When UAE Economy Minister Sheikha Lubna al-Qasimi was transferred to the Foreign Trade Ministry in a February 2007 cabinet reshuffle, it sparked fears among the country’s most powerful families that the reform-minded minister would scrap the laws giving UAE nationals exclusive import rights over foreign brands.
Any move to abolish these retail agency agreements would end the competitive advantages enjoyed by the Gulf’s most powerful family conglomerates. Yet all GCC governments are pledging to open up their economies to competition.
“There is a lot of lobbying going on,” says the general manager of one leading family retail conglomerate. “There is a genuine feeling among the families that they have spent 20 years building up these brands and that the government should not be allowed to take them away overnight.”
GCC retailers are enjoying sales increases of about 13 per cent a year. The entry of new brands takes real growth closer to 20 per cent. Analysts expect this to continue until 2013 at least. But there is growing international pressure on regional governments to open the market.
“There has been a lot of speculation about doing away with agency agreements,” says Robert Ziegler, vice-president of management consultant AT Kearney Middle East. “The retail industry has been pushing for this for a long time as it inhibits foreign direct investment. Abolishing the requirement to have an agent would open GCC markets to foreign companies. But only Bahrain has taken active steps in this direction; otherwise it has been limited to sectors where there is not much value to add, such as manufacturing.”
This could change, he says. “Family conglomerates have diversified into real estate, investment companies and manufacturing.
“Retail is now just part of a bigger picture. Many [firms] have added value to their brands – through logistics and warehousing, for example. But many are asking themselves whether they should continue to depend on their agency businesses. There is the risk that a government could abolish agency laws overnight. If that were to happen, the value of the firm would depreciate.”
Observers say it is a matter of when, not if, the GCC agency laws are abolished, and that the strongest businesses could benefit.
Many global retailers expanded aggressively overseas in the 1990s. Today, several, including the UK’s Marks & Spencer, have returned to franchise-based expansion in markets such as continental Europe (see feature, page 35).
“It [franchising] is an easier way to operate in unfamiliar new markets,” says one analyst. “Do not expect a rush of brands sacking their agents once Gulf agency laws are abolished.”
Instead, the biggest Gulf firms could snap up weaker rivals to create a generation of super-regional franchisees, operating beyond national borders.
Already, Gulf retailers are expanding their control over the retail chain and venturing overseas. Saudi Arabia’s biggest retailer, Riyadh-based Fawaz Alhokair Group, is expanding into Egypt and Eastern Europe.
MH Alshaya & Company, the conglomerate dominating Kuwaiti retail, is building malls for its brands at home, and extended its Starbucks franchise to the Russian market in the autumn of 2007. It has also made strategic acquisitions in Eastern Europe and now represents 15 brands in Turkey and four in Russia.
Abolishing GCC agency laws could make the big players bigger, says the general manager. “In this environment, the company with 1,000 stores will be in a position to consolidate,” he explains. “Everything in the Gulf is up for sale. If someone is willing to pay, loyalty does not come into it.”
But there is also the spectre of oversupply of GCC retail space. Ira Kalish, director of global economics and consumer business at Deloitte Research, says the pace of GCC retail expansion reminds him of China’s coastal cities a decade ago.
“In many developing countries, spurts of retail growth lead to excess investment, creating excess capacity,” he says. “That risk exists in the major Gulf cities, and a shake-up could take place in the next two to three years.
“Dubai today is like Shanghai in the late 1990s. Shanghai found itself with excess capacity, underwent a shake-out, and migration from rural areas helped population catch up with capacity. In Dubai and Abu Dhabi, though, you wonder where additional people would come from without massive immigration.”
For many family conglomerates, now passing from the second generation of owners to the third, it is a time of soul searching. Many younger bosses hold degrees in business, have global experience and want to make changes.
“Change is coming,” says Ziegler. “While some companies are still diversifying, many have started to shed holdings to focus on core business. In Kuwait, [for example], the second generation has taken over Alghanim [Industries] and given it a more Western-style focus, shedding less attractive segments.”
In many conglomerates, there has traditionally been a deep divide between family and non-family, leading to tensions with hired senior management. Traditionally, the chairman signs every cheque, a symbol of family reluctance to delegate power to outsiders.
“If senior managers outside the family are not empowered, they do not last,” says Ziegler. “Trust is a huge issue in family firms. In some cases, trust has been abused. But instead of having checks and balances, many firms operate all the checks and none of the balances.
“However, the new generation seem to have more trust in employees from outside the family. There is growing awareness that decentralisation can be healthy, although I still think it is easier to build a new economic city than to change the mindset of a Gulf trading family.”
Saoud Abdullah al-Darwish, vice-chairman of Qatari conglomerate Darwish Holding, disagrees with the notion that family firms cannot adapt. With assets of up to $1bn, the company, founded in 1944, has embraced change under its third generation of management, restructuring five years ago.
Darwish represents luxury brands including Rolex, Givenchy and Dior. Its retail business has grown by 40 per cent a year for five years, achieving sales of $145m in 2007.
It is moving into real estate and mall management, leasing a 75,000-square-metre mall from Aldar at Plaza Towers in the prime West Bay Lagoon development.
In 2005, the group hired an international consultant to rebrand the flagship Modern Home department store as 51 East.
This is preparation for a retail boom that could bring global rivals such as Selfridges and Harvey Nichols to Qatar, and in the longer term, expansion overseas, says Al-Darwish.
“We do not see ourselves as collectors of agencies – it is about quality, not quantity,” he says. “We employ the best management to run a family business like a normal corporation. To be unprofessional is the biggest threat to the longevity of Gulf family firms.
“We started to do our homework, with changing agency laws in mind, when Qatar became the first regional state to sign the WTO [World Trade Organisation] agreement. We hired Deloitte Touche to create a corporate governance handbook and a professional organisational structure. We have taken major steps to separate management from ownership.”
But will the company be privatised? “We are thinking about it,” says Al-Darwish. “But we will carry out all necessary precautions and feasibility studies first. It is on the back-burner for now.”
Many Gulf companies restructure to simplify the lines of succession, giving a business to each son and, increasingly, to each daughter. But observers disagree over whether privatisation is a goal for family conglomerates, and whether it would attract investors.
“Many of the largest trading firms, although privately owned, operate [like] public companies,” says Simon Thomson, principal of Retail International. “They deal with international PLCs [publicly listed companies], where transparency is required, and raise finance from global banks who require compliance with global accounting and auditing standards. With so much cash washing around the Gulf, there seems little advantage for any locally owned firm to do anything other than remain private.”
Ziegler takes a sceptical view. “Traditional family structures present a risk to foreign investors,” he says. “While it is easy to pick up stock through an IPO [initial public offering], it is less easy to find data about the management team and culture of corporate governance.
“The chairmen of these companies also face internal conflicts of interest between their different shareholdings when they offer part of the business through an IPO, which then benefits other parts of the business. It is the shareholders who suffer.”
Sharia law requires assets to be divided between offspring, raising the prospect of a chief executive officer in his fifties inheriting the same share as his teenage brother. This could also prompt restructuring, says the general manager. “Many of the biggest trading families have set up holding companies,” he says. “Each business operates as a subsidiary, with the holding company put up for flotation. Generally, families only float their businesses when they need capital or they need to get out.”
In 2008, Damas International raised $270.6m through an IPO. As well as restructuring debt, the company plans 130 new stores in Egypt and the GCC this year, as well as future acquisitions.
“In future, we will see more companies that hold 30-40 different businesses across construction, real estate and retail deciding to go to market,” says Tawhid Abdullah, managing director of Damas. “They will start to offer different parts of their holdings to IPO, one by one. It is a good way to prevent problems such as the issue of succession. It means there is less risk.”
What does seem certain is that family firms face unprecedented change. “About 60 years ago, entrepreneurs set up retail and trading companies because that was what the Gulf needed then,” says Al-Darwish. “The world is very different today. Only companies that prepare for change will survive.”
20 per cent: Forecast annual growth in retail sales in the GCC to 2013.