Retail offers risks and rewards in the Middle East

29 January 2013

Despite ongoing external challenges, the Middle East’s fast-growing retail sector remains among the region’s most lucrative economic prospects

Global retailers have been betting on the Arab consumer for years. When famed New York retailer Bloomingdale’s was scouting for its first overseas home, it picked Dubai. Luxury department store Harvey Nichols made its first foray outside the UK in 2000, when it opened in Riyadh. Starbucks, the US coffeehouse chain, launched its first Middle East store 12 years ago, ahead of its debut in South America, India and Germany.

As Western economies have struggled with tepid high-street sales and dwindling consumer spending, several retailers have sought to offset this decline by increasing their footprint in the Middle East.

Testing times for retail

This confidence has been tested in recent years. The global financial crisis curbed tourism in the region, slowing retail sales and dampening demand for luxury goods. Point-of-sale transactions in the UAE, the shopping capital of the Middle East, slid 25 per cent in 2009 to AED1.24bn ($338m), down from AED1.67bn the previous year.

Political upheaval in 2011 also stalled economic growth in some Arab states, and dented consumer spending in others. In the Levant economies of Jordan and Lebanon, rents in key shopping centres have slipped by 33.3 per cent and 7.7 per cent respectively, according to US consultancy Cushman & Wakefield, a reflection of neighbouring Syria’s ongoing bloodshed.

The schemes reflect the shift away from souks and local shopkeepers, towards urban malls and mass retailers

Despite this, the retail sector remains among the region’s brightest economic prospects. In the GCC, Lebanon, Jordan, Egypt and Algeria, some $16.5bn-worth of retail schemes are being planned, commissioned or are under way, according to regional projects tracker MEED Projects.

The schemes reflect the shift away from souks and local shopkeepers, towards urban malls and mass retailers. Much of this is being driven by the twin triggers of economics and demographics: the region has a vast, young population and an emerging middle class.

For many brands, it ranks alongside Africa and China as the next frontier for retail growth. Within US consultants AT Kearney’s 2012 Global Retail Development Index, which ranks emerging nations by their appeal to Western brands, five of the top 20 spots were taken by Middle East states.

Global retail rents*
RegionAverage rents**Rental growth (%)
Middle East & Africa1,1401.4
Central & Eastern Europe1,0390.6
Western Europe2,5262.1
Euro zone2,4301.6
South America1,11411.6
North America3,06010.4
Asia Pacific2,9608.6
*=Year-to-June 2012; **=E a square metre a year; %=Percentage. Source: Cushman & Wakefield

The wealthy GCC states have particular allure. Three are expected to post economic growth of at least 6 per cent this year, according to the Washington-based IMF. By comparison, the UK economy is expected to shrink by 0.4 per cent. Per capita gross domestic product (GDP) across the Gulf ranges from $22,635 in Saudi Arabia to a massive $106,394 in gas-rich Qatar.

Many brands have felt the impact of the region’s high-spending consumers in their domestic markets. Arab shoppers parted with an average of £812 (about $1,301) a sale in the UK in July, during the lead up to Ramadan. This accounted for 32 per cent of international retail sales, according to Swiss research firm Global Blue, and represented a year-on-year spike of 104 per cent in expenditure from Arab shoppers. Qataris led the field with an average spend of £1,288 (about $2,064) in the nine months from January to September, followed by Emiratis, with an average spend of £1,072 (about $1,718).

Foreign brands present in the Middle East

Multinational retailers are also courting Gulf shoppers in their home markets. The region’s luxury malls are dotted with the world’s largest brands, chasing income from high-spending residents and tourists.

The UAE, Saudi Arabia and Kuwait are among the world’s most attractive markets for global retailers, according to US property consultancy CBRE. Some 53.1 per cent of leading retail brands have a foothold in the UAE, a higher ratio than that seen in the US, China and Hong Kong. About 41.1 per cent have a presence in Saudi Arabia, the Gulf’s wealthiest economy, while 40.2 per cent have expanded into Kuwait.

In Saudi Arabia, Egypt and Jordan, the top five retail chains control less than 5 per cent of the grocery market

Almost all are franchised, in deals that have turned local companies into retail giants. The bulk of brands are shared between a clutch of firms, such as the UAE’s Al-Tayer Group, which counts Gucci, Yves Saint Laurent and Bloomingdale’s in its franchise portfolio, and Kuwait’s MH Alshaya, which has more than 60 brands in its collection.

Many of these franchise operators also have mall-building subsidiaries, an indication of the market’s insular nature. The UAE’s Majid Al-Futtaim (MAF) is both the partner for French hypermarket chain Carrefour and one of the Middle East’s largest mall developers. Arabian Centres, Saudi Arabia’s largest mall builder, is a subsidiary of Saudi apparel retailer Alkohair, whose brands include the US’ Gap and UK chains Clarks and Monsoon.

MH Alshaya is a majority shareholder in Mabanee Real Estate Company, the developer behind Kuwait’s largest shopping mall, The Avenues. The retail complex counts Debenhams and H&M, both Alshaya brands, among its anchor tenants.

Regional expansion for retailers

These pairings have driven growth across the wider Middle East and North Africa. Faced with rising competition at home, companies looked further afield to bolster revenues. This paved the way for foreign retailers to launch in Egypt, Jordan and Lebanon, under the umbrella of their franchise deals. Brand penetration is a fraction of that seen in the more developed retail markets of the GCC, but is steadily increasing.

Marks & Spencer this year opened its first outlet in Jordan, in partnership with the UAE’s Al-Futtaim Group, and has plans to launch a flagship store in Egypt. Alshaya has 14 brands in play in Lebanon, 12 in Egypt and 18 in Jordan, but has yet to dabble in the Algerian market. MAF has shopping centre developments under way in Beirut and Cairo, adding to its 11 existing malls.

Still, retail in the Levant and North Africa is a longer game. Opportunities for growth lie in their underserved retail markets, rising consumer spend and – in Egypt and Algeria – vast populations. But foreign brands may also battle bureaucracy and struggle to find quality real estate. Algeria, for example, has just one Western-style shopping mall, which opened its doors in 2010. Cairo, the capital of the Arab world’s most populous state, has less than half the amount of retail space on offer in Dubai.

Retail rents across the Middle East and Africa rose by just 1.4 per cent in the year to June 2012, according to the US’ Cushman & Wakefield, a reflection of a deficit of quality retail space and the downward pressure of political unrest on rents. Only Central and Eastern Europe saw a smaller rise in lease rates, of 0.6 per cent.

Grocery offers perhaps the largest returns for mass retailers, both in the GCC and the wider Middle East. The sector is highly fragmented and dominated by small traders and local stores. In Saudi Arabia, Egypt and Jordan, the top five retail chains control less than 5 per cent of the grocery market. This is in sharp contrast to developed markets, such as the UK, where the four biggest players control nearly 75 per cent of sales. The opportunity for mass retailers will be in leveraging their buying power to offer cheap goods to the Middle East’s large pool of low-income consumers.

There is also an opportunity to overhaul the type of retail concepts on offer, creating direct competition for corner shops with branded grocery stores or large-scale discount retailers. Turkey’s low-cost giant, BIM, plans to launch in Egypt in the first half of 2013, with tentative plans to expand into Algeria. UK discount chain Poundstretcher opened a store in Dubai in May, its first foray outside the UK and Northern Ireland. The company said it felt there was a “gap in the market” for budget retailers. Additional stores are planned in Abu Dhabi and Qatar.

Entertaining shoppers

Retail faces disparate challenges across the Middle East and North Africa. In the GCC, increased competition for tenants and footfall is putting pressure on operators to offer more than just a shopping experience. Newer properties are now weaving in entertainment offerings to increase the dwell time of shoppers and create spill-over revenues across the mall. These range from multiplex cinemas and snow villages, to water parks and soft-play facilities for children.

In Bahrain and the UAE, the gap between the rents commanded by prime malls and older, secondary properties is widening. Malls that fail to address the need for fresh attractions could struggle to remain competitive.

In Egypt, Algeria and the Levant economies, the risks are greater, but so are the potential returns. Though the region’s rising middle class has triggered a shift towards more modern shopping formats, unorganised retail still controls the lion’s share of the market and big-box brands will have to battle for sales. Change may come slowly, but for brands prepared to make strategic, long-term investments, the gains could be significant.

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