Over the course of this year retailers have been reporting flat to lower sales year on year. While the level of variation depends on the type of business, across sectors — fashion, accessories, jewellery, furniture, food — few would be able to report the kind of growths that they were used to seeing between 2011-14.
What is perplexing though is that the drive of brands to enter this market is not abating. New operators and brands are still vigorously pushing for locations in Dubai and Abu Dhabi. And the lack of availability of spaces in the large regional malls is resulting in a spillover into smaller developments or even onto the high-street.
Major developers are still seeing growth in their retail businesses both in terms of revenue as well as profitability. But the fact of the matter is that:
• Retailers who are already in malls are loathe to vacate spaces even if their stores are not profitable; and
• New operators are still queuing up for space and are ready to jump in if at all there is a vacancy.
This is creating an anomalous situation. While existing retailers are complaining about decline of business and profitability, rents are continuing to spiral upwards.
Why would a new unproven mall with a new untested operator be able to get a rental of Dh600-Dh700 per square foot on his property in Umm Suqeim and be able to pre-rent before it is completed? Even high-street stores on Jumeirah Road are asking for rents of Dh350-Dh500 per square foot, and stores on Shaikh Zayed Road are commanding key money in the millions.
These are rates that were unheard of outside of the major developments and they indicate two realities that bode well for this region —
• There is still tremendous confidence in the economy and people are willing to bet that the downturn will not last; and
• Retailers and operators in other parts of the world continue to find traction and growth here, unlike in their own markets.
It is well accepted that business here is invariably dovetailed with the health of other regions. The years 2011-14 were booming with the buoyancy of business in China and Russia. This was reflected in the inflow of customers from those regions as tourists as well as buyers. The current downturn in those markets has directly affected the market here.
But as has always happened in the past, Dubai will find some market to give it a push when it faces a downturn. And perhaps the situation will change if business with the neighbouring giant Iran opens up as a result of the agreements that are now being finalised. It is reassuring to see major developers trying to build new revenue streams. They are busy remodelling, renovating and rebuilding their assets to monetise currently unused spaces or even common spaces. Where possible, extensions are also being built.
They are also engaged in the development of smaller neighbourhood centres. In the next two to three years, we will find at least 10 new small centres around Dubai, which will take some of the pressure off the regional malls.
But these are midterm solutions. For now the worry is how long will they succumb to the temptation to continue to strengthen their bottom-lines through rent increases?
Rental rates at the major malls become the benchmark for other properties in the city, resulting in the unrealistic rates that we see. The rent increases are progressively raising retail break-evens, making them difficult to achieve even for seasoned operators.
As a result, the market is gradually getting restructured. In the present environment for any retailer to succeed he has to factor into his plans —
• A quick expansion into a network of shops. Sustaining and running a business with just one location is now practically unviable;
• A longer break even period which could be anything from three to five years, unlike the earlier days when one could start making a profit in the first year; and
• As a consequence of the above two points, a much larger capital provision is required to start and sustain a new business. It needs mentioning, that contrary to all the declarations, bank finance is generally not forthcoming for the first two years of the business. So the investor is on his own in his initial journey.
Some people feel this is making our markets more realistic, bringing them into line with what is happening in the rest of the world. On the other hand, it is taking away some of the traditional attractions of doing business here — low cost, easy entry and quick returns.
— The writer is a senior executive with a large retail group and these are his personal views.
