Falling on its feet

We all know there was a severe downturn last year, and that Dubai and its flagship retail sector took a hit. With the exception of the mass grocery segment, no one was spared. From luxury to fashion, electronics to automotive, almost all registered declines.

With thousands of job redundancies and salary freezes, and in some cases contraction, consumer confidence was dented. Later in the year, the Dubai World saga jolted once again the slowly-recovering confidence. Banks shutting out credit or making access to it very stiff across the board added to the overall decline in spending. And generally people were plain cautious.

As Dubai's retail makes a slow comeback — some signs allude to that — the expectations of retailers have been adjusted to a new set of realities. A different mallscape is expected to appear on the horizon, at least for the next few years, it is believed.

That essentially means Dubai's retail sector will continue to grow, but differently. There will be a ‘new normal', to borrow some jargon from the financial world, a far cry from the boom years of 2005-08. Now the issue is: in the changed circumstances, what is sustainable?

Abu Dhabi's retail segment, meanwhile, with its limited offerings, was relatively less affected last year. And now it's the turn of the capital city to see its supply of retail developments — the mega malls and community centres — come online gradually as residential developments get completed. Elsewhere in the Northern Emirates, growth will continue at their own pace.

That signals UAE retail will continue to grow at a fair clip.

Though reliable official statistics for overall UAE retail sales are not available, according to Business Monitor International, a London-based industry consultancy, the sector was worth $107.3 billion (Dh394 billion) in 2009, by reference to GDP expenditure data. "Retail sales will grow to $150.5 billion by 2014," says its latest quarterly sector report.

That increase may already be under way. After almost a decline of 20 to 30 per cent in volume sales, February's Dubai Shopping Festival (DSF) came as a welcome relief to retailers, leading to a positive first quarter return over the same period last year. Some have in fact witnessed double-digit growth.

Though happy with those results, retailers are realistic, saying this growth compares with a severe dip in the first quarter of 2009. In some cases, sales have since slipped.

"As expected, retail sales after DSF have declined, since most customers would like to take advantage of the upcoming Dubai Summer Surprises (DSS) offers," says Abraham Koshy, general manager of luxury-brands group Rivoli. "However in the post-DSF period, we see a like-for-like increase over the same period last year, which is very encouraging."

"It is quite understandable and normal that after such peak sales periods, retailers experience a relatively quieter period for the next few weeks," says Mahboob Murshed, managing director at Alpen Capital. "Overall, in comparison to 2009, we see that the customer sentiments have improved and most retailers are feeling more confident in their outlook for the rest of the year."

This view is attested to by the latest report by AC Nielsen, issued early this month, which says the UAE is seeing a slow and steady return of consumer confidence, though tentatively. "Consumers are still looking to economise and are expected to continue to shift to larger-pack formats and/or move to retailer-store brands," it says.

Another recent report, by Alpen Capital, suggests that retailers focusing on ‘non-discretionary' goods will continue to outperform in the short term while those in the discretionary bracket, especially the ‘big-ticket' items, will face challenging conditions — and this holds true for the GCC as a whole. "There might be some consolidation in the discretionary segment which might lead them to evaluate their future strategy."

As the retail sector gears up in the months ahead, expectations for the year are sober. Most realise that the growth of the years 2006-08 were abnormal.

"We need to be realistic about what is sustainable growth in the longer term," says Ashish Panjabi, chief operating officer of Jacky's Group, of which Jacky's Electronics is part. "This is one of the lessons of the country at the moment. We can't continue to grow at 20, 30, 40 per cent without having a dip. If we [have] 7 or 8 per cent a year, that is fine, that is sustainable."

Peter Walichnowski, CEO, MAF Properties, believes sales will be between 5 and 10 per cent higher than last year as a trend. "Every market goes through cycles. Retailing is a long-term business like shopping-mall ownerships are. So you've to ride out the cycles. I think the retailers have learnt, and are probably better able now to plan [rather] than just blindly opening up stores across the region and extending themselves. Therefore it's been a healthy correction to bring some sort of reality to the market."

With customers still price- and quality-conscious, it's clearly a tougher test. The diminished purchasing power of consumers resulting from contractions in consumer finance is still a hindering factor, says Murshed.

However, in the malls it is each retailer's own strategy that will decide their fates. "Everyone has their own formula," says Panjabi. "I think the market is big enough at this stage to have [that]."

Like for like

In fact he likens the consumer electronics sector to the mass grocery sector. There are Carrefour, Lulu and Union Cooperative, which have their own customer bases. Then there are Spinney's, Choithram and the Al Maya, which co-exist and operate in the same market, followed by the madinas (small neighbourhood shops) or the neighbourhood groceries. And now there's the Carrefour Express and Géant Easy (see accompanying interview), with Choithram entering into the hypermarket in Arabian Plaza. In electronics similarly there are the bigboxes, the small players, and the speciality players, he says.

"There will be some which will disappear because they can't compete in the long term, they won't get the brand support, Panjabi says. "You have seen this in the IT industry. Seven or eight years ago you went to Khalid Bin Walid Road to buy a laptop or Al Ain Plaza. Today how many are going there, [even] though you may still get it a little cheaper?"

Pricing pressure and its impact on margins continue to play in the minds of the retailers. "We have negotiated hard with our principals, and we pass that benefit to our customers here," says Koshy. "In that's sense our pricing has always been sharp. We are constantly evaluating the pricing in other key markets such as Hong Kong or Singapore, London or Paris. Since Dubai is considered to be a duty-free destination, we have to ensure that — especially in the luxury segment where people are always comparing prices."

Says Panjabi, "What has been a big factor is average selling prices [coming] down. So even if you grow at 20 per cent, if your price has dropped 20 per cent, your top line remains the same."

But now selling prices in his sector seem to be firming up slowly, he says. Retailers are saying, "Let's replace it with the latest technology and maintain the price."

Moreover, where there is a big gap in terms of [oncoming] technology, prices go in the opposite direction. "You take 3-D television, which is going to come out in a month or two. This is where price points are starting to go up — because there is a consumer demand for it."

Landmark Group, one of the largest fashion retailers in the GCC, has an eye on inventories to deal with the pressure on margins.

"We have tried to ensure that our inventory levels are manageable and seasonable stocks are sold within the season to reduce the impact of discounting," says Vipin Sethi, Chief Executive Officer, who reminded that fashion footfall was hardest hit last year. The group has been offering its customers "value" in every way — price, quality and shopping experience, he adds.

Needless to say, retailers are ensuring that costs are minimised in terms of rentals and other operational costs. And that has led to all retailers constantly monitoring the performance of each and every store in each of the malls and other shopping centres, more than ever before. Some have closed their shops in some locations where they found themselves struggling. Jacky's Electronics closed their store in Souq Al Bahar last December.

"We ran it for two years and it didn't perform up to our expectations," Panjabi said. "We had a chat with Emaar. We tried a lot of things and they tried to support us but it didn't work out. It was better to come out and concentrate our efforts in Dubai Mall. Emaar is our landlord there as well. And they agreed."

Jacky's has now two stores in Dubai Mall on different floors, which has been performing up to its expectations. "You have to expect a lot more from the mall today," Panjabi explains. "I think the way they have developed here is that there are certain malls you have to be in if you want to be in business — you need to be in Deira City Centre, Mall of the Emirates, Dubai Mall, Mirdiff City Centre. What is happening now is [in] what one can call secondary- and third-tier malls, where you have to start evaluating at this stage."

Rivoli has similarly closed down a store in one of the hotel locations, though not in any of the malls. "However, we will not hesitate to take some hard decisions if a certain location does not deliver to our expectations," says Koshy.

Murshed of Alpen Capital points out that it's true there has been a shift in focus from old stores and malls to newer ones. This has led to a decline in occupancy rate in the older malls while new malls are receiving good footfall.

Rentals, most retailers say, haven't declined, especially those leases entered into before the crisis. "If you have a long-term lease in place, it's not easy to extricate yourself," says David Macadam, head of retail at Jones Lang Lasalle. "Probably you have to live through it. But the shops that are being let now are probably done at a more realistic level."

The opening of more malls in Dubai presumably will impact sales in each store. Four new malls opened in the emirate last year, though they were what one would call community malls. And this year, the big one — Mirdiff City Centre — opened. The assumption before 2009 was that the pie would continue to get bigger, with an assortment of factors — strong economic growth, increasing population, higher disposable incomes, rising tourist numbers, growing urbanisation and development of a modern retail infrastructure.

Last year that pie shrank, especially with the dip in population and tourism numbers. "With the opening of additional malls, retailers' business at each mall got sliced slightly thinner," says Jacky's Panjabi.

However, with the opening of Mirdif City Centre in March, we may have seen the last of the mega- or power- or destination- (whichever you want to call them) malls being built at least for next two to three years in Dubai. "The super-regional malls are finished for a while," says Macadam.

They will move instead. "The next big ones will be in Abu Dhabi such as the one in Yas Island," says Peter Walichnowski, CEO, MAF Properties, which is building a community mall in Fujairah, which will have a Carrefour and about 100 shops.

There is enough scope in the ‘in-fill' developments in the form of community malls and neighbourhood centres in both Dubai and Abu Dhabi, which are still witnessing the development of residential communities, say both Walichnowski and Macadam.

Abu Dhabi, currently undersupplied, will have, according to a recent report by Investment Boutique in Property Monthly, more than 2.4 million square metres of available retail space by 2012. Many of them as planned are concentrated in common catchment areas and that could mean retailers will be cautious in selecting where to locate their stores.

Jacky's has not yet entered into agreement with any of the upcoming malls in the capital.

Location, location

"It's a matter of location, and at the moment we haven't got the right location. The malls that have spoken to us — either the rentals don't fit the budget, or the locations are not those we would like to get into," says Panjabi. Though undecided now, Rivoli plans to be in some of the locations, Koshy said.

Given that it is a self-regulating industry it is to be expected that most retailers are fairly cautious [in the case of Abu Dhabi], says Macadam.

"But there is room for growth, [though it] won't be anything near the way it was in Dubai. The mall owners and developers are realising now that most retailers are quite cautious."

But the mall offering, big or small, is here to stay, and that is where high-street retailers could be adversely affected in the evolving retail scene. "With the gradual entry of large international retail chains, well-established high-street retailers [here] are under intense pressure to compete on price and quality," says Murshed. "This has resulted in some of these regional retailers reducing their footprint considerably and concentrating on such areas where such chains have yet to penetrate [with] their business volumes.

"We have also observed that international retail chains have expanded their operations in certain malls that can attract larger audiences, due to either their location (close to prominent landmarks) or easier accessibility, with the launch of the Dubai Metro."

And that's something Dubai will continue to have in its favour: a place where tourists want to be, and where the infrastructure is still on an improving trend.

- The writer is Financial Features Editor, Gulf News.