DUBAI — As the euro’s value plummeted last year, prices for luxury products in the UAE’s dollar-pegged market were suddenly significantly higher than in Europe. And consumers in the region took notice.
Shoppers were spending less in The Dubai Mall and more on the Champs-Elysées. According to a study by MasterCard, in 2015 consumer spending in the UAE was down 7 percent, while spending by Gulf residents in Europe went up 38 percent. Price sensitivity coupled with falling crude oil prices have directly hit the pocketbooks of consumers in the Gulf, who are putting the brakes on spending.
“We are not in a phase of double-digit growth anymore,” said Patrick Chalhoub, cochief executive officer of the Chalhoub Group, one of the region’s largest retail operators. “This is a new norm. There is smaller growth. And with operating costs such as mall rents growing faster than sales, this is a very competitive environment with volatility.”
Speaking at the Retail Leaders Circle recently, Chalhoub stressed that it’s not doom and gloom for the Gulf. “This region has a lot to offer because of its demographics and youthful population, which will still drive business. There is a huge middle class in the making,” he stressed.
But growth will not be at the hyper pace that many foreign brands entering the market have become accustomed to. The UAE retail market is expected to be valued at $53.7 billion in 2016, up 7 percent over 2015, a lower rate compared to 8 percent projected for 2015, according to Euromonitor International. Only three years ago the market saw double-digit growth.
“This is more of a mature market model. Brands can no longer make the above average margins they once made in the region, which are more typical of emerging markets,” said Marcus Freeman, chief financial officer of Chalhoub Group. “But slower growth does not mean recession. There is a paradigm shift: We are going from managing for growth to managing for value. This is something we are not used to in the Middle East.”
Softer sales figures have not been limited to the luxury segment.
“In the Middle East there is this perception that you have to grow, grow, grow. We have been opening stores left, right and center. Now we are focused on fewer stores, but better ones,” said Marwan Moukarzel, deputy ceo of Azadea Group, operators of more than 600 high street stores in the region including Bershka, Mango, Massimo Dutti and Zara. “Brands like Massimo Dutti were selling without much effort. Today we have to be more active on the social media front, with targeted marketing activities. We really have to create value for our customers.”
There has also been a shift in the tourist traffic to the UAE. Russian and Chinese travelers topped the list in the last few years, but as those economies have suffered, the demographics have shifted. In 2015, Indians were the number-one tourists, followed by Saudis.
“We as retailers have to adapt to a new mix in tourism. Obviously if we want to sell to Russians, it’s very different than Saudis,” Chalhoub said.
Brands are maturing in how they view the market, according to Nisreen Shocair, president of Virgin Megastore Middle East and Africa. “New stores opening in Dubai do not have to be these big flagships anymore. Brands are more flexible to have different formats whereas before they thought everything in the Middle East should be glitzy.”
One of the great challenges which all retailers are grappling with is retail space. While there is a large supply on the market, two malls in Dubai dominate: Dubai Mall and Mall of the Emirates. Rent in those spaces remains high.
“We are under pressure from consumers who want better value,” said Scott Bisset, group finance director at Kamal Osman Jamjoom Group, which runs a variety of homegrown brands and franchises including The Body Shop. “We would like to be competitive on pricing but our cost base is high. There is pressure to get good real estate at a reasonable price. We have to maintain pricing because we are burdened with more and more costs.
“I have one brand in my portfolio that has 31 stores in the region, but we can’t get into Dubai Mall,” he added.
The wait list to enter the world’s biggest mall remains long despite sales in stores stagnating in 2015, and rental increases of 26 percent. This has put increased pressure on retailers’ margins. Azadea’s Moukarzel believes this will normalize: “In the short-term, mall developers are not responding fast enough. But in the midterm there is a correction coming. There is a lot of supply coming up,” he said.
While not all will be megamalls, consumer tastes are beginning to shift towards city-style street malls with outdoor walking areas. The Chalhoub Group has bet big on this, with an upcoming opening of a large new concept store next month in CityWalk, a new outdoor mall development.
“There is an arrival of a new style of shopping here,” said Chalhoub.
Despite the extreme weather conditions in the summer, he feels consumers will go if they find the right product. “In Europe and North America people still go outside to shop despite the extreme cold. The heat is not so different,” he said.
As the Gulf economies continue to move at a sluggish pace, retailers are focused on evolving consumer tastes — and new pockets of growth in the region. Countries such as Egypt, for example, show a lot of promise. “We believe in it in the long-term,” Freeman said. “With 80 million consumers, it’s a market well-suited for bridge brands.”
Azadea is also optimistic. “Our growth there has been more than 10 percent, so we are definitely bullish on Egypt,” said Moukarzel.