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The Middle East: From Opulence to Discipline

The Middle East Retailing

Ten years ago, the Gulf region was full of promise for retailers. But, since the price of oil dropped, the retail sector has been reshaping itself. Here’s why…

For a long time, the Gulf region was an El Dorado for international retailers, with its dynamic economy driven by the wealth of the oil industry, its population’s strong buying power and the attractive tax systems (no corporate or income tax). Even if, as predicted by Euromonitor, the retail market continues to grow by 8% in the United Arab Emirates (UAE), the dynamic just isn’t the same. After a period of opulence and ease, the region has now entered a new phase of maturity. For the past three years, luxury sales have been dropping: they fell by 1% in 2015, 2% in 2016 and are predicted to drop by 3% this year, hard-hit by the significant decrease in the buying power of the wealthy. According to Driss Iziki, Sales Manager at Cegid, Africa and Middle East, “the wealthiest households are watching their spending now more than 4 or 5 years ago, since most work in the public sector, where salaries have dropped. For example, women who were buying on average two luxury bags per year have decreased their spending and are only buying one today.”

 

In this economic climate, brands selling more accessible products are thriving. “Sales in lingerie and cosmetics are at an all-time high”, observes Driss Iziki. The makeup segment is growing rapidly, representing 35% of the cosmetics market. The Sephora store in the Dubai Mall is one of the best performing in the world, in terms of sales per square foot, even ahead of the boutique on the Champs Elysées in Paris. In fashion, customer demand has moved from formal wear to informal wear, from heels to sneakers. The cafe and restaurant sector is also booming since it plays an important role in social life; of the 58 new brands having launched a store in Doha in 2016, 23 were in the restaurant sector. Sportswear is also doing well, with brands such as Under Armour, GapFit, Jordan and New Balance planning ambitious expansions.

 

Still in its infancy, the eCommerce market in the Gulf is now developing rapidly, thanks to its young population. At the beginning of 2017, Amazon caused waves by acquiring Souq.com, the top eCommerce retailer in the Arab world. This triggered never-before-seen growth in the sector and the arrival of new players on the scene (Noon, Menamalls, etc.). According to the E-Commerce Foundation, eCommerce will grow by 11% this year in Saudi Arabia (to US$5.5 billion), more than in the US (+9% to US$ 438 billion), but less than in France (+20% to US$ 95 billion) and in China (+20% to US$ 682 billion). The relatively slow growth of eCommerce can also be explained by cultural factors. According to Patrick Chalhoub, Co-Founder of the Chalhoub Group (reseller of Sephora, Saks, L’Occitane, etc.), “payment upon delivery is extremely common in the Middle East, where 75% of transactions are made in cash. Consumers are distrustful of credit cards and many women don’t have them. In addition, there’s no organized system of postal codes in Dubai, making deliveries complicated. Finally, home-delivery is not always possible because some women are uncomfortable with it for cultural reasons”.

 

Adapting to the Young and Very Connected Clientele

Although eCommerce is growing less quickly than elsewhere, certain brands have been able to adapt to the young and very connected clientele – in the Emirates, 21% of the population is less than 15 years old and 34% is less than 25. In this region, where interpersonal relations are very important, luxury brands have taken bold initiatives in the way of customer relations. In Dubai and Abu Dhabi, one well-known accessories brand has the practice of photographing new products and sending the pictures to their VIP customers via WhatsApp with a message like: “I just received this bag on pre-release. I can reserve it for a week. Would you like to stop by the store to see it?” In addition, certain brands start sales a week in advance for their wealthiest customers. According to Driss Iziki, “many brands will go as far as advising their best customers if one of their neighbours bought a bag in the store, in order to avoid any awkwardness. Here, the future of multichannel retail really lies in this capacity to communicate with VIP customers through private message, via WhatsApp and Messenger, in order to foster a personal relationship. We’re a long, long way from email blasts and coupons”.

 

In the Gulf region, retail is more concentrated than any other sector. As stated by Xpandretail, in Dubai 15 wholesale vendors represent almost 90% of the international brands present in the market. These are the major families forming the groups Chalhoub, Al Futtaim and Alshaya, whose reach extends from Morocco to Russia. “Foreign brands wanting to enter the market in the Middle East tend to partner with one of these local actors since legislation requires that local businesses be the majority shareholders. If companies want majority control, they can establish themselves in the free zones of the UAE, but things are more restrictive in terms of business”, Driss Iziki.

 

However, things are starting to change. Retail is playing a major role in the economic shift in the region, aimed at reducing dependence on revenue from petroleum and gas. On the heels of the program “Dubai 2020”, the young Saudi Prince, Mohammed Bin Salman (33), launched “Saudi 2030” to attract foreign investors. In Saudi Arabia, international brands will soon be able to control 100% of their business. The Kingdom wants to create a million jobs in the retail sector, promoting the employment of locals (who historically worked in the public sector, where salaries were higher), women and expatriates preferring to settle in the UAE because of its family-oriented and religious culture. In addition, the UAE and Saudi Arabia did the unthinkable: on January 1, 2018, a value-added-tax (VAT) of 5% in the retail sector (excluding food and health products) was created. This has raised prices, which are already higher than those in Europe, by 10-20% in fashion and 40% in luxury.

 

The Middle East – Focus on the 2 Biggest Retail Markets

Country Size of the retail market in 2016 (in US billions) Retail sales figures/population (in US$) Population (million inhabitants)
Saudi Arabia 114 3.560 32
United Arab Emirates 73 8.111 9

 

Source: AT Kearney, data from the end of 2016

 

For more information, download our whitepaper The Keys to Successful International Expansion to learn best practices and the pitfalls to avoid in terms of internationalisation, merchandising, taxation… etc.

 

26 February 2018
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