Wanderlust…

The International Reporting (and Life) Adventures of Vivian Salama

“Retail sales look very healthy”

Posted by vmsalama on October 21, 2008

I’ve been a bit quiet lately watching this financial monster unfold, and this seemingly endless US election campaign wrap up.  It is both an exciting and exhausting time to be a reporter in New York.  I will be back very soon.  In the meantime, I published this article today on the impact of the financial crisis in the retail sector in both the US and the Gulf. Always happy to hear your thoughts.  -vms

Vivian Salama

The National | October 21, 2008

The ups and downs of the markets are enough to make anyone invest in a crash helmet. A day of market euphoria is now often tailgated by one of nail-biting anxiety. 

However, beyond the day-to-day angst witnessed everywhere from New York to Dubai to Tokyo, the ultimate indication that the world’s number one economy may be slipping into recession came last week with news of the latest US retail sales, which offer the best indication of household demand.

Sales at US chain stores rose by a mere one per cent last month, making it the weakest sales growth of any September since 2001, when the industry was in a recession and absorbing the shock of the 9/11 attacks. Also earlier this month, MasterCard SpendingPulse, which measures US retail sales, said a steep drop in consumer spending sent its specialty retail sales index down 7.7 per cent in September compared with one year ago.

Many experts say there are more tough times still ahead for the US.

“We expect October sales to post a sluggish increase of about 1.5 to 2.5 per cent, as there is considerable uncertainty about the economy,” said Michael P Niemira, the chief economist and director of research for the International Council of Shopping Centres (ICSC).

Nearly 10,000km and a world away from Wall Street, the UAE is among the handful of countries bucking the current crisis with its love of high fashion, fast cars and shiny jewellery. Everything from car sales to computer sales and mall revenues is growing in double digits and expected to continue this way for months and possibly years to come.

“Consumption contributes a large part to the GDP and it is essential,” said Mary Nicola, an economist with Standard Chartered Bank. “In the past few years, most of the strength for western companies was driven by their growth in the emerging markets – it is a way to diversify assets.”

Worth about Dh367 billion (US$100bn), the retail sector serves as a major driving force behind the economies of the GCC and has become the second-largest non-oil industry in the region. It is forecast to grow to Dh1.8 trillion by 2010 according to Retail International, a Middle East consultancy firm. Retail spending in the UAE alone is projected to reach Dh37.4bn a year by the end of the decade.

However, a walk through any of the country’s malls reveals that the western business world may not be so far away after all. American and European stores such as Saks Fifth Avenue, Debenhams, Versace and Bloomingdales continue to pop up at shopping centres across the country, sending subtle reminders of the international crisis at hand, despite continued prosperity here in the region.

For instance, US sales at Saks Inc, which owns Saks Fifth Avenue stores, decreased 10.9 per cent for the five weeks ending on Oct 4. All the while, Saks Fifth Avenue has continued its expansion throughout the GCC, with the latest location due to open in the Dubai Marina. Similarly, Bloomingdales will make its debut in the region with the opening of the massive Dubai Mall next week, just as its American counterpart announced it is slashing prices by as much as 60 per cent on various items in an effort to lure buyers back into stores.

In today’s global economy, some experts believe it is foolish to take such news with stride. 

“Nobody likes uncertainty, so obviously it is going to have an impact on any kind of business, including retail businesses,” said Naeem Ghafoor, the chief executive of Skyline Retail Services Consultancy. “Luckily, our whole credit system works differently here in that we are a more cash-oriented part of the world than the US.”

Ajay Dayal, the general manager of retail and marketing for Easa Saleh Al Gurg, the holding company with brand names including United Colors of Benetton and Siemens appliances, said the UAE must now play the “wait and watch game”.

“I think we are over the first hump,” he said. “I get the feeling that sentiments will not get hurt because the government has come in so strongly and supported the banks and made sure liquidity is continued.”

Since the beginning of October, all seven Gulf bourses have fallen sharply. Dubai suffered the most, falling 22 per cent; Abu Dhabi was down 13 per cent and Saudi Arabia, Qatar and Oman were all down by 15 per cent. Still, many believe this is merely in reaction to the global market climate and is in no way an indication of the region’s economic stability. 

Moreover, the strong purchasing power in the region, it is believed, will continue to fuel growth in the retail sector. Figures released this week by the Ministry of Economy revealed that private spending, which includes household expenditure on food, rent, education and other goods and services soared by nearly 18 per cent to an all-time high of Dh290bn last year.

“Retail sales look very healthy in the region at the moment and we haven’t seen any drop-off like you see in the US and Europe,” said Shahram Shamsaee, the senior vice president of retail for MAF Shopping Malls. “Here, access to credit is a lot stricter, there are a lot more restrictions on borrowing and you have to be employed to be able to borrow.”

Others attribute the region’s stability to the franchise business model, which requires international companies to partner up with local holding companies. There are several benefits to franchising a business, say industry leaders. The biggest draw is it generates income, and it fuels business growth with minimal risk and minimal capital investment. It also increases the potential for market penetration while minimising operation costs and expenses.

“It is a way to diversify your assets and minimise exposure essentially,” said Ms Nicola. “US and European assets aren’t doing so well nowadays, so they turn to partner up with businesses here so that they maintain their chances for growth.”

In fact, the Gulf has become an oasis from the global economic downturn that has seen millions of cash-strapped consumers in the West cutting back on spending, with many brands turning to the GCC as a means to survive tougher times.

Figures released by the regional car industry estimate that the combined market for cars and light lorries in the GCC will increase about 10 per cent to 1.2 million vehicles this year. 

General Motors America reported losses of $8.5bn in revenues in the second quarter of this year compared with the same period last year, while in the Middle East, Africa and Latin America, the company increased second quarter sales by $1.7bn.

Luxury brands have done even better. Lexus UAE reported a 50 per cent increase in year-on-year sales for the first half of this year, while Lexus sales in the US were down by 15 per cent for the same period.

Far from feeling the pinch at the pump, drivers in the Gulf enjoy subsidised petrol, making heavy-duty 4x4s a common sight on the UAE’s roads.

Similarly, in the Middle East the PC maker Dell posted 55 per cent growth in unit sales in the second quarter compared to the same period last year, according to company figures based on International Data Corporation information, whereas in the US, Dell sales grew by a mere 5.8 per cent. Acer, the world’s number three PC maker, reported regional sales were up more than 54 per cent in the first quarter, while sales slumped 20 per cent in the US for the same period.

While Emiratis actively contributed to retail sales, the buying power of the country’s expatriate residents – who make up more than 80 per cent of the population – was the major source of success, a study by the Delhi-based RNCOS found. 

Tourism is also a massive factor stimulating growth, with the UAE expecting more than 11 million tourists annually by 2010. However, with dire economic conditions in Europe and North America, many travellers are likely to stay closer to home. Last month, ABTA, a leading UK travel organisation, warned that the UAE must do more to develop its budget hotel sector or risk losing tourists to cheaper destinations.

“There may be a drop in pure tourist traffic because people coming from the West may feel a bit threatened, but we have to wait to see how the winter season is impacted,” said Mr Dayal. “Let’s wait and see – it shouldn’t be too bad.”

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