Gcc retail industry overview by Sutherland Global Services

GCC Retail Industry Overview August 2013

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Global Retail Industry Overview 1

Global Retail Sales

USD17.0 Tn (2012)

GCC Retail Sales

USD186.7 Bn (2011)

Saudi Arabia Retail Sales

USD83.3 Bn (2011)

UAE Retail Sales

USD50.1 Bn (2011)

Qatar Retail Sales

USD22.0 Bn (2011)

Kuwait Retail Sales

USD14.0 Bn (2011)

Bahrain Retail Sales

USD8.0 Bn (2011)

Oman Retail Sales

USD9.2 Bn (2011)

Region

Market Size (USD Tn) 2012

CAGR (%) – 201216

Key Contributing Countries

Asia and Australasia

7.4

12.3

China, Indonesia, India, Malaysia

Latin America

1.4

8.4

Brazil, Uruguay, Chile

North America

3.7

4.2

US, Canada, Mexico

Western Europe

2.9

1.9

UK, France, Germany

4 Major Retail Markets

5 Comment about the Future of GCC’s Retail Market

“The year 2012 has been a good year for the retail industry and I have a positive outlook for the sector. The sector is uniquely positioned to capitalize from the growth in tourism and hospitality sectors in the GCC and should see a healthy growth in the coming years. While there is immense opportunity for the companies operating in this sector, there is also a lot of competition. Only the most innovative and efficient players will be able to maintain and grow their market share.” – Nilesh Ved, Chairman of Apparel Group “The retail industry in the region has grown at a fast pace and at the same time consumers have become increasingly sophisticated. Today in the luxury retail industry, we see a lot of repetition; almost in each mature market you will find the same brands next to each other, the same merchandise and even the same decoration and window displays. Our GCC consumer is a well-traveled and savvy one, therefore we have to start customizing more products and concepts with him or her in mind.” – Ashraf Abu Issa, Chairman & CEO, Abu Issa Holding

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GCC Retail Industry Size & Growth GCC Retail Sales (In USD Bn) Total Retail Sales

USD186.7

USD200.7

USD270.3

2011

2012

2016

Food retail sales

Non-food retail sales

Oman Bahrain Kuwait Qatar Saudi Arabia UAE

Sales of supermarkets and hypermarkets in the GCC region are expected to reach USD59.0 Bn in 2016, growing at an annual average rate of 10.5% during 2011-16. Personal luxury goods segment is expected to grow at a CAGR of 8.2% during 2011-16 to reach USD11.8Bn in sales.

2011

Duty-free and travel-related retail sales in the Middle East are forecasted to outperform the broader retail industry in terms of growth. This growth will be driven by an anticipated higher passenger traffic at the Abu Dhabi, Qatar and Dubai International Airport.

2012

2016

Outlook for Saudi Arabia is the most optimistic in the region, with an expected CAGR of 9.5% during 2011-16. Rising population, expatriate wealth, strong household consumption, modern retail concepts and a thriving tourism sector continue to provide ideal conditions for growth.

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Macroeconomic Drivers of Retail Industry (1/2) Unemployment Rate (%) In August 2012, Omanâ&#x20AC;&#x2122;s Ministry of Finance announced plans to put USD1Bn, mostly generated from the additional oil revenue, toward job creation in the Sultanate.

15.0 15.0

15.0

10.0

5.6

5.4

5.0

5.0 3.5

3.7 1.7

1.7

4.0 1.6

0.5

0.3

2007

2008

2009

5.5

4.6

4.3

4.2

3.7

5.8

5.5

4.2 3.6

2.1

4.0

3.4

2.1

0.5

0.6

0.5

2010

2011

2012

0.0 UAE

UAE is planning to make changes to its labor laws to encourage its citizens into the private sector. This will help ease the burden of a bloated public sector in case of a fall in oil prices.

Saudi Arabia

Qatar

Kuwait

Bahrain

Unemployment in Qatar is the lowest in the GCC region. This is because Qatar has one of the highest rates of spending on education in the region, i.e. 3.1% in 2011.

Oman

For 2012, unemployment in Saudi Arabia stood at 5.5% of the total Saudi labor force (15 years and older), which means there are at least 300,000 unemployed people in the country. Because of the poor education system, many young Saudi job-seekers lack the required qualifications and skills specified by employers.

Middle East is among the two regions in which the aggregate unemployment rate is estimated to exceed 10%, the other being North America. According to ILO estimates, more than one in every four economicallyactive young people in the Middle East is unemployed.

Source: IMF, Trading Economics, World Bank, Central Department of Statistics & Information ÂŠ 2013 Sutherland Global Services Inc., All rights reserved. Privileged and confidential information of Sutherland Global Services Inc.

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Macroeconomic Drivers of Retail Industry (2/2) Consumer Confidence Index 96.9

100

82.4

86.1

80 71.6

83.2 74.1

70 67.3

99.7 98.8 98.4 92.9

89.2

95.1 83.6

85.0 70.1

73.6

80.4

90.6 82.8

93.6 88.3 83.9

96.5

96.6 91.5

93.6 85.7

84.7 82.1

90.9 86.0 83.5

95.8 95.6 95.2 91.4

Despite unemployment has dropped to the average of ~9%, it still remains much above the pre-recession levels of 4-5%

81.1

72.4

70.9 65.8

52.5

50 49.7

40 30 29.6

20 2H 2009

1H 2010 UAE

2H 2010 Saudi Arabia

At the time of global economic recession, the consumer confidence level of the Middle East region went to as low as 52.5. UAE registered a record low of 29.6.

Source: Sutherland Research

1H 2011 Qatar

2H 2011

1H 2012

2H 2012

Kuwait

Bahrain

Middle East

1H 2013

Consumer confidence level across the Middle East has soared to new heights, with an average score of 81.1. Consumer confidence level measured positive scores for all five indicators, namely regular income, employment, economy, stock market and quality of life

Note: The MasterCard Worldwide Index of Consumer Confidence has a range of 0 to 100, with 50 as the mid-point. A score of 50 denotes a Neutral situation and a score of above 50 denotes consumers are optimistic about the economic climate and quality of life over the next 6 months

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Key Challenges in the GCC Retail Industry (1/2) Socio-Economic Events • Few GCC countries have experienced events such as socio-political unrest in the recent past. For instance, Bahrain, which is highly integrated to the global economy, suffered a social unrest, which stalled tourist inflow into Bahrain and raised concerns on the political framework of the region • Moreover, UAE and Bahrain were also vulnerable to the global financial crisis, which hampered their economic performance

Increasing Competition • The fast-growing real estate development in the region has created a trend that has made shopping destinations like Dubai and Jeddah extremely congested in terms of retail infrastructure • This has deepened the competition among rivals within the limited scope, which is highly fragmented. To remain viable and competitive, retailers keep innovating strategies such as product differentiation, price-related offers along with placing the mall distinctively in the minds of patrons through various entertainment packages like amusement parks and food courts • Moreover, leading retailers in the GCC region, who are typically either family-owned or privately-operated, constantly face challenges to counter the threat from large international players and remain competitive. Further, improper succession planning and lack of well-defined authority in family-run businesses lead to various operational challenges

Increasing Rentals • With the industry back on its growth path after the global financial crisis, rentals have started to soar in top-tier malls across the GCC region. For instance, Majid Al Futtaim Group was reportedly planning to increase rents in 2012 at its premier property, Mall of the Emirates, after seeing an increase in the turnover at the mall • With the global economic uncertainty receding, consumer sentiments gain traction and rental expenses surge ahead. Such upward revisions in rental rates at major malls squeeze the margins of retailers, inducing many operators to relocate stores to lower-tier malls

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Key Challenges in the GCC Retail Industry (2/2) Overdependence on Food Imports • The GCC region imports 90% of its food requirement, as the food production in the region is minimal due to less available arable land and water and unfavorable weather conditions • During 2007-08, when commodity prices increased globally, many GCC countries experienced shortage in the supply of cereals as the regular exporting countries to the region curbed supply of various food commodities to meet domestic demand • Moreover, export restrictions led to panic, which further fuelled food price increases, pushing inflation in the GCC higher, from 5.3% in 2006 to 10.7% in 2008. This was also seen as a major cause of social unrest and fiscal challenge in the region during 2007-08

Staffing Issues • The GCC region relies a lot on expatriate workforce with large and small retailers employing skilled migrants from Asian and non-GCC MENA nations. Attrition rate of such workforce is generally high since many of them return to their own countries after making significant savings, which makes it tough for retailers to retain talented and capable workforce • Also, there is a mismatch between industry requirements and unskilled local workforce in the region. It is a big concern especially in Saudi Arabia, Bahrain and Oman. Moreover, restricted labor regulations in countries like Saudi Arabia have posed a critical challenge for the sector

Losses from Counterfeit Market • The GCC market has witnessed an increased influx of counterfeit products over the last several years. The counterfeit market that ranges from apparel to pharmaceuticals and consumer electronics not only poses health hazards but also damages the brand reputations of several leading firms • Such a thriving parallel market poses a big challenge for the GCC retail market, which incurs losses in millions of dollars every year due to counterfeit products

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Key Trends in the GCC Retail Industry (1/2)

Growing Market of Private Labels

Increasing Price Consciousness among Consumers

• Private labels are making their way into the GCC retail market as grocery retailers stay focused on profit growth. Currently, sales from the private labels account for close to 10% of the overall retail sales, compared to mere 3% three years back in the region • Private labels, generally, earn high gross margins for retailers as compared to third-party brands since they do not have to share profits with manufacturers. They also help retailers increase the range of offerings, negotiate better terms with suppliers of third-party brands as the availability of shelf space becomes more constrained, and enhance store image and customer loyalty • Private label retailing is still at a very nascent stage in the GCC region compared to the other mature markets in terms of structural progressiveness of the industry. Moreover, finding manufactures who have the capabilities to supply good-quality private label products and consumer brand loyally towards imported products is increasingly becoming challenging for retailers • Though the 2008 global economic slowdown did not have any significant effect on the GCC region, it has however left a long-lasting impression on consumers’ minds, making them more value-conscious • Both the high-income as well as low-income buyers of the GCC region have started giving equal consideration to quality and price. At the same time, they are also willing to postpone their purchases in a bid to secure the right prices • Price-conscious behavior of consumers has given opportunities to international value retailers to make their presence felt in the region. For instance, Matalan, a UK-based retailer, which opened stores in Abu Dhabi, Fujairah and Muscat in 2011, is making business in the Middle East. Other low-cost global retail chains such as Daiso and New Look are also expanding their footprint in the region

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Key Trends in the GCC Retail Industry (2/2)

Growing Momentum of Online Retailing

• Despite a low usage penetration, Internet has already played a significant part in the Arab Spring and as a result the GCC region is expected to see massive growth in online sales • According to Euromonitor International, the UAE and Saudi Arabia will host a staggering 95% and 136% growth, respectively, in the online retail sales over the next five years (by 2018) through a surge in consumer enthusiasm and confidence • Growing online sales will be encouraged by a growing usage of credit cards as consumers become more comfortable with buying online. Moreover, consumers will be more sophisticated and confident that online orders offer quality products, prompt home delivery and card security

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Country Snapshot – UAE Key Retailers in UAE Sr. No.

Company

Operator Type

Company

Operator Type

Al Tayer Group

Luxury retailer

Groupe Casino (Géant)

Hypermarket & Supermarket

2 3

Apparel Group Azadea Group

Lifestyle retailer Lifestyle retailer

9 10

Joyalukkas Group Jumbo Electronics

Jewelry retailer Electronics

Chalhoub Group

Luxury retailer

Landmark Group

Grocery and lifestyle retailer

Damas

Jewelry and watch retailer

Liwa Trading Enterprises

Diversified retailer

Dubai Duty Free

Airport retailer

Carrefour

Hypermarket

EMKE Group

Hypermarket & Supermarket

Rivoli Group

Luxury retailer

Expected GLA* Addition

Recent Developments

8,000 7,000 6,000 GLA (000’s sqm)

Sr. No.

5,000 4,000

3,000 2,000 1,000 0 2011E

2016F

• In April 2013, the UK-based supermarket chain, Waitrose, announced a plan to expand its operations in the UAE by opening more stores in Dubai to bring the total number of stores in the UAE to five by 2013 • In March 2013, Tommy Hilfiger opened a childrenswear store in Al Wahda Mall of Abu Dhabi. Earlier, in February 2013, Tommy opened its first footwear and accessories store in the Middle East in the same mall • In March 2013, Eros Group, the sole distributor of major brands in consumer electronics and allied multi-products in the Middle East, opened its 32nd retail outlet in Dubai Mall of the UAE • In November 2012, Dubai announced its plans to construct a new city, Mohammed Bin Rashid City, which will house the world’s largest retail mall, the Mall of the World • UAE is ranked 7th in the AT Kearney’s 2012 Global Retail Development Index

* GLA: Gross Leasable Area www.sutherlandglobal.com 6 August 2014

Country Snapshot – Saudi Arabia Top Retailers in Saudi Arabia (2011) Sr. No.

Company

Operator Type

Average Sales Area (m2)

Grocery Banner Sales (USD Mn)

Market Share (%)

144

628,500

4,365

1,742

4.2

30 108

205,000 162,440

6,833 1,504

929 879

2.3 2.0

Al Azizia Panda United

2 3

Bin Dawood Supermarkets Al Othaim Supermarkets

Hypermarket & Supermarket Supermarket Supermarket

Carrefour

Hypermarket

107,000

6,294

683

1.7

Farm Supermarkets

Supermarket

115,850

2,696

327

0.8

Expected GLA Addition

Recent Developments

1,200

1,000 GLA (000’s sqm)

No. of Stores

Sales Area (m2)

800 600 400 200 0 2011E

2016F

• In March 2013, Saudi supermarket chain, Tamimi Markets, announced the opening of a SR56 Mn store in the city of Hofuf. The retailer also unveiled its plan to open 50 new stores in the kingdom by 2020 • In April 2013, Spinneys announced its plans to enter Saudi Arabia. Spinneys will open 10 outlets in Saudi Arabia over the next decade in cities including Riyadh and Jeddah • In October 2012, British retailer Debenhams opened its new department store in Othaim Mall in Riyadh, taking its store count in the country to 10 • Saudi Arabia was placed first in the Middle East region in the maiden annual Retail International Programme Expansion Index that ranks the top 40 international retail markets • Saudi Arabia is ranked 14th in the AT Kearney’s 2012 Global Retail Development Index

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Country Snapshot – Qatar Key Retailers in Qatar Sr. No.

Company

Operator Type

Company

Operator Type

Abu Issa Holding

Diversified fashion retailer

Almuftah Group

Diversified retailer

Al Mana Fashion Group Al Meera Consumer Goods Company

Fashion retailer

6 7

Family Food Centre Mannai Trading WLL

Grocery retailer Electronics and auto retailer

Qatar Duty Free

Airport retailer

Salam Studio and Stores

Lifestyle stores operator

3 4

Alfardan Group

Supermarket High-end automobile and jewelry retailer

Expected GLA Addition

Recent Developments • In May 2013, Al Meera Consumer Goods Company opened a new store in Nuaija. It followed the opening of two convenience stores earlier during the first quarter of 2013 in Al Waab and Sealine • In March 2013, the Swedish furniture retailer, Ikea, opened its Qatar store offering a ‘unique range’ of home furnishing solutions through its trademark ‘blue box’ store at Doha Festival City beside Al Shamal Road in Al Daayen Municipality • Qatar was placed second in the Middle East region in the first annual Retail International Programme Expansion Index that ranks the top 40 international retail markets • In July 2012, LuLu opened a new hypermarket spread across more than 200,000 sq feet in Al Khor. The new store took the store count of Lulu in Qatar to four

1,600

1,200 GLA (000’s sqm)

Sr. No.

800

400

0 2011E

2016F

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Country Snapshot – Kuwait Key Retailers in Kuwait Sr. No.

Company

Operator Type

Alghanim Industries

Electronics

City Centre Kuwaiti Union of Consumer Cooperative Societies

Supermarket

Mass grocery retailer

M.H. Alshaya Company

Lifestyle retailer and restaurant operator

The Sultan Center

Supermarket

Expected GLA Addition

Recent Developments

1,000

GLA (000’s sq m)

800 600 400 200 0 2011E

2016F

• In May 2013, Tom Tailor, an international fashion and lifestyle brand for stylish casual wear and accessories, officially opened its first flagship retail store in Kuwait at Al-Muhallab Mall in Hawally • In April 2013, Aspinal of London, a UK brand for luxury leather creations, opened its first store outside the UK at Avenues Mall in Kuwait • In December 2012, Ralph Lauren opened a new flagship store covering 1,350 sq m at The Avenues Mall in Kuwait. The newlyopened store is the largest operating Ralph Lauren store in the Middle East and is operated by the Chalhoub Group • In August 2012, Centrepoint (Landmark Group) opened its eighth store in Kuwait as part of its plans to strengthen its footprint in the GCC region • Kuwait is ranked 12th in the AT Kearney’s 2012 Global Retail Development Index

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Country Snapshot – Bahrain Key Retailers in Bahrain Sr. No.

Company

Operator Type

Al Jazira Group

Grocery store operator

Bahrain Duty Free

Airport retailer

Jawad Business Group

Grocery store operator

Al Jazira Group

Grocery store operator

Expected GLA Addition

Recent Developments

1,200

GLA (000’s sqm)

1,000 800 600 400 200 0 2011E

2016F

• In May 2013, Marks & Spencer (M&S) opened its brand new store at Mirdif City Centre to complement its planned expansion in the GCC region. M&S operates 10 stores across Bahrain, which are run under a longstanding franchise agreement with Al-Futtaim • In January 2013, Extra, a Saudi-based big box retailer, expanded its regional presence by opening a new store in Bahrain. The new store is Extra’s first outlet outside Saudi Arabia • In December 2012, Klassno, a Singapore-based coffee brand announced its plan to expand its retail outreach in Bahrain through a partnership with local distributor Babasons • In October 2012, Sharaf DG, a UAE-based consumer electronics retailer, opened its second store in Bahrain at Enma Mall • In August 2012, Géant opened its second outlet in Bahrain at Enma Mall in Riffa

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Country Snapshot – Oman Key Retailers in Oman Sr. No.

Company

Operator Type

Assarain Group

Furniture and furnishing retailer

2 3

Jawad Sultan Khimji Ramdas

Electronics/Telecom retailer Lifestyle retailer

Mustafa Sultan

WJ Towell Group

Electronics Furniture, furnishing and other consumer products retailer

Expected GLA Addition

Recent Developments

700

GLA (000’s sqm)

600 500 400 300 200 100 0 2011E

2016F

• In December 2012, The Children's Place (TCP), a North Americabased children's specialty apparel retailer, opened its first store at Muscat Grand Mall • In November 2012, Qatar-based retailer Al Meera signed an agreement to acquire hypermarkets and supermarkets in Oman to expand its operations in the region • In November 2012, REDTAG, a Dubai-based value retailer of fashion, lifestyle and homeware products expanded its network in Oman with the opening of its third store in the country in Markaz al Bahja. The opening of the new store is part of Redtag's strategy to further expand in the region in which it already has operations such as Saudi Arabia, Bahrain, Kuwait, Qatar, the UAE, Yemen and Jordan. Redtag entered Oman in August 2012 • Oman is ranked 8th in the AT Kearney’s 2012 Global Retail Development Index

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