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29 March 2024

Tourism revival in 2010 to fuel retail growth

Tourists shop at a jewellery store in Dubai. (EB FILE)

Published
By Shuchita Kapur

The GCC retail industry is expected to grow in the future with a rise in population, urbanisation, middle class (with increasingly higher per capita income), inflow of tourists and a growing number of passengers in transit.

These factors continue to provide conditions conducive to retail development in the GCC countries, according to a new report by Alpen Capital, entitled, GCC Retail Industry Report 2010.

As per the figures given in the report, the region may see a gross leasable area (GLA) addition of about six million square metres in the GCC retail space in 2010-2012.

This increased space should be absorbed easily as there is a growing demand across the region. Absorption of the incremental retail space will depend on continued strong growth in tourism, and the authors of the report are particularly optimistic about demand coming from tourism.

The report expected revival in demand generated from tourists and passengers in transit to further boost retail sales in 2010. "As per our estimates, short-visit tourist retail sales is expected to register revival while sales at duty-free shops at airports will rise significantly under the impact of rising passenger traffic," it said.

"This rate can be higher than our estimates, given the rate at which airport infrastructure work is under progress. Annual events such as the Dubai Shopping Festival will continue to attract international shoppers," said the report.

The authors substantiate their view by quoting figures from the Department for Tourism and Commerce Marketing (DTCM). According to the department, the report said, a 3.3 per cent year-on-year rise in Dubai hotel revenue was recorded in Q1 2010.

Besides, the room occupancy rate increased to 76 per cent in Q1 2010 from 73 per cent a year earlier, which bodes well for the retail sector as well.

Addition of retail space

On supply estimates, the GLA addition of six million sq m in the GCC retail space in 2010-2012, as mentioned above, will lead to GLA growth at CAGR of 14.5 per cent.

The authors of the report said that the majority of the GLA addition is expected in the UAE and Saudi Arabia.

Moreover, Qatar is expected to have major addition in GLA in 2012. Higher GLA addition for Saudi Arabia is justified given its high and growing population base – the Saudi population constitutes 63 per cent of the total GCC population and is expected to grow at CAGR of three per cent over the next few years. As a result, latent demand existing in the Saudi retail market justifies significant GLA supply growth over the next few years, said the report.

On the other hand, Dubai has the highest GLA per capita in the region, but it is also at a risk of oversupply. However, it is the strongest tourist destination in the region – a factor that should lead to increased demand and thus absorption of any more of shopping spaces in the city.

"Therefore, although GLA per capita seems high in relation to its population, this is less of a concern when factoring in tourist spending. Moreover, the tourists have a relatively higher propensity to consume and therefore post higher retail spend per capita," the authors said.

"Given the GLA addition, retail market sizing from the supply-side depends on the absorption rate of additional supply of retail space. It would be misleading to assume that the overall occupancy rate in the retail sector is high if new malls are fully occupied. The sector is witnessing a growing preference for newer malls."

On financials and valuation, the authors assessed the financial performance of eight of the largest publicly listed retailers in the GCC. This group is referred to as the 'GCC retail companies' in the report. The study compared the GCC retail firms with emerging and developed market peer groups to assess the financial strength of these retail giants.

"In line with our expectation, non-discretionary [primarily food category] retail companies reported healthy top- and bottom-line growth in Q1 2010.

"Also, we believe our overall industry growth forecast of 8.3 per cent in 2010 is endorsed once performance of both types of retailers (discretionary and non-discretionary) is viewed in a consolidated manner.

"As forecast in our initiation report, GCC retail companies reported moderate revenue growth in 2009. The GCC retail players reported average revenue growth of six per cent y-o-y in 2009, compared to 33 per cent y-o-y in 2008. The emerging market peers and developed market peers recorded revenue growth of 16 per cent and two per cent, respectively, during 2009."

In terms of operating margin, the GCC retailers on an average performed better than their developed and emerging market peers.

"Average operating margin for the GCC retailers improved by one percentage point during the year to 10 per cent in 2009. Emerging market peers and developed market peers posted average operating margins of four per cent and nine per cent, respectively, in 2009.

"The operating margin improved in 2009 primarily due to a drop in input costs of the retailers, and with other expenses such as leases and rentals declining during the year."

On valuation based on trailing P/E (price-to-earnings), the GCC retailers are trading at a trailing 12-month P/E of 20.5x, compared with emerging market and developed market peers at 32.1x and 31.6x, respectively, said the report. The Gulf retail companies are trading at a discount of 36 per cent compared to the emerging and developed market peers, indicating a relatively attractive valuation range. The trailing P/E ratio clearly indicates an expectation of continued revenue and earnings growth for the industry, it added.

However, overall, liquidity remained lower than the emerging and developed market peers, as evident from the turnover velocity and free-float figures.

"The average turnover velocity of the Gulf retailers was 83 per cent, less than that of emerging and developed market peers."

Comparing non-discretionary retail segment with the discretionary goods segment, the authors deduced in the report that budget retailers focusing on non-discretionary products outperformed in 2009, while retailers focused on discretionary luxury goods faced a challenging environment.

"The outlook for food and other non-discretionary goods retailers remains robust, while there are signs that the luxury goods segment is beginning to recover from the very weak performance in 2009."

Brand awareness

Discussing the industry trends, the report highlighted that GCC consumers are becoming more and more brand-conscious and the demand for foreign goods and services has also picked up domestically.

"American and British brands are in high demand. They have a proven acceptability here and are considered reliable, consistent and mature. Similarly, brands from France, Germany, Italy, Holland, Brazil, Canada and the Far East are also in demand.

"The abundance of custom-designed shopping complexes across the region, along with the proliferation of branded store networks, has created an acute need for professionals to stay in touch with the latest trends and best practices in the industry."

Citing the figures of a Nielsen consumer survey in 2009, the report pointed out that the UAE topped global rankings in believing that designer brands are of significantly higher quality than standard products (43 per cent). Almost 60 per cent of UAE consumers believed designer brands projected social status. This has attracted many luxury brands, restaurants and hotels to the country.

The survey also explored the latent potential for luxury fashion brands to expand their business in the UAE into related products such as mobile phones, laptops, MP3 players and even kitchen appliances.

In the survey, 57 per cent of UAE consumers were willing to buy luxury branded mobile phones (compared to a global average of 34 per cent); 46 per cent to buy fashion-branded laptops (global average of 29 per cent), and around 25 per cent to buy luxury fashion-branded MP3 players and kitchen appliances, as mentioned in the report.

Due to healthy demand, many foreign retailers are setting shop in GCC.

In 2008, a survey by CB Richard Ellis revealed that 37 new international retailers entered Saudi Arabia, a number greater than any country in the world.

Kuwait ranked second in the survey and the UAE registered fourth in position. Dubai's recognition as a leading tourism destination has also attracted foreign brands, as around 40 per cent of consumers at malls and fashion outlets are tourists, the report said.

However, despite their rising affluence, Gulf consumers are cutting down on their expenses. Thus, meals out and shopping trips are currently being kept in control by the consumers to curb their expenses.

Again citing a Nielsen survey, the report pointed out that 55 per cent of consumers in the UAE bought stores' in-house branded goods, which were almost 50 per cent cheaper than the name-brand equivalents. In Saudi Arabia, 29 per cent of the population bought store-branded goods. Besides, the demand for discretionary luxury goods has not yet reached the kind of levels seen in 2008.

UAE retail sector development

The Alpen Capital study expects a GLA of about 2.25 million square metres to be added in 2010-2012, around 35 per cent of which will be in Abu Dhabi and just over 50 per cent in Dubai.

In 2009, average occupancy levels in Dubai malls were one of the highest in the GCC, and these are expected to continue to remain high. In Abu Dhabi, the retail market is undersupplied and, like Dubai, shopping malls enjoy high occupancy rates.

The global economic slowdown has had a mixed impact on the UAE retail market. In Abu Dhabi, retail spending per square metre may decline in 2010 under the impact of significant increase in retail space.

The analysis said the Dubai retail market does not appear to be oversupplied, despite heavy addition in retail space. "The short-term imbalance is expected to be mitigated once the current employment problem faced by expatriates reduces and tourism regains its earlier tempo," it said.