By: Gulf Marketing Review

Retail has scripted for itself a spectacular growth story in the GCC. Driven by the desire to liberate themselves from the shackles of an oil-based economy, the GCC countries took an active decision to invest in other areas of the economy, of which retail was a prime part. The result of this decision is evident. Dubai today is regarded as one of the prime retail hubs, not only in the Middle East but in the entire world.

A report by Ardent Advisory & Accounting says the GCC retail market has grown at an average rate of seven per cent over the past five years, higher than the global average. Five out of six GCC countries have featured in the top 30 on the 2015 Global Retail Development Index. Hence, top global players are vying for a foothold in the GCC retail space. But with so many malls opening up, competition levels will skyrocket – can brands and mall operators survive?

“A good concept and format (flagship or convenience) will do well regardless,” maintains president, Middle East & North Africa, Virgin Megastore, Nisreen Shocair. “Brands have to experiment and determine which format will work where. A convenience format, such as a coffee brand, cannot be a profitable proposition anywhere. It may not work for all brands.” Maintaining that there are more opportunities than challenges, she says the current business environment is part of a cycle, which will pass. “It is an opportunity to realign goals, strategy, organisation and teams, so everyone emerges stronger,” she adds.

Virgin Megastore has 40 stores in nine countries across the MENA region and has been growing year-on-year in terms of stores, sales and profitability. The company also plans to open new stores and formats in Saudi Arabia and Qatar, its the fastest-growing markets.

However, some retailers believe that the number of upcoming malls in the region is only going to increase. The CEO of Portuguese premium luxury brand, Sacoor Brothers Franchise, Dubai, Bart Denolf, says: “Competition is high in this region; the presence of international brands is seen in most of the shopping malls, making it more and more important to be unique. This is a mall culture; people spend most of their leisure time inside these centres. There are a lot of shopping malls in the GCC, but there is still not a full penetration of the malls into the regional market so far.”

“There are some retailers who are reshaping their market position and are concentrating more on the best malls. However, we should not forget that there are many buyers who don’t necessarily visit these mega malls. Rather, they prefer visiting convenience malls or compact-type shopping centres. Overall, I believe there’s space for more malls in the region that can offer something different to shoppers and cater to the entire family,” he adds.

Country manager UAE for the Chalhoub Group, Sharmila Murat, agrees: “There has been a rapid growth in the GCC region’s retail sector, with a number of malls opening and expanding, as well as the rise of online retail. Nevertheless, in terms of GLA per capita, the region is still behind Europe and the US,” she notes.

Chalhoub Group is a leading partner for luxury brands across the Middle East, with the majority of the business concentrated in the GCC. It operates more than 650 retail stores across different segments of fashion, beauty and gifts, through its own concepts developed in-house or as a franchise or joint venture partner of global brands.

Acknowledging that retailers are having a tough time in the region, Murat says: “We have challenging times ahead, therefore we need to adapt to the new norm and changing consumer behaviour. There are fundamental shifts happening and we need to understand them and deal with them with speed, agility and efficiency. In spite of the foreseen challenges, it will probably be one of the most interesting periods and a reminder that we can never take anything for granted.”

WHAT DO CUSTOMERS WANT?
The ability of retailers to put the customer front and centre for their business will determine the industry’s future success. At last month’s Retail Leaders Circle MENA event in Dubai, various experts shared insights on the region’s retail sector.

For instance, the president of Virgin Megastores MENA, Nisreen Shocair, delivered a keynote address on ‘Redefining Customer-Centricity’, where she highlighted a common retail misconception that price promotions are at the heart of customer-centricity.

“This is about knowing your customer, understanding what they want, listening and acting. Your brand alone does not guarantee customer loyalty, because the market is saturated. Neither does exclusivity, because there is no such thing as exclusivity anymore. It’s not going to be your location in a mall either if people aren’t going to the mall anymore. What is going to be paramount to the success of your business today is your relationship with your customer,” she said.

Consumers increasingly expect a seamless, connected experience across channels (including web, mobile, social and in-store) and delivering this effectively requires real time data. According to Shocair: “The days of waiting six months to run a campaign and then bringing in a market research company to run the results are gone. It’s all about real-time. Retailers need to maintain their competitive edge by gaining real-time information on their customers. Customer-centricity is about delivering a more tailored and personalised shopping experience – one that delivers the right products, services and value to each customer at the right time.”

THE FUTURE OF RETAIL
According to an EY report Building the pearl of the Gulf, Qatar’s retail supply is expected to grow at approximately ten per cent during 2013–2018 and the demand for retail properties is expected to continue in the mid- to long-term. The retail segment is the fastest growing of all real estate sub-sectors in Qatar.

Further, the study notes, there has been growth in international brands entering super/hypermarket chains. Luxury goods outlets among modern retail facilities are in strong demand, following a growth in the number of tourists and affluent citizens. An increase in shopping mall construction, including Mall of Qatar, is the result of strong demand for retail space, the report notes.

Huge government investments have been made into infrastructure in order to host the 2022 FIFA World Cup. There are planned projects with many underway, including hotels, restaurants, retail spaces, transport facilities and football stadiums. However, the report cautions: “Due to the scenario where supply will exceed demand, vacancy rates are expected to increase, forcing landlords to cut down rental rates.” Historically, the report continues, Doha was a significantly under-supplied retail market, leading to significant investment in organised retail over the past decade. Traditionally, residential-focused developers benefited from diversification while meeting the needs of a rapidly rising population. Looking ahead, the retail sector is expected to see significant supply additions in the medium to long-term, far out-pacing population growth and leading to risks of oversupply.

With the threat of new supply, current landlords are looking at capital improvement plans to mitigate competitive risk and maintain market share. By 2020, when the last of the current proposed supply is expected to enter the market, Doha’s GLA (gross leasable area) per capita will rival that of established tourism destinations such as Manhattan and Dubai, the EY report adds.

MARKET SATURATION?
The overhang of upcoming supply and existing high mall density levels indicate retail market saturation, says a report by Core Savills. “As one of the most penetrated retail markets in the region, Dubai, despite its modest population, has the second highest mall density in the world of 1,214 GLA sqm/1,000 people, trailing marginally behind New York,” it reads.

Dubai has a mall density nearly 380 per cent higher than that of London and 240 per cent of Paris, partially because these European markets have a stronger high street market, in addition to a much higher population base than Dubai.

Such high mall density is largely justified by Dubai’s very high visitor to tourist ratio of nearly 5.6 visitors per resident. Yet Dubai offers the most competitive prime rents across global retail hubs and positions itself favourably amongst luxury and fashion retailers. Luxury retail rents in Dubai are nearly 90 per cent lower than New York and almost 75-76 per cent lower than Hong Kong, London and Paris, the report notes.

Core Savills CEO, David Godchaux, says: “Although mature in its volume and retail offerings, with a strong B2C network, Dubai’s retail sector largely remains an oligopoly. Demand is led by privately owned retail groups, which operate almost 90 per cent of global brands in Dubai, while the top five state-backed developers form nearly 87 per cent of total retail supply. In a retail ecosystem such as Dubai, this ‘close control’ makes the market relatively less elastic compared to other global markets, which are typically driven by a much larger pool of offer and demand.”

“Despite the softening regional economic conditions, demand from retailers has not seen a significant dip, with stable pre-leasing activity witnessed in The Dubai Mall expansion and other strategically located under-construction malls nearing completion. Furthermore, the super-regional malls, which are located on Sheikh Zayed Road, are all currently witnessing occupancies northwards of 98 per cent. This has led many retailers to be on the waiting list as developers aim to maintain a tenant mix that is unique and appropriate for the pitch in which the brand is located,” adds Godchaux.

Tough time ahead?

Godchaux warns: “With the looming overhang of deliveries to escalate the existing high levels of mall density in the next three years, the warning signs of market saturation have started to show. The strengthening dollar has caused a contraction in spending from Russian, British and European tourists, while the lull in oil prices and ensuing austerity measures have affected the buying sentiment, particularly for discretionary spending of GCC consumers. Ongoing flat rentals are yet to reflect these relatively lower margins and are straining the ability of some retailers to pay rent for the prime strips they occupy.”

“The three super-regional malls on Sheikh Zayed Road – The Dubai Mall, Mall of Emirates and Ibn Battuta Mall – will remain top choices for existing and new brands to operate as the market starts to saturate. Low-rise pedestrian retail offerings are expected to gather pace as they add value to residents by upgrading community living without losing tourist appeal, capturing both demand segments. On the other end of the spectrum, community centres, which offer a well-thought-out tenant mix and serve a strong captive market, will perform well, while retaining retailers as well as minimising leakages to super-regional malls, particularly for basic needs,” the report forecasts.

“Dubai has long shed its ‘emerging retail market’ tag and has firmly positioned itself as a global shopping destination on the back of its robust retail and tourism sector, which positively affects other domains of its diverse economy. With rising levels of new stock coming to market over the next three to four years and the first signs of market saturation starting to show, it’s to be seen if demand can continue to match up, [hoping] the strength doesn’t become a threat instead,” Godchaux concludes.