Dubai’s retail market has become increasingly fragmented over the last 18 months, with a clear divergence evolving in the performance of major destination malls, such as Dubai Mall and Mall of Emirates, and smaller community-focused centres. While prime facilities continue to be successful in attracting the crème de la crème of international brands, achieving and sustaining significantly high rental rates, and in generating superior levels of sales and footfall, there are visible signs of pressure elsewhere in the market, amid rising vacancy rates and downward rental pressures. While it is difficult to deconstruct the relative impacts of online retail versus the negative effects of increasing supply, challenging economic conditions, and sustained US dollar strength, e-Commerce is clearly starting to have a more profound influence on the buying habits of local consumers and the subsequent performance of the country’s retailers and malls.
For smaller retailers, and those not supported by large franchise holders, the high rental rates charged by larger shopping centres have become a major operational issue as sales levels have dropped. As a result, occupancy rates across the emirates are now showing signs of downward pressure as stores close, or relocate to more cost sensitive locations. With retail conditions continuing to deteriorate, we expect to see vacancy rates rise further, as new supply levels outpace population and tourism growth, and as retail sales per capita decline. However, it is likely that this trend will be driven more by the softening performance within secondary mall locations and within seasonally impacted non-mall formats, and less from the major destination malls, which have traditionally cannibalised demand from the smaller centres.
Huge opportunity
The e-commerce contribution to retail in the UAE, and the wider Middle East, remains a very small fraction of the overall market size, and consequently it represents a huge opportunity for the industry. However, it also signifies a considerable threat for the traditional brick-and-mortar store, and retailers who are slow to embrace the new reality in the region’s shopping space. According to Euromonitor, e-commerce equated to just 1.5 per cent of the overall retail industry spend in the UAE during 2016, a figure which could rise to 4.1 per cent by 2021. In comparison, based on data from the US Department of Commerce, US consumers spent 12 per cent of their total retail spending via online channels during 2016, reaffirming the huge long term growth potential for multichannel businesses.
With a population of over 200 million, the Middle East certainly has the capacity to accommodate multiple online platforms. However, at this time, two prominent ventures are posturing to establish a dominate position, namely the Amazon backed Souq.com and Mohammad Al Abbar’s Noon.com.
While online retail is at a nascent stage in the wider region, it is clear that platforms will need to be attractive and functional, and deliver a compelling customer experience to succeed in a market where shopping and visiting malls is widely regarded as the main leisure pastime. While evolving, customers’ expectations are already very high, based on experience of international competitors and their achievable delivery times, and hence online providers in the region will need to ensure appositive alignment from both a technology and customer experience perspective.
Distribution facilities
In the wake of the multichannel revolution, major structural changes will be required to help elevate the infrastructure and service delivery within brick-and-mortar stores. It will also drive a wave of development in the industrial and logistics sphere, with new distribution facilities being developed around major transportation nodes to ensure faster delivery times, such as the Al Maktoum International Airport (Dubai South), where IKEA’s new warehouse has already been delivered. In terms of mall design, an increase in on-location storage facilities and new click and collect areas are also likely to be required to be able to accommodate rising sales from online platforms. As a result, the traditional store may start to take on a slightly different role, which could bring rise to an increase in concept stores, and other new ways for retailers to connect with customers and elevate the retail experience.
