The rise of the retail giants

08 August 2008

As the Gulf’s economic boom drives major local and foreign shop chains to expand in the region, smaller businesses are losing out.

Combine high living standards with an oil price surge unprecedented since the 1970s and what do you get? A consumer boom the like of which the Gulf has never seen.

Two sectors above all are feeling the positive effects: real estate and mass-market retailing. And the main beneficiaries are the Gulf business houses that are developing shopping malls and franchise partnerships with foreign retail brands.

However, conditions are not quite so favourable for traditional shops and markets, which are gradually losing their share of trade to the big outlets that are increasingly common across the region. But even for these smaller players, the overall rise in consumer spending is creating a broadly positive business climate. Recession is not on the agenda.

Across the GCC, the value of food sales in the period June 2007 to May 2008 was up 10.1 on the equivalent period in 2006-07, according to US-based market research firm The Nielsen Company. Growth rates are comfortably into double figures across the smaller economies and even in Saudi Arabia - which, with a large population and many on modest incomes, is naturally slower to respond - trade is up by 3.1 per cent.

Sales growth

UK department store chain Debenhams, which has franchise outlets in five GCC markets, as well as Jordan, reports double-digit rates of growth in sales. Francis McAuley, international director at Debenhams, says this is underlying growth, after the impact of new store openings is stripped from the group’s figures.

“In terms of international retail, people still refer to the Middle East as an emerging market, but I would disagree with that,” he says.

In such trading conditions, it is hardly surprising that retailers have big expansion plans. For the likes of Debenhams or Carrefour, the Gulf is a useful counterweight to the more sluggish markets of their home economies in Europe. And for the big indigenous business groups, today’s favourable conditions are a chance to diversify and broaden their reach.

The Fawaz Alhokair Group, for example, has more than 600 stores across Saudi Arabia. Among its latest projects is a franchise of Austria-based home furnishing company Kika, which carries 40 top European brands, in Dhahran. Meanwhile, Alhokair’s Food & Entertainment Company plans to open 40 stores in the kingdom this year.

Attracting investors

The group predicts that its 2006/07 turnover of SR5bn ($1.3bn) will triple over the coming five years. Such prospects have, understand-ably, attracted investors. An initial public offering of 30 per cent of the group’s stock, worth SR2.4bn, attracted 2.1 million subscribers, although excess funds were returned. Since then, the stock has performed steadily, despite the wide fluctuations in the overall performance of the Saudi market.

While rising incomes and expanding populations have been powerful drivers for the expansion of the retail sector, social trends specific to the Middle East are also a factor. This is a region that is becoming steadily more affluent, but where climate, landscape and social customs combine to limit the range of leisure options available to much of the population.

Much of the indigenous population have more time and money available than ever. Shopping has come to fill an important role in the leisure sector, especially because malls offer an easy environment for families to stroll and chat. Visits to malls can be adjusted to budget. Even for the many families on modest incomes in Saudi Arabia, Bahrain or among the Gulf expatriate population, they offer a low-cost chance to go out together.

Moreover, although shopping malls in their current form are clearly a modern phenomenon, they are not entirely out of synch with Arabian culture. They represent an updated, shinier, air-conditioned version of the souk, the traditional market that is a feature of almost any town or city in the region.

In Kuwait, for example, some of the Gulf’s most glitzy retail centres, such as Marina Mall or the upscale indoor avenue of top-name brands that adjoins the JW Marriott hotel, share shopping time with the city’s old Mubarakia Souk or the huge paved hall of the purpose-built fish market.

Regular evening shopping is very much part of everyday life. “Our Gulf customers visit our stores once every 10 days,” says McAuley. “In the UK, it is a lot less than that.”

The frequency of shopping trips itself acts as a further driver for trade. To tempt repeat visitors into opening their purse strings each time, retailers must constantly produce new products and designs. This in itself is useful for European retail groups that are seeking market outlets in sectors such as fashion.

In this lively scene, Dubai stands out from other regional markets because it has developed shopping as a major theme of its appeal as a tourist destination. A city whose traditional trading base was originally fuelled by wholesale businesses - distributing goods for resale at the retail level in neighbouring countries - retains that niche but has also transformed itself into a high street for consumers who fly in from around the world.

Mall of the Emirates is the pre-eminent example of this trend. Developed by the Majid al-Futtaim Group (Maf), it now claims to be the largest ‘shopping resort’ outside North America, with 223,000 square metres of trading space. It houses more than 400 retailers, and the construction of two hotels will put a significant number of customers directly on site. Maf says the site will soon attract more than 30 million visits a year.

The group currently claims 90 million visits a year across all seven of the malls it operates in the UAE, Oman and Egypt.

Retail hub

However, the group is further reinforcing Dubai’s role as a retail hub with the development of the 183,400 sq m Mirdif City Centre, with 430 retail outlets, which should open in early 2009. It has also revamped its original flagship operation, Deira City Centre, which is on the fringe of Dubai’s traditional market district.

But from a strategic point of view, Maf has balanced its investment in Dubai as a shopping tourism destination with the development of malls catering for local populations, such as the City Centres in Ajman, Sharjah, Cairo and Alexandria. A similar project is under way at Qurum in Muscat, while a 150,000 sq m mall will open in Bahrain in September.

Besides the overall growth in trade, Nielsen detects two significant trends in the Middle East retail sector: large stores are steadily increasing their share of the market; and, despite the trading boom, shoppers are becoming more price conscious when it comes to food and other basic essentials.

Research by Nielsen has found that in the UAE, hypermarkets and supermarkets have increased their share of trade - for a sample ‘shopping basket’ of food and other basic consumables - to 49 per cent from 43 per cent in 2003. Meanwhile, at the bottom end of the trading chain, the market share of small, local grocery stores has fallen from 25 per cent to just 18 per cent.

In Saudi Arabia, the trend is not so far advanced, but its direction is the same: the biggest retailers, with floor space of 501 sq m or more, have increased their market share from 32 per cent to 37 per cent, while the small grocers have slipped from 23 per cent to 20 per cent

“Overall, there is a trend of sales moving towards the bigger format,” says Piyush Mathur, Middle East regional managing director for Nielsen.

However, he says he does not believe that small shops will be wiped out altogether in the UAE. “They provide a home-delivery service, even for very small quantities of goods,” he says. “That is a service that the housewife loves. When the householder suddenly finds they have run out of something, all they have to do is call the local shopkeeper and he will send round a delivery boy with the item in minutes. No supermarket can match this local service.”

Niche services

Moreover, adds Mathur: “They also offer credit to regular customers. This is very useful for migrant workers on a low budget. And they sell things you need daily - phonecards, milk, perishable items.”

He says traditional souks will continue to play a role, because their variety and atmosphere is an attraction in itself, for both locals and, in a holiday destination such as Dubai, tourists. Specialist markets such as gold souks are also a distinct attraction.

However, the onward march of the big retailers and the major malls does seem unstoppable. It is reinforced by the importance of branding, with better-off consumers keen to buy specific named products. Curiously, however, the country where big retailers claim the largest market share of basic consumables trade - 60 per cent - is Kuwait. This is because of a long-established indigenous phenomenon that is deeply rooted in Kuwaiti culture: the co-operative system.

There are co-operatives in the UAE too - Union Co-op, Sharjah Co-op and Abu Dhabi Co-op, for example - which are run on more aggressively commercial lines. But they do not command the same predominant place in every-day consumer life as Kuwait’s co-operatives.

Meanwhile, despite their rising affluence, Gulf consumers are beginning to feel the strain of inflation, particularly in the UAE.

“There is an impact from the [price] increases, whether it is rents, school fees or even transportation,” says Mathur, noting that this is beginning to affect the way people behave. “Consumers are starting to look at ways they can cut down,” he adds.

Meals out and shopping trips are obvious targets for belt tightening. And this is prod-ucing a marked shift towards the purchase of own-brand products in supermarkets.

Nielsen has found that 55 per cent of con-sumers in the UAE report buying own-brand goods, which can often be almost 50 per cent cheaper than name-brand equivalents. In Saudi Arabia, 29 per cent of the population have bought own-brand goods, according to Nielsen.

The inflationary pressure on consumers is also noticeable in the way retail groups promote themselves, with the likes of Carrefour or Saudi supermarket chain Giant stressing the value for money they can offer. Giant now even features its best prices for basic items such as cheese or antiseptic on the opening page of its corporate website.

With inflation in the GCC a growing problem for locals and expatriates alike, the region is likely to experience a rise in supermarkets promoting their value-for-money credentials in their own brand products. This will further increase the market share of the major retailers.

But with a growing middle class in the region, all segments of the retail sector are set to continue growing for many years.

Investing in malls

Together with super-tall towers, giant shopping malls have become the emblems of the Gulf construction boom. The Gulf’s rapidly expanding middle class, expatriate as well as local, means that there is more disposable income than ever before in the region. Well situated shopping malls therefore represent an excellent investment opportunity for developers.

But many of the malls under development are more than simply an investment aimed at tapping into the region’s growing desire to shop. The malls themselves are being developed as landmarks that will attract businesses, residents and tourists.

UAE developer Emaar Properties’ Dubai Mall, for example, will be as much of an attraction to the Downtown Dubai development as the Burj Dubai - the world’s tallest tower. The mall will be the world’s largest and aims to attract 35 million visitors in its first year of operation.

There are about $3.1bn worth of mall projects under development in the GCC, with many of the biggest names in Gulf real estate, such as Emaar, Majid al-Futtaim, Aldar, Tamdeen and Dar al-Arkan, driving megamall projects.

The biggest market is the UAE, where $1.1bn worth of developments are under way, representing about 58 per cent of all mall projects in the region. Saudi Arabia is the region’s second-largest mall market, with $560m worth of projects under way.

Key fact

10.1 per cent: Rise in sales of food across the GCC from 2006-07 to 2007-08.

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