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The new gold rush

May 2007
The Gulf's retail market is the world's fastest growing sector, with 176 million square feet planned by 2010. But this development has come at a price. Major retail groups are making it increasingly difficult for smaller players to carve a role for themselves. This, when the traditional discounters - who are set to significantly transform the retail landscape - have not yet fully arrived. Amelia Shepherd-Smith asks whether, in light of continuing inflation and a shortage of skilled workers across the sector, it is a case of too many shopping centres?
Shoppers voted with their feet to close down Sharjah's Safeer Mall in February this year. First, they blamed poor road access, and then, the proximity of Deira City Centre, which sat bustling by comparison, just 20km away. What resulted was the sudden closure of no less than 34 businesses in the emirate. And although it hardly constituted a bursting of the retail bubble, the incident no doubt served as a reminder for retail groups across the region - inflation will force the industry to consolidate.

In his capacity as Partner for Middle East Strategy Advisors (MESA), Joern-Carlos Kuntze predicts increased competition throughout the Gulf Cooperation Council (GCC) region's retail industry in the next decade, and lists high rents, rising costs of staff, and a general increase in the cost of living as growing threats to the industry. "Everyone is competing for retail space - to have a prime location - and every mall operator is taking as much for themselves as possible."

Al Futtaim Group Director for Retail, Jim McCallum, warns that inflation is already proving a barrier to growth and recently announced that he believed current rental rates were "silly." Why then are the world's leading brands continuing to make a beeline for the GCC's retail market? For starters, the business case is compelling. Home to 500,000 high-income professionals and a GDP of more than $600 billion, the region has money to spend.

Reports that the population is growing at an average 2.8 per cent and that its tourism industry is growing at 7 per cent are also positive signs. For reasons such as these, Mike Davidson, President for the Middle East Council of Shopping Centres (MECSC), is bullish about the industry's prospects, "Retail is becoming a major contributor to GDP for a number of Arab countries, particularly in the GCC," he says.

"The growth of national populations and influx of expatriates have made for a viable industry while the continued growth of regional and international inbound tourism, plus the region's general tax-free status, makes for a lucrative opportunity for retail brands," Davidson adds.

It has taken the Gulf just 50 years to transform itself into a $50 billion retail market. Back in the 1990s, the region's Gross Leasable Area (GLA) was just over five million square feet. Today, the number has swelled to more than 53 million square feet, and industry tracker Retail International reckons that this figure will more than double by the end of the decade. Even more revealing than sheer numbers is the way people are spending.

With its booming economies, growing middle class, and rising per capita incomes, it is perhaps surprising to know that the per capita spend across the GCC states sits well below Western European benchmarks. Kuntze, for one, is confident that the situation will change, and probably rapidly, as equal, and in some cases superior product offerings are found in the UAE, Bahrain, Qatar and Kuwait in particular.

Shopping begins at home
"Less than five years ago, the prime shopping locations for high net income individuals in the GCC were the high streets of London, Paris, New York and Munich, but times have changed," he says. "The growth of the national and expatriate populations, particularly the white-collar sector, has been critical." MESA predicts that by 2009, retail spending in Dubai's shopping malls alone will exceed $7.6 billion, followed by Saudi Arabia ($6 billion) and Abu Dhabi ($1.9 billion).

By 2008, Dubai will boast three of the 10 largest malls in the world and much of its success comes down to its ability to market itself. Its two local shopping initiatives - Dubai Summer Surprises (held in August) and the Dubai Shopping Festival (held from December-January) - have worked wonders to attract an increasingly international crowd to the region. Responsible for roughly 50 per cent of retailers' annual turnover, the 10-year-old events have proven a hit with tourists, who today make up 65 per cent of total retail business.

Putting Dubai success in perspective is its per capita retail space, which compared to the US, is four times larger. And with more mega malls under construction, OC&C Strategy Consultants predicts that Dubai will eventually have 16 times more per capita retail space than the average for the European Union's 25. Trailing behind are Doha and Abu Dhabi, for whom the multiple can be reduced to four and three times, respectively.

In the past year, Dubai has realised a 26 per cent increase in its GLA, and by 2010, it is forecast that the emirate will be able to lay claim on 44 per cent of the total GCC region's space. In terms of numbers, this will see its GLA growth from 14.75 million square feet to 45.75 million square feet.

Key projects on the horizon include Abdulla Al Futtaim Group's Dubai Festival City. Spread over 2.7 million square feet, it will include the largest Ikea in the Middle East (275,000 square feet) and is heralded as the largest privately funded project in the emirate. Other highlights ahead include Emaar Properties' 3.8 million square feet Dubai Mall and the doubling of Nakheel's Ibn Battuta Mall, which is currently 1.5 million square feet in size. Family business I&M Galadari will also soon leave its mark with Dubailand, a Disneyland-type complex for which phase one is set to measure a huge 5.9 million square feet.

Regional roulette
Compared to Dubai, the rest of the Gulf is still playing catch-up. Abu Dhabi has focused on 'Grade A' retail space, and hopes to increase its GLA from 5.74 million square feet to 14 million square feet in the next four years. Milestones are to include phase two of its Marina Mall, which is set to increase its GLA to 1.6 million square feet, and a 1 million square feet souk is planned.

In Kuwait, developer Tamdeen is building 3600 Kuwait, Al Kout and the 1.4 million square feet Mall of Kuwait. Currently home to 278,000 square feet of GLA, Bahrain's capital, Manama, will also welcome an extra 6.5 million square feet of GLA and grow 216 per cent by 2010. Central to its aims is the development of Bahrain City Centre, a 1.6 million square feet complex which, when finished by Majid Al Futtaim Investments (MAFI), will be the region's largest.

Nearby, Qatar will also increase its GLA by 7.9 million square feet, including its Italianate Le Villagio Mall, while Saudi Arabia expands its available space by 56 per cent to 75 million square feet . To achieve its aims, the local Savola Group has teamed with South Africa's Old Mutual Properties to build 14 projects, which together will be worth more than $1 billion.

An important characteristic of all retail markets in the GCC states is the growth of international retail brands. From 20 in 1985, there are now 400 non-indigenous retailers who have together sought to bypass foreign ownership laws by initiating franchising agreements with local operators. The result is a situation whereby many of the largest retailers in the Middle East today operate as part of a portfolio, which collectively encompasses a wide range of international brands. For international companies, the reasons for such a move are simple - it's a way into a new market with little capital requirements, it's low risk, and it lets a company grow fast. On the upside, the franchise concept has let leading franchisees such as Kuwait's MH Al Shaya Group and Saudi Arabia's Al Hokair Group become critical players in the Middle East retail and shopping centre development industry without the need for a retail front of their own.

Successful retailers for whom such groups franchise include high profile UK brands Harvey Nichols, Boots and Debenhams, as well as Saks Fifth Avenue and Kenneth Cole from the US, and Sweden's H&M. The latter was considered a particular coup for the Al Shaya Group, as it has not before this point shown an interest in franchising.

But franchising has a downside too - if a retailer fails to choose the right partner. Across the Gulf, a unique situation exists where only a few retail players control 70 per cent of the market in their portfolio. If these brands are not managed well, the market faces a higher risk of cannibalisation. "Problems can start if you've got similar brands under one umbrella," says Kuntze. "If a retailer wants to have a strong brand, it's important they make sure there is a commitment and dedication to develop that brand in terms of key milestones."

Reinventing innovation
For developers seeking to differentiate themselves, a common tactic is to establish in the region's shopping malls increasingly large entertainment anchors such as Dubai's Mall of the Emirates' Ski Dubai - a 1,300 square feet indoor ski resort. Another common trend in the region's shopping centres is to build a 150,000 to 220,000 square feet hypermarket as an anchor. This move has been lucrative considering AC Nielson's report that shoppers spend more than 127 hours in a hypermarket each year.

Leading the hypermarket brands in the region is Carrefour, which last year made $1billion Gulf-wide. Providing strong competition is French Géant and the UAE Emke Group's Lulu Hypermarket, as well as the Saudi-owned HyperPanda in Dubai Festival City.

Professional discounters across the sector are proving a hard act for smaller businesses to follow. Explains Kuntze: "The market is going to grow quickly and I'm not talking about cheap shops. The real discounters haven't entered the market yet because it is not mature enough, but I think that in the next five to 10 years, this will change, and possibly even sooner."

In the meantime, evidence suggests the only local retailers able to remain viable are the ones with a long brand history such as Paatchi, or others who have chosen not to sell an Arabic brand exclusively, but rather as part of a collection, for example Aïthsi, whose collection includes international brands such as Gucci and Prada. Increasingly, successful differentiation includes services as well as products.

Across the Gulf, high churn rates continue to negatively impact the GCC retail markets. A combination of high demand and low retention rates is the culprit, and small business operators have been able to use the environment to their advantage by setting staff training initiatives and bonus schemes. As founder of the UAE furniture outlet THEOne, Thomas Lundgren has noticed improved retention rates following the introduction of fund raising initiatives and certain other incentives for his staff. Other speciality stores, such as those in the electronics field, are also being given an opportunity to satisfy a market that is too often criticised for its unqualified staff programmed more to give certain information than trained or qualified advice. Despite its shortcomings, interest in the region's retail markets continues, particularly from European and American retailers in search of the mid-income market. Colliers International, for one, predicts that Dubai "will not undergo a period of stabilisation for retail real estate in the foreseeable future."

Unlike Europe, where the real estate market must constantly question its portfolio, pricing and people, the GCC market has enjoyed continuous growth in recent times. But increased competition and an overall maturation of the market in the next decade will force a fine-tuning of the local retail concept as overall growth slows. At this point, says Debenhams International Director Francis McAuley, "Only those brands and concepts that correctly adapt to this multicultural environment will succeed."

© Gulf Business 2007