Middle East and North Africa (MENA) includes eight of the top 20 countries in the Global Retail Development Index (GRDI)™ – and, despite the region’s political turmoil that has gripped the world since December 2010, including government overthrows in Tunisia and Egypt, civil war in Libya and protests in numerous other countries, it remains a promising retail growth opportunity.
The study reveals that its economy is recovering from the recession, with a growing consumer confidence, most countries are expecting 3 to 5 percent GDP growth over the next year, disposable incomes are high, with an ever rising young and middle class population; the consumer base is ever more connected and engaged.
Prior to the events that haven taken place in the middle east during this year, many barriers already were in existence including :foreign ownership regulations that differ from country to country, the high share of family-owned businesses, the comparatively fragmented retail landscape, and limited foreign ownership outside free zones in most countries. These challenges need careful attention by any retailers considering expanding their businesses, however with a positive outlook for the future.
Kuwait: Small but highly attractive.
Kuwait, 5th in the GRDI, remains MENA’s highest-ranked country. While it has only 3.1 million inhabitants, 96 percent live in cities and 65 percent are between the ages of 15 and 39. These demographic trends have led to retail sector growth of 8 percent annually over the past five years. Overall, retail sales are expected to grow from $8.41 billion in 2011 to $11.92 billion in 2015.
Disposable income will remain exceptionally high, driven by low utility costs, extensive welfare provisions and high salaries for government jobs. Kuwait has one of the highest retail sales per capita of any country in the Index ($4,300), and strong government support for improving citizens’ welfare should boost consumer confidence and spending. In January 2011, to help citizens improve living conditions and to celebrate the 50th anniversary of independence, Kuwait’s government presented its citizens with $3,500 and free food staples for 13 months.
While Kuwait offers an exciting destination to international retailers, given its small population, entry will most likely make sense as part of a regional approach.
Saudi Arabia: A young and engaged population.
Saudi Arabia dropped three places to 7th position in the GRDI this year, but that reflects the relative performance of higher-ranked nations more than Saudi Arabia’s underlying fundamentals. Saudi Arabia, with 29.2 million citizens, is clearly a retail hot spot worth watching.
Consumer confidence in Saudi Arabia is high; bullish sentiments mean greater spending and less saving. Consumer spending is increasing rapidly, with most disposable income spent on food, apparel, health and beauty. Non-food categories grew 8 percent
and food categories 4 percent in 2010. Given its young population (two-thirds under the age of 29) and high discretionary income, Saudi Arabian consumers are considered by many retail experts as early adopters.
New brands and international players arrived in 2010, and current operations expanded in most retail sectors, including fashion, electronics, digital products, furniture, home products, automotive, health and beauty products. On the food scene, local players dominate, with Panda and BinDawood as the leading hypermarkets, while Carrefour brings international know-how and expertise to help drive the sector’s development. Saudi firm Savola Group plans to increase the number of Panda stores to 120 supermarkets and 40 hypermarkets in 2012 and has acquired
several competitor assets, including 11 Géant stores from the Fawaz Alhokair Group.
Several international retailers entered the market in the past year. Boots, the U.K. health and beauty retailer already present in the UAE, Kuwait, Bahrain and Qatar, opened its first Saudi store in Jeddah in 2010. Indian mobile handset maker Micromax plans to enter Saudi Arabia in 2011 through several partners.
When considering Saudi Arabia, retailers have to bear in mind the constraints of government regulations. Retailers must hire Saudi employees, particularly for operational positions such as checkout, and they often need to comply with the religious laws (such as Halal principles for food preparation). Despite these challenges, Saudi Arabia should not be ignored.
UAE: Becoming saturated.
The UAE (population 5.4 million) is recovering quickly from the economic downturn, reflected by the second-highest ranking in market attractiveness of all countries in the GRDI. Tourism, sizable household consumption and ample retail space is boosting the retail sector. Still, the UAE dropped from 7th to 9th place this year. One cause is an increasingly saturated market as many foreign entrants have set up operations in the country.
Consumer spending grew a healthy 9 percent last year, a good indicator of consumers’ stabilizing confidence. Overall, however, consumers remain cautious with discretionary spending and, compared to pre-crisis years, have a greater propensity to save. Prices are rising faster than wages, and many consumers are feeling their purchasing power declining. In response, the government temporarily lowered prices at hypermarkets for 260 basic commodities in March 2011 and began supervising pricing tactics by retailers.
For many retailers, the UAE remains the preferred entry point into MENA for new products and brands. In 2010, Bloomingdale’s opened its first store outside the United States in Dubai, and Victoria’s Secret opened its first store in the region through a partnership with M.H. Alshaya.
The economic downturn gave UAE retailers pause for thought. Until recently, many of them established outlets in whatever mall space was available, failed to consider the market position, adjacent facilities or store location within the mall, and as a consequence paid the price: Unfavourable location and a poor economic climate forced France’s Auchan to close its Dubai DragonMart hypermarket in January 2011; and major luxury fashion and accessories player BinHendi Enterprises closed its 26-store wing in Deira City Centre after its customers, no longer suited to its high-end products, started going to newer malls. Now, retailers are paying more attention to consumer profile and location and the
selection they offer in each location.
Consumer spending in the UAE grew a healthy 9 percent last year, a good indicator of stabilizing confidence.
Turkey: Leapfrogging into the top 10.
Turkey jumped eight spots to take 10th place in the Index. The economy has recovered from the global recession, with GDP growing by 8.9 percent in 2010. Turkey’s population of 73.6 million is mostly urban, and more women have entered the workforce. The demand for convenience shopping is increasing, and the number of shopping malls is surging, especially in Istanbul and other large cities. Retailers are also investing in medium-sized cities by introducing smaller formats to improve market access. The Turkish market has potential, but the domestic and international competition is intense. Growth along with consolidation will be the key highlights of the market in the coming years.
Domestic discounter BIM is the market leader by revenues, followed by Migros Turk (owned by private equity) and Carrefour (in a partnership with local conglomerate Sabanci Holding). The other main players are Metro Group (Real Hypermarkets), domestic player Bizim Toptan, Tesco Kipa, Kiler (which had a 2011 initial public offering), Makromarket and discounter A101. Regional and local retailers expanded by 50 percent in the past two years, and the market is consolidating. There is still room for consolidation as the top four players make up only 14 percent of the industry. Private labels are just 8 percent of sales, below European levels, but that is expected to increase in the next few years.
No major grocers entered in 2010. In the electronics sector, Best Buy exited Turkey in 2011 after a two-year trial run with two stores. Apparel retailer H&M entered in late 2010, while C&A ramped up its commitment to Turkey with plans for 10 new stores on top of its existing base of 24 stores, focused predominantly on the Anatolia region. Another retailer betting on Turkey is German shoe retailer Deichmann, which opened 44 stores in 2010 and has committed $8.5 million to opening a further 20 stores. It is seeking to have 200 Turkish stores in 10 years.
Lebanon: A solid debut.
Lebanon, with its 4.3 million inhabitants, is new to the GRDI, taking 11th place. It is an attractive market for many retailers, thanks to the liberal mindset of its consumers and recent investment in new malls. While GDP grew at a 7 percent CAGR for the past five years, there are several challenges. Additional infrastructure investment is needed to repair insufficient road networks and communications lines outside of Beirut, and disposable income remains fairly low. Further, Lebanon’s stability, measured by the country risk score, is lower than most of its neighbors on the GRDI—a factor to gauge when evaluating the market for entry.
Lebanese consumers are among the most liberal in the Middle East. The alcohol industry is fairly strong, which distinguishes it from most MENA markets. The electronics and home appliances sector has also grown rapidly over the past five years, with Khoury Home leading the pack. It pioneered the concept of a one-stop-shop for home appliances and is undergoing a large-scale expansion, with five major outlets planned.
Azadea Group’s Le Mall concept was launched in 2009 by the local Azadea Group, which also holds franchise rights for retailers such as ZARA and Mango and has placed all of its banners in Le Mall, resulting in significant cost savings. A second Le Mall was introduced in 2010 in Saida in the south, the city’s first high-end mall. A third Le Mall is under construction in a northern suburb of Beirut, providing additional opportunities for retailers to enter or expand in Lebanon.
Egypt: Growth despite turmoil.
The dust is still settling from the demonstrations that led to the ousting of President Hosni Mubarak, but when all is said and done, the movement could lay the groundwork for a promising mid- to long-term retail opportunity. Egypt moved up one spot this year, to 12th place.
Egypt’s retail market is expected to grow 10 percent over the next five years, driven by a large, active and growing population of more than 80.4 million that is gaining purchasing power. Still, Egypt has a low share of modern retailing compared to other North African countries such as Morocco and Tunisia. This, coupled with low levels of market consolidation and growing consumer demand, continues to make Egypt attractive for large global retailers.
Within grocery, international retailers have a strong foothold in the hypermarket sector, where the focus is on the middle-income population and the sale of local products. Competition in this space is increasing with the arrival of new international grocery retailers and the expansion of existing international retailers. The modern grocery retail area is expected to grow by 23 percent annually over the next few years. Lulu Hypermarket, from Abu Dhabi-based EMKE, entered in 2010, with plans to expand in coming years. Carrefour has doubled its sales area in
Cairo and Alexandria over the past five years, with plans for 15 more stores in Egypt. Metro Group entered in 2010 under its Makro Cash & Carry banner and plans to open 20 outlets in the long-term. Metro sources 90 percent of its products locally. Dubai-based Spinneys also plans to expand its presence in coming years. Growth in grocery, and particularly hypermarkets, is partly driven by an increase in women in the workforce who are looking for more convenient food preparation.
Policy reforms in Egypt, such as tariff and tax reductions, helped pave the way for entry by foreign non-grocery retailers. In 2010, Marks & Spencer opened its first Egyptian store in conjunction with UAE-based franchise partner Al-Futtaim Group, while Debenhams expanded into Africa with its first store in the Alexandria City Centre mall. Al-Futtaim has stated that future plans to expand the IKEA brand into Cairo depend on regional stability—both international retailers were forced to shut down temporarily in Cairo and Alexandria due to the violent protests early in 2011.
Morocco: Retail sales bolstered.
Morocco drops from 15th to 17th place this year. The retail sector represents 13 percent of the country’s GDP and is expected to grow 5 percent annually in coming years. A strong performing tourism sector and a shift toward more modern retail channels has bolstered retail sales. Key drawbacks in Morocco (population 31.9 million) include low consumer spending per capita compared to Tunisia, complexities in the distribution models and the need for local knowledge.
In 2010, the grocery sector saw significant consolidation and growth. Metro Group, which entered in 1998, agreed to sell its eight Moroccan stores to local chain Label’Vie, the first time Metro exited a country. It cited limited growth and expansion potential for its self-service wholesale business in Morocco. Label’Vie also partnered with Carrefour to open Morocco’s first Carrefour hypermarket last year. In addition, Turkish supermarket retailer BIM announced plans to open approximately 40 new stores, increasing its Moroccan footprint to 85. Elsewhere in retail, luxury players are drawn to Morocco’s expanding and progressive middle class. Dior opened a store in Marrakesh and has plans to open a second in Casablanca. The suburbs of both of these cities present new and interesting retail opportunities.
Tunisia: Slowing consumer spending.
After a year of political turmoil and a drop in consumer spending growth to 1 percent per year, Tunisia, a nation of 10.5 million inhabitants, drops eight spots to 19th. By regional standards, Tunisia has a more advanced and diversified economy, and the government has gradually loosened its control of the market in favor of greater privatization. However, retail space development continues to lag behind its neighbors. While Tunisia remains on the radar as a good opportunity, we envision a two- to three-year slowdown in store openings and development due to the political uncertainty.