Opinion - Norman Macdonald - Letter from the Middle East

Middle East challenges remain

Norman Macdonald, vice president of Toy Triangle, based in the United Arab Emirates, gives us an overview of the Middle Eastern toy market and what challenges and opportunities exist in the region.

The Middle East has struggled to recover post Covid, but it would be too easy to blame the current situation solely on the effects of pandemic, as that would ignore all the other factors that are in the mix. These include:

• Inventory – which remains high and, like the rest of the world, this has had an impact right across the supply chain. Stock in both retailers and distributors warehouses is above levels that would be considered healthy, and that has been the state of play for most of 2023. High inventory is normally as a result of overbuying or underselling - or in the Middle East’s case a combination of both. Higher stock levels at retail means lower levels of local purchases, resulting in a build-up of stock in the distributors’ warehouses.

• Cashflow - over the years, as has happened all around the world, retailers have come and gone in the region. Every time one of them closes, it causes repercussions amongst suppliers. The toy retailers that remain active are competing to secure extended payment terms from suppliers, asking for consignment or goods supplied on a sale or return basis as they try to balance the books. This uncertainty can create a strained relationship between distributor and retailer, as they end up having far more conversations about terms than they do about sales. Healthy cash flow has remained a challenge in 2023 for all parties, with a few exceptions.

• Changing shopping habits - e-Commerce took a lot longer to take hold in the Middle East for a variety of reasons: no street addresses for deliveries, suspicion about online payments and a focus on luxury shopping malls, some of the largest and most impressive in the world. The Covid pandemic was a game changer, as many consumers found it easier to shop online and stayed with it, happy to avoid traffic jams and full car parks. On top of that, the high number of malls in the Middle East has also led to overcapacity.

• Discounting - inventory, cash flow and changing shopping habits are all significant challenges, but if you add into the mix a high volume of distributors bringing in speculative product, this invariably leads to discounting, longer payment terms and panic sales to try to balance the books.

• Oversupply - it’s not uncommon to see, for example, multiple brands featuring practically identical product; I counted over eight brands of remote-control cars in toy retailers recently. The retailer won’t sell any more than if it had two brands, so this creates dead stock. In reality, there are too many distributors in the region chasing too little business.

• Economic factors and war – in a climate of fear, people tend to become savers rather than spenders. In addition, rising bills and expenses has led to a change in shopping habits on a wide variety of products including toys.

So, is it all doom and gloom? Not at all – on the plus side, the Middle East has higher disposable income, large families, a high percentage of the population under 18, oil wealth and now government adopting longer term economic strategies.

Looking at individual countries within the region:

• Egypt: has currency issues and extra admin on imports but for those with patience, it can be a decent market.

• Saudi Arabia: is the largest market in the GCC (Gulf Cooperation Council), but toy retailers are closing and delaying payments which is creating a challenging trading environment for distributors. However, the relaxing of visa requirements and increased tourism and sporting activity should help in years to come.

• UAE: remains stable and is benefitting from increased tourism from Russia and Israel. Christmas is expected to help the toy market here.

• Kuwait: used to be the third largest market in the GCC but has now been replaced by Qatar. The malls here are well established, and excellent toy retailers ensure this is still an important market for toys.

• Qatar: enjoyed a boost from the World Cup and an increased emphasis on tourism, the country is on the up but still relies heavily on UAE importers.

• Lebanon and Jordan: the ongoing conflict in Palestine and Israel has created uncertainty in both markets.

• Bahrain/Oman: make up relatively small markets serviced mainly out of the UAE.

It looks very likely (at the time of writing) that a number of Middle Eastern distributors will return to Hong Kong in January. This used to be the norm as part of an annual visit to meet suppliers in China; now, for the first time in a few years post Covid, Hong Kong appointments are being made. However, Nuremberg remains the go-to trade show for Middle East distributors and key retailers.

In terms of brands, whatever is working in the USA and Europe will invariably work in the Middle East, albeit often with a three/six-month lag. Suppliers need to be aware though of cultural differences; there should be no rainbows on product or packaging, for example.

Brands such as L.O.L. Surprise!, Squishmallows and Barbie all delivered a very healthy performance in 2023 and Gaming, Collectibles and Arts & Crafts have also had a good year. However, TV driven properties are in decline, while app and Gaming licensed properties are grabbing a greater market share.

I expect to see improvements in the toy market throughout the region in 2024 compared to last year. The wise companies will have learned lessons and applied those learnings into strategies, as they look to the future. I look forward to seeing friends and colleagues from the toy community at the London and Nuremberg Toy Fairs, ahead of what I am sure will be another fascinating year’s trading.