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Qatar

LOOKING FOR VALUE What the Ramadan price freeze on consumer goods means for consumers and businesses

By Rajeev Acharya and Shereen D’Souza, Doha

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price freeze by the government on a variety of fast moving consumer goods has been a constant feature of the holy month of Ramadan for the last few years. The idea, according to government sources, is two-fold: to make sure that people have access to basic food and non-food items at lower prices during the fasting month, and traders - both retailers and wholesalers - don’t increase the prices of these items due to increasing demand. Demand for most food items rise substantially during the holy month.

There is a general impression that although Ramadan is a month of austerity for Muslims in terms of food, thought, action, as well as behavior with others, consumption of consumer good (FMCGs) goes up massively during this month. According to community sources, people, especially non-Muslims, think that Muslims tend to eat more after breaking their fast during the holy month, which is not true.

“The fact is that families especially, Qataris) prepare a lot of food to distribute to the poor and then post-iftar (the light meal with which the fast is broken is called iftar) they invite relatives, colleagues and friends to feast as part of a centuries-old tradition, and that’s why food consumption goes up during the fasting month,” a source tells bq.

Informal studies suggest that Qataris spend more on average on food intake than expatriates. And, more importantly, for the past several years, food, house rent and entertainment costs have been going up in the country, as part of inflation. Inflation has been hovering here at around three percent on average since 2008, when rents were high and it had peaked at a record 15 percent. However, according to knowledgeable sources, even three percent price rise is high in the case of GCC states that have traditionally been witnessing inflation at the rate of one percent since the days of oil discovery and exports.

Another key factor that is expected to substantially impact prices this Ramadan is increasing population. The population last Ramadan was less than two million. It has already crossed the two million mark and the numbers have already been making an impact on the demand for housing and food. House rents have been going up and so have food prices.

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During Ramadan last year, the Ministry of Economy and Commerce froze the prices of some 320 food and non-food items and this year the number is expected to go beyond 350 according to market sources

Insufficient production

Profitable or not?

According to a source in the retail sector, the direct impact of the rising population is felt on two basic food items: ‘khubs’ (local bread that is sold by bakeries at a fixed price of QR 1 - the price is fixed for decades now) and eggs. “If you find these two items are in short supply in retail outlets, it simply indicates that their demand is going up due to increasing population while their production is not increasing at the same proportion,” says a source. He says that before 2008 when Qatar’s population was less than a million, khubs used to be available at grocery stores until late in the night. “Now, we run out of khubs by 8pm. You would be lucky if we have it until 9pm,” a sales employee at a supermarket says.

Bakeries get wheat flour from Zad Holding (formerly, Qatar Flour Mills) at subsidised rates and the subsidy amount is provided to Zad by the government annually. According to market sources, while the country’s population has more than doubled over the past 10 years, from a mere 750,000 in 2004 to over two million presently, the amount of subsidy provided by the state for khubs flour has been in the range of QR 50 and QR 60 million indicating production of khubs hasn’t risen as considerably as the population.

During Ramadan last year, the Ministry of Economy and Commerce (formerly known as the Ministry of Business and Trade) froze the prices of some 320 food and non-food items and this year the number is expected to go beyond 350 according to market sources.

A senior official at Family Food Centre (FFC), a prominent supermarket tells bq, wheat flour, juice, milk, yoghurt, sugar, rice, chicken, and edible oil are some of the food products whose prices are frozen by the government during the month of fasting. “I don’t think it (the freeze) affects our profitability since we have huge sales during the holy month.” “During this period, our sales increase manifold. However, profitability is affected. Margins are low and we are known for our prices. We try to maintain this (low prices) during Ramadan as well,” P. Salim, fresh food manager at Lulu Hypermarket, tells bq. “Even at our end we reduce the prices of several items (during the holy month),” Salim adds.

FFC says that sales peak during the first few days and last 10 days of the holy month. Ramesh Ramchandani, foodstuff manager at Al Safeer, however, tells bq that the price freeze during Ramadan does affect their profits. “We lose money.

Even suppliers don’t give us any discounts during the fasting month,” he adds.

Hoarding by baqalas A major problem reported by big retailers, during the price freeze that is in effect for almost 40 to 45 days during Ramadan, is that smaller outlets like neighborhood stores, buy the items at lower prices in bulk and allegedly store them for sale after Ramadan and Eid Al Fitr. “We see a lot of people from the baqalas (neighborhood grocery stores) coming to us frequently buying items in bulk but we can’t stop them or even lodge

a complaint with the police. On what grounds can we stop them?” asks an official of a bigger retail outlet.

According to sources in neighbourhood stores, the prices of the items that are earmarked for freeze during the holy month come down by almost 15 percent.

“That’s a big margin,” says the source “and hoarding is a reality.” He says neighbourhood stores usually sell items at rates that are at least 10 percent higher than the bigger shopping centres. So given that they “hoard” Ramadan items in bulk which they have bought at 15 percent lower prices, their profit margins after Ramadan can go up to 25 percent.

Items with a longer shelf life like wheat flour, sugar, rice (especially), edible oil, milk powder and jelly are among the items that are hoarded in larger quantities by the neighbourhood stores, it is understood. Nearly all the neighbourhood stores have storage facilities and these items are stocked there. “If the police conduct raids immediately after Ramadan, these people can be caught red-handed, but the thing is, nobody is bothered enough to lodge police complaints,” say sources.

Several reports suggest that despite the popularity of hypermarkets and malls, neighbourhood stores have been doing quite well, thriving on their popular home delivery services. “They (neighbourhood stores) sell all kinds of items, and despite the fact that they charge more, their delivery service is quite in demand.

Households need things urgently. They won’t go to hypermarkets or malls for every need of theirs,” says the source.

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GCC

AN APPETITE FOR RETAIL Food retail, despite hindrances, shows huge opportunities with an expanding market in the GCC

By Shereen D’Souza, Doha Food retailers have a USD 23 billion opportunity over the next four years. The industry is one of the most dynamic and is significantly contributing to the economic success of the GCC. Between 2007 and 2012, food retail grew seven percent per year and this is self-explanatory of the industry’s potential.

According to A.T. Kearney, consumer spending on food in the GCC was USD 83 bn in 2012, up from USD 59 bn in 2007, and is expected to reach USD 106 bn by 2017. Modern trade penetration in the GCC has brought about growth in all store formats, right from small convenience stores to large hypermarkets, each one being an important slice of the pie and contributing to food market development.

Import inconsistencies GCC states conventionally rely on imports due to their limited domestic production. Saudi Arabia and Qatar face several challenges in importing food, as compared to the UAE. UAE is the 15th biggest importer of food trade in 2012 at a value of USD 16 billion, according to the

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International Trade Statistics 2013 report published by World Trade Organisation (WTO). The UAE’s imports of food represents 1.1 percent of the world’s imports value as well as the annual percentage increase in imports of food in 2012 recorded at 13 percent, according to the report.

The procedures in the UAE are shorter and consignments reach the concerned companies faster. “For fresh food (perishables) the food import procedures can be completed the same day, for dry food it takes two to three working days for online registration and sample testing. The time spent is reasonable as it allows importers to have the products available within a short period,” explains Engineer Husain Sulaiman Al Marzouqi, chairman of All Fresh Co., a UAE based import-export company.

Fresh foods are imported faster as the Saudi Arabian and Qatari borders are “very lenient towards food,” adds Abdul Gafoor K. Mohamed, executive director of Jaleel Holdings. Other food items can take between two to three weeks in Saudi Arabia according to him. “Saudi Arabia has backlogs, and is faced with a lack of computerisation.

However, they are starting to implement changes,” he says.

There are some categories of food which face more restrictions than others - meat, for instance. “If you are bringing in a consignment of chicken, the consignment will immediately be rejected if there are feathers on any of them. In Dubai, everything is computerised and linked to a barcode. When your next consignment comes in, they may randomly check and reject it,” explains Mohamed.

The systems in certain other GCC countries are not flexible and transparent. “When a consignment is rejected, there are huge costs involved,” he adds. “If we import olive oil which has a shelf life of three years, in Qatar it’s only two years. So now, we have started importing all of our products based on Qatar standards. In Dubai, there is more

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scope as a product can be sold even at lower prices and there will be a huge market for it, but that’s not the case in Qatar.”

Supply chain (in)sufficient?

Qatar is all set for a logistics turn around as part of the Qatar National Vision 2030.

Last year, Qatar’s transportation and logistics sector made around USD 7545 mn in revenue, according to arabiansupplychain. com, exhibiting a 16.5 percent jump over the previous year. Although hypermarkets like Al Safeer Centre and supermarkets like Family Food Centre in Qatar claim that they face “no problems with distribution” and feel there are adequate facilities, the current infrastructure is seemingly inadequate in comparison to the UAE that has a dynamic, functional and efficient supply chain.

Al Marzouqi says: “The supply-chain infrastructure in the UAE is very well equipped to satisfy growing consumer demands - excellent air cargo service covering the world’s biggest fresh food exporters, airports, facilities at port terminals, modern road networks and sophisticated telecommunication services.” Qatar is however stepping it up with massive investments and projects in the pipeline like the upcoming USD 1 bn Qatar Cargo Complex at Hamad International Airport (HIA) and the USD 35 bn rail and metro projects.

Move towards self-sufficiency Saudi Arabia, the most self-sufficient of the GCC states, has a lot of factors to attribute its status to. Several years ago, the government established rural roads, irrigation networks, and storage and export facilities and encouraged agricultural research and training institutes as part of an extensive plan to promote modern farming and ultimately achieve self-sufficiency.

Qatar imports as much as 90 percent of its food, according to the Financial Times.

Although Qatar’s natural resource wealth safeguards it from severe price fluctuations, past experiences have shown limitations in this regard but reports have revealed that Qatar is aiming for a 70 percent self-sufficiency status by 2023. Jonathan Smith, director of communications for Qatar’s National Food Security Programme suggests focusing on improving resource efficiency rather than output targets.

UAE is the second largest food producer in the GCC; however, it relies heavily on imports to meet its domestic requirements.

Al Marzouqi explains that the GCC states can achieve self-sufficiency by “encouraging local companies to invest in agricultural projects, protecting existing farmers by helping them in product distribution (cooperatives, points of collection and sales) and keeping them away from market fluctua-

GCC food import estimates (in USD bn)

Country

2015E

2020E

Bahrain

1.1

1.6

Kuwait

3.6

5.3

Oman

3.3

4.8

Qatar

2.1

3.3

Saudi Arabia

24.5

35.2

UAE

5.5

8.4

GCC Total

36.3

53.1

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46 tions by ensuring a minimum sales price which covers their production costs.”

While vegetables and dairy products dominate regional food production, GCC countries rely on imports to satisfy their meat and wheat requirements. In 2010, the GCC collectively imported 27.5 million tons of food, more than double the food that was produced locally. In addition to significant investment in foreign farmland, countries in the region are increasing focus on developing the food manufacturing sector.

Ongoing trends “The organic food category is one other that has been growing during the last five years,” says Al Marzouqi. The organic food industry has picked up pace over the last few years and increasing use of agro-chemicals and other harmful pesticides, along with growing consumer awareness, has contributed largely to growth of this industry. According

land to form five percent of total planted area in the Kingdom by 2017 from one percent currently.

In 2007, a non-governmental, independent body Saudi Organic Farming Association (SOFA) was established under the supervision of the Ministry of Agriculture, with a mandate to support Saudi farmers engaged in organic farming. The government allocated SAR 60 billion (USD 16 million) to boost the domestic agricultural sector in 2012.

UAE is not far behind and is establishing efforts to regulate and certify organic food.

The UAE Ministry of Environment and Water also recently approved 18 farms for organic branding. Ilias Assimakopoulos, CEO, Agthia Group PJSC, explains the challenges related to this sector include “exposure to input cost of imported raw material, while well entrenched in management risk controls are nevertheless affected by external factors

some of their dairy products. This sort of government intervention, or interference rather, impacts company profitability and will hinder its growth. Mohamed feels that this has already happened. “Several years back, we had food products coming in reefer trucks in the summer, and in normal trucks in the winter, due to obvious supporting external weather conditions. However, new regulations state that all food products have to be imported in reefer trucks, irrespective of the season. This naturally increases the cost to the company.”

Despite setbacks like this, major food retailers and manufacturers see the potential in the region going by Gulfood statistics.

The 2014 edition of the annual food and hospitality show had 4500 companies from 120 countries participating with over 80,000 trade visitors from 172 countries.

The show was also host to the first Halal World Food exhibition, given Dubai’s position as a primary global trading hub for the international halal food industry.

In 2007, a non-governmental, independent body, SOFA, was established under the supervision of the Ministry of Agriculture, with a mandate to support Saudi farmers engaged in organic farming. The government allocated SAR 60 billion to boost the domestic agricultural sector in 2012

Dubai's annual food and hospitality show - Gulfood

to Orient Planet, the organic food market in the GCC was estimated at USD 300 million in 2009, with more than 3,000 outlets dedicated to organic and natural products.

Currently, the industry in the GCC region is at a nascent stage compared to that in the West and demand in the GCC is at par with demand in the US and Europe several decades ago.

Saudi Arabia remains the largest organic food market at an estimated USD 270 million in 2009 (90 percent of the total GCC organic food market), according to Orient Planet. In 2009, the government invested USD 267 mn to increase organic food production in Saudi Arabia and as per the Food and Agriculture Organization (FAO), the Kingdom has nearly 0.03 million hectares (ha) of organically planted land. A recent study anticipates organically planted

that could have an impact on food inflation and gross margins.” The market is growing fast and higher prices are a hindrance, however, prices may be regulated by the market mechanism of demand and supply in the years to come.

The GCC states are dependent on imports to meet their domestic requirements, hence inflationary tendencies will always prevail.

Also, production is limited and thus the nations are price takers for agricultural imports and profoundly exposed to global food price hikes. In addition, companies operating in the region find it difficult to pass on the increase in food costs to their consumers due to government intervention, according to an Alpen Capital report.

For instance, during July 2011 and November 2012, the Saudi Ministry of Commerce asked Almarai to roll back prices of

According to a Thompson Reuters report commissioned by the Dubai Government last November, the global halal food market has an estimated annual value of USD 1 trillion – which equates to approximately 20 percent of a global food market predicted to reach USD 5.3 trillion by the end of 2014 (Datamonitor). With GCC halal food imports, according to the Economist Intelligence Unit, set to jump from USD 25.8 billion in 2010 to USD 53.1 billion by 2020, the UAE’s annual halal food imports will reach USD 8.4 billion by the end of the decade.

With the rise in regional income levels and the growth of tourism in the region, the GCC will continue to provide significant investment opportunities for major international businesses and manufacturers eyeing regional buyers, distributors, logistics providers and storage and transport solutions.

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