as much as places to shop. Malls in the GCC have a greater proportion of non-retail space than in other parts of the world. That includes the usual food outlets and cinemas but also attractions from a waterfall to children’s playgrounds and a ski slope.

If you visit a mall in the UAE in the evening, particularly on weekends, it is obvious that footfall is still incredibly healthy. The challenge is in monetising those visits. Rather than spell a downward spiral for malls, the e-commerce boom may in the long term cause operators to readjust their revenue streams, adding more entertainment options to make up the shortfall in stagnant or declining retail rents.

Emaar Malls is arguably one of the firms most likely to be affected by e-commerce growth due its ever-growing physical retail space. However, it has continued to report profit growth, partly due to expansion. In the most recent results — the third quarter of 2016 — revenue grew 8 percent and profit rose 16 percent.

S&P analyst Sapna Jagtiani told Arabian Business in February that “footfalls in the malls are stable”. However, shoppers are buying less. She warned that Dubai was likely to lose its “shopper’s paradise” label “very soon”, particularly if the US dollar continues to rise.

With the increase in online retail globally and less competitive prices, fewer shoppers will see the need to travel to Dubai purely for that purpose.

E-commerce in the GCC was worth just $5.3bn in 2015, contributing about 0.4 percent to the region’s GDP, according to advisory firm AT Kearney. It added that e-commerce has the potential to quadruple to $20bn in just four years, if the right enablers were put in place. Well the Amazon-souq.com deal, believed to be worth $580m, is sure to help do that.

When the acquisition is finalised later this year, GCC consumers will be able to more easily order items from Amazon, while the more empowered business is expected to expand across the region, giving consumers outside the UAE little reason to travel to shop.

The deep pockets, data and experience of Amazon in the Middle East will speed up the region’s e-commerce boom. There is no doubt about it.

But it does not yet spell the end for retailers and mall operators. As with so many industries these days, they will survive if they rapidly adjust. The starting gun has been fired with the souq.com deal — the first off the block will be the frontrunners in a race where those lagging behind will find themselves overlapped in no time.

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