By Courtney Trenwith
Comment: The deal has fired an e-commerce boom in the GCC, but it is not the only problem facing malls
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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Very thoughtful article Courtney, it may not spell the end right now, but as you said the first shot has been fired.
The simple fact of the matter is Dubai Mall's rents are absolutely astronomical and EMG will face a severe drop in revenue on this asset moving forward as the the model is completely unsustainable, in so far as GLA volume v's sales.
Online sales will grow rapidly as the value proposition is broken, ie. bricks and mortar prices on goods are now too expensive to represent fair value.
It simply doesn't add up for almost all but a few to set up shop in a mall in the current circumstances at these levels and you can expect to see a range of leases to not be renewed this year and next as trading conditions tighten and overall retail sales decline.
Dubai's overall retail GLA is wildly oversubscribed when you take into consideration the expansion of the Dubai Mall as well as other retail destinations underway.
It would appear that the race to build malls and add retail space in GCC might well out pace the demand. That will result in excess square meters of retail space, falling rents, and re-thinking about how to utilize some space. This will also drive competition between malls as they seek to have the most attractive lifestyle experiences with which to attract consumer traffic.
At the same time this will not be only about e-commerce vs. in-store/mall shopping. The is a opportunity for leveraging e-commerce, marketing, and loyalty programs via mobile devices to enhance the customer experience while inside and outside malls. Few retailers and/or mall operators in GCC have turned their attention to this opportunity to focus another element of the customer experience.
As others have mentioned the rentals are astronomical in Dubai across the board, not just in retail.
It makes it very hard for retailers to compete on price with e commerce, let alone to spend more money on 'lifestyle' offers to attract people away from their apps and computers.
Retailers and mall management need to embrace new digital ideas and find ways of fusing them with the shopping experience. On top of this landlords will need to reduce their expectations dramatically or we will continue to many empty units in malls.
It will not be a cake walk for E Commerce in the region, as GCC is not US. There is an opportunity for retailers and Mall owners to adopt Omni channel strategy, Joint Marketing and Loyalty programs to keep the customers intact. Their efforts in standing united at this juncture is key to ward off any threat from standalone E-Com players.
Players like Emaar might see pressure on rents , but would need to align to the new market reality in joining hands with retailers / brands and take on Amazon in particular and other E Com players in general. As highlighted by the reporter (Ms Courtney), Malls have great opportunity to expand non retail area for entertainment and leverage on physical activity / health to promote sports like basket ball , Squash, Badminton, Skating etc for children , which can pull families during weekends and keep the offline shopping intact.
I am sure that the Mall owners and retailers would be soon ready with their Ammunition and move with their cheese.