Wanderlust…

The International Reporting (and Life) Adventures of Vivian Salama

UAE retailers remain optimistic

Posted by vmsalama on April 6, 2008

By Vivian Salama

The National

ABU DHABI // UAE retailers are optimistic that they will weather the global financial storm, despite a warning last week by Ben Bernanke, the US Federal Reserve Chairman, that the US economy was heading for a recession. Retail sales are stalling in countries across the West as cash-strapped consumers stay away from shops.

The loss of consumer confidence is exacerbated by high consumer debt levels. A new report released by the European Union revealed that European retail sales dropped 0.5 per cent in February, causing a setback to the gains made over the Christmas-New Year holiday period. The EU’s largest economy, Germany, reported a 1.6 per cent decline.

Conversely, retail growth in the Middle East shows no signs of abating. According to regional industry forecasts, the retail industry across the Middle East is projected to exceed Dh1.84 trillion (US$500 billion) by 2010. 

In Dubai and Saudi Arabia, the sector is currently valued at Dh27.89bn and Dh22bn, respectively. The same is true in other emerging markets. In China, for instance, retail sales have continued to expand by some 20 per cent in the first two months of 2008, despite that country’s rising inflation rates.

“What we are seeing in the West, in countries like the US and the UK, is due to the fact that they do not have as much liquidity in the system,” said Naeem Ghafoor, the chief executive of Skyline Retail Services Consultancy in Dubai. “[In the UAE], we don’t suffer from lack of liquidity. If anything, we have an oversupply.”

Retail is the second-largest non-oil sector in the UAE and across the Gulf Co-operation Council (GCC). A recent report by property consultant CB Richard Ellis ranked the UAE eighth in a study analysing the attractiveness of 250 retail markets around the world. Wholesale, retail and repair contributed to 20 per cent of the UAE’s gross domestic product (GDP) last year, according to the study, with Dubai accounting for one-third of the country’s total retail development.

International retailers with a presence in the region generally operate under local holding companies, such as Al-Futtaim or Alshaya, and therefore are not subjected to the same burdens that are affecting their home countries.

Gains are reported across the board, especially in areas of discretionary spending such as fashion.

Muscat Duty Free, one of the leading retailers in Oman, closed 2007 with sales 11 per cent ahead of 2006. Dubai Duty Free, the world’s third-largest duty-free retailer, said revenue grew 24 per cent in 2007 to a record Dh3.18bn. The UAE gold and jewellery sector also reported overall gains for 2007.

“The Emiratis have a lot of disposable income,” said Mr Ghafoor. “They like to drive well, dress well, live well. To an extent, that goes for the expat community as well. Fashion is an industry that has a good future here.”

In contrast, most analysts believe that 2008 would bring bad tidings to the sector in both the US and Europe, and retailers there were bracing for a bumpy ride.

During his testimony to the Joint Economic Committee in Washington, Mr Bernanke pinpointed the bleak outlook. “Concerns about employment and income prospects, together with declining home values and tighter credit conditions, have caused consumer spending to decelerate,” said Mr Bernanke.

Retail is the second-largest industry in the US, based on the number of businesses and employees. Total retail sales in the US ended 2007 on a positive note – up about 3.8 per cent to Dh16.48 trillion, according to a Plunkett Research estimate.

American retail giants JC Penny and Gap are among the companies feeling the brunt of the slowdown now, having reported a drop in first quarter sales by 6.7 per cent and 6 per cent, respectively.

In spite of the optimism across the GCC, there are some retail areas struggling to withstand the impact of global inflation. The Abu Dhabi Department for Planning and Economy recently reported a 10.7 per cent jump in inflation last year.

Food, beverage and tobacco accounted for 11 per cent of that the widespread rise, and supermarkets across the region are reporting record-high food prices.

“The food industry is always impacted by world commodity prices, as opposed to the clothing industry, for example, which is much more disconnected,” said David Berrick, the general manager of retail for Abela Supermarkets.

Throughout the region the clothing and luxury goods retail sector has so far withstood the economic burden causing the commodities crisis, but industry analysts caution that they should not take the situation for granted.

A significant risk is posed by the secondary effect of inflation on the labour market.

“At some point in the future it will become very difficult to find a workforce here because people will not be able to afford living on the salaries that they [are] getting,” warned Mr Ghafoor.

“Salaries are not going up at the same rate [as inflation]. The retail industry needs to remain aware of the fact that staffing malls requires a steady workforce – and you won’t maintain [one] if the workers can’t afford to feed themselves,” Mr Ghafoors aid.

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