Retail challenges in the GCC
What changed at retail in the Gulf? Is it structural? This is a question that comes up with steady frequency during last months. I will share my point of view, from the angle of the sports industry, which is a mass footwear and apparel business, particular in some aspects but close to fashion in a lot of them.
The slow down we have been facing since approximately last January has been bothering retail related executives and companies for the last months. The essence of the question is how much do they need to change because of this slow down. If it just temporal, some soft measures might be enough, if it structural, more profound changes might be needed to remain profitable and competitive.
Market challenges came after a good Q4 of 2015, all of a sudden, traffic figures plummeted, first in UAE and after in other markets, making it difficult for retailers to achieve their goals, even if they worked hard in improving their conversions, generating promotions and trying to build excitement.
If we look at the context of 2016 we see the region has been exposed to an increased level of instability, even if UAE has remained a safe place, financially and in all other aspects. We have seen how the situation in Syria did not significantly improve, how Egypt struggles to recover, and some other regional parties are facing different levels of stress: Iran sanction lifting has not really taken off, Yemen is amidst a civil war, Saudi Arabia has been trying to manage the budget deficits related with low oil pricing etc.
This created a context in which a large part of Arab population feels is safer to save or invest money rather than spending at the same speed they used to.
This has come paired with a slowdown of the wealthy Chinese elites spending in the Middle East, and with the Russian tourists faced with a Ruble devaluation that slowly but surely has been eroding their spending abroad.
All this comes in times of a weak Euro vs USD (and remember that local currencies are pegged to the USD).
As one can see above, all of this is temporary. Some of those factors should resolve relatively soon, whilst other might take longer but are not structural. As a matter of fact, UAE sales are slowly recovering, or at least not decreasing anymore. Saudi Arabia is still struggling, their commitment to an aggressive 2030 plan to ease oil dependencies and to boost private sector will definitely make the Kingdom population uneasy for a while, specially this large mass of Saudi that depend on government employment. That said, we would expect that as prices of oil normalize, the situation will improve, and price of oil should normalize one way or another in a few months, even if low price becomes the new normal. This is why today, KSA remains the most complex market paired with Bahrain, which is highly dependent (at retail sales) of Saudi population.
My point of view is that retailers need to seek efficiencies to manage the yearly budgets, and need to take soft actions such as cost management, hiring freeze etc. but not necessarily bigger reorganizations or change in the profitability model. My point of view is the current market weakness will remain until mid 2017 or second half of 2017.
All that said, even if current situation is not structural, there are structural changes happening in Gulf retailing indeed, of which I will share my opinion in the near future. Most importantly are related in one hand with current pricing structure across most of retail and VAT implementation next year, and the second structural area is E-Commerce and how it is impacting existing retail. Those two elements will require a bigger rethinking of businesses, and will require also participation of not only retailers but also public bodies and real state operators. As it stands today, retail in the GCC is not at immediate risk but definitely has a lot of work to do in the next 3–5 years to adapt to a new reality.