Levant political woes slow retail growth

27 January 2013

Lebanon and Jordan’s retail sectors have significant long-term potential, but instability in the region is denting consumer confidence

In 2010, retail was on an upward trajectory in Lebanon and Jordan. For regional and western firms seeking fresh growth opportunities in emerging markets, the growing middle classes of the Levant economies presented a lucrative prospect.

While these fundamentals remain in place, the troubled political climate that has dominated the region since early 2011 has curbed the sector’s growth. Consumer spending has slowed, while the escalating violence in Syria has crimped trade and tourism volumes. Subdued economic growth forecasts for both states reflect the unrest; the Washington-based IMF expected Jordan to see 3 per cent growth in 2012, and Lebanon 2 per cent.

Luxury brands

For some retailers, however, Lebanon’s long-term prospects outweigh the current instability. Despite its small size and relatively low income – at $10,425, per capita gross domestic product significantly lags behind the GCC states – Beirut has gained a name as a retail hub. The city is home to haute couture designers such as Elie Saab and Reem Acra, who share the market with established luxury brands such as Dior, Cartier and Louis Vuitton.

The sector flourished until 2011, driven by four years of consistent economic growth at 7-9 per cent and the rise of high-end malls. Consumer spending was further bolstered by the more than 2 million tourists that visited Lebanon in 2010. IMF data shows retail and wholesale trade comprised 28 per cent of GDP in 2009, the largest contribution of any sector.

Beirut prime retail rents*
LocationAnnual rent (€/sq m)
Rue Verdun1,103
Rue Hamra670
ABC Centre Achrafieh1,567
Beirut Central District946
*=Year-to-June 2012; sq m=square metre. Source: Cushman & Wakefield

But there is no question that regional unrest, and specifically the Syrian civil war, has since taken a toll on the sector. Lebanon fell 10 places in AT Kearney’s 2012 Global Retail Development Index, which ranks emerging nations by their attractiveness to western brands, a nod to the country’s difficult operating climate.

Political and economic woes have exerted downward pressure on prime mall rents. According to the US’ Cushman & Wakefield, leases were flat in four out of five key shopping districts in the year to June 2012. In Beirut Central District, the capital’s commercial hub, rental prices dipped by 7.7 per cent. In comparison, the average rise in retail rents across the Middle East and Africa was 1.4 per cent for the 12-month period.

Annual rents across the sites ranged from e670 ($866) a square metre to e1,576 a sq m. The average cost in the Middle East and Africa was e1,140 a sq m.

The turbulence has also hurt consumer confidence, reining in spending and deterring tourists. According to the Byblos Bank/AUB Consumer Confidence Index, sentiment dropped to a record low in the first half of 2012, smothered by fears over increasing volatility and rising living costs. Nassib Ghobril, chief economist at Byblos Bank, warned in November that consumers would need “a positive political shock of the magnitude of the Doha Accord to restore their confidence.”

Amid this, several multinationals have made their debut in the market, betting that Lebanon’s future returns are worth the gamble. The US apparel chain Gap opened its first store in August, in partnership with local retail franchise operator Azadea Group. The Beirut-based company is responsible for bringing a slew of Western brands to Lebanon, including clothing stores Mango and Zara, and French retailer Decathlon, which launched in September.

The UK’s Marks & Spencer was expected to open its first store in Lebanon before the end of 2012, under its franchise deal with the UAE’s Al-Futtaim Group.

UAE-based Majid al-Futtaim (MAF) Group is also making a play for a slice of retail sales. The developer expects to launch Beirut City Centre in early 2013, its first retail project in the country. The mall, which represents a $300m investment by MAF, will include 200 stores and a multiplex cinema, and will add 60,000 square metres of leasable retail space to the city’s supply.

The mall will also mark the launch of Lebanon’s first Carrefour hypermarket, a sign of the country’s gradual shift away from small, independent traders and towards big-box retailers. Rival brand Spinneys opened its newest supermarket in Byblos in September, and now operates eight stores across the country, with plans for several more.

According to AT Kearney, food and beverage retail sales are forecast to increase by 80 per cent between 2011 and 2016, while hypermarket sales are expected to jump by 41 per cent.

Smaller retail market

Jordan’s fledgling retail sector has seen gentler growth. The kingdom has neither the population scale of the North African states, nor the consumer wealth of the GCC states, so has been slower to appeal to multinationals. Per capita consumer spend in the Arab state is $3,570, according to consultancy Planet Retail, less than half the $8,956 seen in Lebanon. Efforts to modernise Jordan’s cities have been delayed by the country’s economic woes, with government reshuffles stifling the progress of large state-backed infrastructure schemes.

A lack of modern retail space has also curbed the entry of foreign retail brands into Jordan, a situation that is gradually changing. The 150,000 sq m Taj Lifestyle complex opened its doors in December 2011 in Abdoun, creating space for 190 stores. Its tenants include the grocery chain Spinneys, which opened its first Jordan store in the mall in 2011, and the UK’s Marks & Spencer. The retailer planned to open its first outlet by the end of 2012, with a second store in the pipeline. 

Amman’s retail supply will be further boosted by the launch of Abdali Mall, which is scheduled to open in 2014. The shopping centre will bring more than 70,000 sq m of leasable area online, and its construction represents an investment of $150m, according to regional projects tracker MEED Projects. The $150m Crystal International Mall in Amman was slated for completion in the fourth quarter of 2012, but is understood to be on hold.

Unsurprisingly for an immature retail market, Jordan’s grocery sector remains highly fragmented. The kingdom’s top five organised retail brands control less than 5 per cent of the market, with the bulk of sales still captured by corner shops and independent stores.

France’s Carrefour was among the first big-box brands to enter the market in 2006, and now operates one hypermarket and seven supermarkets. Kuwait’s The Sultan Centre operates 16 outlets under the Safeway brand name, following its acquisition of that company in 2003.

Online purchases

Jordan may have lagged behind other Arab states in terms of bricks and mortar retail developments, but it was one of the first to tap into the lucrative market of online shopping. Jordanian entrepreneurs have been behind some of the region’s most successful e-commerce sites, at a time when internet penetration is rising. Consumers in the UAE, Saudi Arabia and Egypt spent $1.01bn on internet retail sites in 2011, according to research firm Euromonitor International. That number is expected to double by 2016.

The market is attracting significant investment. In April, MarkaVIP, an online shopping retailer that uses a ‘flash-sales’ model, secured $10m in series B funding, in a deal led by the European venture company Prime Ventures. The website offers cut-price luxury goods to members in limited-time sales. Since its launch in 2010, the company has gained 1.5 million members, shipping goods across the GCC, Jordan and Lebanon.

Souq.com, founded by Jordanian entrepreneur Sami Toukan, is one of the region’s largest e-commerce sites, with a customer base of 3.5 million. In November, the US hedge fund Tiger Global and South Africa’s Nasper Limited invested an undisclosed sum in the company.

In October, Souq.com itself invested $2.5m in fellow Jordanian start-up Run2Sport, which bills itself as the region’s first online sports retailer.

Both Lebanon and Jordan’s retail industries have significant long-term potential, but current political and economic woes may stunt growth in the near term. If the Levant economies see an uptick in tourism and consumer confidence, retail brands already active in the market will be well-placed to profit.

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