02 March 2017

By Sarah Jacotine

With an average of four new food and beverage outlets opening in Dubai every day, according to figures released by last summer by Dubai Municipality, some analysts fear the sector is approaching saturation point.

A report this time last year by Abu Dhabi-based newspaper The National forecast that up to a fifth of the United Arab Emirates’ 16,000 F&B companies could close by end of 2017.

“People overreacted; 20 percent would be highly visible – that’s basically a collapse of an industry,” Nikola Kosutic, a Dubai-based research manager for Euromonitor International, told Zawya this week. “What we are seeing are some structural changes, so an increasing number of outlets are closing but being replaced by new operators coming into the market,” he added.

The outlets that are closing tend to be those launched without a solid strategy, by foreign operators who were attracted by the average revenue of an UAE outlet being the highest in the world at $850,000 per annum.

“It has been the norm in this industry to think that if you open a restaurant you will make money. That is not the case any longer and that is definitely a sign of an industry maturing. Operators need to be smarter, and do proper due diligence and sophisticated market research,” Kosutic remarked.

While many consumers have “started being more cautious” in their spending habits, especially at a time when oil prices are still low, Kosutic said he believes the situation is not as dire as many perceive it to be.

“The economy has seen some slowdown but things are actually not that bad. UAE GDP growth has remained strong and positive; it is only 1.5 percent lower than what we saw in 2015 and other economic fundamentals are positive as well, such as growing population and disposable income.”

His views were echoed by a report released this week by recruitment firm Cooper Fitch, which stated that market sentiment looks reasonably positive for 2017. It estimated a GDP growth of between 4-6 percent across the UAE, with the oil price predicted to be between $55 and $65 per barrel.

Analysts at the Gulfood Breakfast Briefing earlier this week also pointed to the fact that the UAE’s F&B sector has historically remained resilient in times of adversity. Atiq Juma Nasib, senior vice president of commercial services at Dubai Chamber of Commerce and Industry, a non-profit public organisation that represents around 150,000 businesses, highlighted the country’s fast-growing population and thriving tourism market as the main factors driving the sector.

Price pressures

With consumers being more careful with spending, suppliers working in the industry have found that operators have also started to be more conservative.

Robert Jones, general manager of coffee roaster Coffee Planet, said that while the UAE-founded company diversified and experienced double-digit growth last year, this growth was smaller than forecast.

“Globally there was a lot of instability in 2016 and that manifested in the UAE in a number of ways,” he said. “The oil price didn’t help, nor did the weakening of the dollar and the pound from a tourism perspective, which impacts part of our business. Customers were a little more cautious last year.”

Price consciousness among buyers is also related to the UAE’s high operational costs. Fasahat Beg, executive vice president of water, beverages and dairy at Abu Dhabi’s Agthia, said that while the company’s top line outlook is good for 2017, there are challenges with the bottom line due to input costs, such as utility rates increasing.

Suppliers have inevitably felt pressure to adapt to buyers’ needs and have been forced to explore new promotional activities.

Haykai Moussa, a commercial specialist at Nestlé Professional, who handles sales of coffee for offices in Dubai, reported that many beverage companies are providing drinks machines to commercial businesses free of charge.

“When offices want to cut costs, providing free coffee to employees is not a priority. We give coffee machines to companies and provide maintenance – they just have to buy the product from us. Most beverage companies are trying to do as many promotions as possible. Nescafé and Nestlé are well known, so half of our job is done, but budgets are small still,” he said.

The arrival of VAT

A big talking point for the sector is plans to introduce value-added tax (VAT) in the UAE from January 1, 2018, with a 5 percent tax applied to the majority of payment transactions. Euromonitor has said that F&B is one of the industries that will be affected the most, although legislation is yet to be released detailing which goods and services will be levied with tax.

Many companies in the UAE have experienced the introduction of VAT in other markets and therefore understand the reasons behind it.

“This is a very progressive market and the government has invested hugely in its development and infrastructure. It was only a matter of time before it happened if that level of growth is to continue, and it’s fair that it happens,” said Jones.

VAT rates around the world vary hugely – the highest is 27 percent in Hungary – and one of the UAE’s biggest trading partners, India, implemented VAT more than a decade ago.

“How many countries around the world have no tax? One has to see that as economies mature and develop, there will inevitable be a small price to be paid for that,” said Mark Napier, exhibition director for Gulfood.

Artisan food manufacturer Intelligent Foods’ general manager, James Le Gassick, made the point that those who are used to VAT in other countries are pleased that the UAE is not introducing it at a higher rate: “We are all hoping it doesn’t increase too rapidly. This extra cost is not too big of a jump for the consumer.”

Kosutic told Zawya that it is more likely that F&B operators will absorb the VAT cost, rather than pass it onto already price-conscious consumers.

“There will be a small effect on importers, distributors and anyone else in the supply chain, and the F&B operator will bear the biggest chunk of cost. Five percent is actually quite a lot when you have some of the highest prices in the world, which the UAE has, and very few players are investing enough resources in exploring how it will affect their bottom line in the long run.”

© Zawya 2017