The retail slowdown has been with us for over a year now and many operators have had to take a hard look at their models. The simple equation that governs the business is the ratio of net revenue (gross revenue less cost of goods sold) to fixed and variable expenses.
Retailers have long done what is possible to reduce variable expenses to the bare minimum — marketing and advertising is probably the largest of these costs. And the shrinking number and size of print publications and the hordes of empty outdoor boards are witness to this phenomenon.
However, the two main fixed expenses, rents and cost of staff, are much more difficult to prune. It is well known that rentals in this market tend to move only in one direction — upwards — especially if you are looking at prime properties. This even though the sales in many of them are not necessarily growing.
In the case of staffing too, we have an inherent problem. The way the labour market is structured does not lend itself to flexibility, unlike many developed markets where retail staffing costs can be quite elastic. A good proportion of their employees work part-time — a few days a week, a few hours a day — and resources can be increased or decreased quickly, based on specific seasonal or periodic needs.
In our region, the staffing model is dependent on the system of visas and employee permits. This adds substantially to the cost and time required for hiring of new staff, especially when they have to be brought in from overseas. As a result, to avoid the long delay and cost of finding and bringing in qualified new people, many retailers — especially smaller ones — end up with more staff than they need.
Or with much fewer people than they actually require hoping to weather the weak period before they start adding headcount. Some retailers opt to continue with poorly performing staff simply because they are already so thinly manned they cannot afford the delay or cost of recruitment.
While in principle, people cannot be turned on and off like a tap, all three of the above scenarios are inherently inefficient and add to the cost. If you are operating in one of the neighbouring countries where procedures are not as efficient and rules not as defined as the UAE, you can multiply the effect of the problem by two or more times.
The net result is that fixed costs cannot easily be brought down. The only way to correct the ratio therefore is to increase sales.
Dubai, as always proactive and responsive, recognised this. It laid out at the beginning of this year an annual calendar which created opportunities and periods throughout the whole year to enable retailers to have a variety of events and promotions to drive sales. Abu Dhabi is moving in the same direction and will probably have something similar in 2018.
But, ultimately, a sustainable turnaround will only happen when the overall pie expands.
We know there are two major contributing factors to this growth, an increase in the number of visitors and in the number of residents. The enhancements in infrastructure and facilities are all predicated upon having more people using them, but there seems to be a lag in this catching up.
So while the country is investing huge resources in building for the future we do not have enough users to absorb this right now. In the short term, even the tourist oriented businesses will find it difficult to bridge the gap.
Businesses will need to adjust to longer gestation periods as are normal elsewhere. As an extreme example, look at the well-publicised case of Eurodisney, Paris, which was set up in 1992 (and which is partly owned by Kingdom Holding of Saudi Arabia). It has still not turned a profit and has required repeated cash injections and bailouts. The latest, a 1.5 billion euro (Dh6.40 billion) recapitalisation was in February.
The entry of a number of new hotels, amusement parks, attractions and schools into an already stretched market have diluted the business of the existing players making conditions tougher for them. They will need to have the resilience to hang on for more time before things start turning around.
This has been happening in the retail sector as well with the continuing entry of more — and larger — shopping centres and malls, many coming on stream in the next couple of years. Until the number of users catches up, things are only going to get tougher.
— The writer is a senior executive with a large retail group. These are his own views.