The retail sector in Kuwait, as part of one of the world’s most prosperous societies, has achieved rapid growth in recent years, with retailers benefitting from strong economic fundamentals, evolving consumer tastes and a relatively unsaturated market. These factors are set to continue underpinning further growth and diversification over the coming years, with various segments expected to perform well, including the traditionally strong market for luxury goods, new malls and hypermarkets, and the relatively untapped world of e-commerce.
The retail market, including wholesale, was worth a total of $5.8bn in 2013 – equivalent to 3.3% of GDP – according to investment bank Alpen Capital’s 2015 “GCC Retail Industry” report. While the trend has been a positive one, growth has fluctuated in recent years. In 2009, as the global economic crisis struck, year-on-year market growth fell by 23.4% before surging back by 16.5% in 2010. Declines of 8.7% and 3% followed in 2011 and 2012, respectively, but in 2013 the market recovered again, expanding by 11.9%. Alpen Capital expects the compound annual growth rate (CAGR) of the retail sector to reach 6.7% between 2013 and 2018, with some segments outperforming others. The supermarket and hypermarket segment, for example, is forecast to see a CAGR of 9.6%.
The sector can roughly be divided into three segments: a fairly large high-end segment that caters to most Kuwaitis and well-off expatriates; a substantial mid-range market that caters to less-well-paid expatriates, including a high number from Arab countries outside the GCC; and a small budget segment that exists for expatriate labourers, who tend to be very price conscious and send more of their income back to their home countries as remittances.
Room To Grow
Over the past decade or more, attention has shifted towards the retail markets of fast-growing emerging economies, as growth in more established developed markets has slowed. While Kuwait and its neighbours are highly developed, high-income countries, they have some aspects in common with emerging markets in that their retail sectors were historically underdeveloped and under-invested. While billions have been committed to retail in recent years, the potential for expansion in the Gulf is still substantial. Several segments are relatively untapped, opportunities for diversification are growing, and economic momentum continues to be strong. In this sense, Kuwait offers an ideal combination of developed market income levels, with emerging market growth potential.
To realise this, Kuwait will have to first overcome some short-term fiscal pressures. In its 2015 Global Retail Development Index of 30 emerging markets, management consultancy AT Kearney ranked Kuwait 27th – 19 places lower than the previous year’s report. Although the company noted that a change in data sources was mainly responsible for the downward revision, it also cited weaker GDP growth caused by lower oil prices – 94% of Kuwait’s export revenues are generated from oil – as a factor in the fall in rankings. Although Kuwait has suffered the most from the knock-on effects of current macroeconomic challenges, the other GCC member states that are included in the report also slipped in the 2015 rankings. The UAE fell three rungs into seventh place, and Oman dropped nine places to 26th, while Saudi Arabia – a much bigger market – was less impacted, falling just one place to 17th (the rankings did not include Bahrain and Qatar).
Despite this overall negative revision, Kuwait performed well in three out of the four criteria measured by AT Kearney, For market attractiveness it scored 81 on a scale of zero to 100, with 100 being the most attractive – below the UAE but above Oman and Saudi Arabia – and achieved 68.1 for country risk, with 100 being the lowest risk. For market saturation, it scored the highest of the four countries at 33.2, with zero indicating the greatest degree of saturation, suggesting continued opportunities for new entrants. By comparison, Oman’s saturation scored at 24.9, Saudi Arabia’s at 30.4 and the UAE’s at 16.5. For the fourth indicator – time pressure, a measure of the long-term sustainability of the country’s retail market as a function of sales volume, retail sales area and economic development – Kuwait scored zero, with 100 being the highest level of pressure.
AT Kearney noted that Kuwait’s retail sales growth between 2012 and 2014 was lower than that of the UAE, Qatar and Saudi Arabia, with the number of new entrants to the market slowing. But beyond this, the company reported that Kuwait’s long-term prospects remained strong, forecasting 6% annual growth in retail sales through to 2020, thanks to continuing urbanisation, a growing expatriate workforce and an rising population of young and affluent consumers.
The factors that are likely to drive growth in the Kuwaiti retail sector over the coming years are economic, demographic and social. First and foremost, Kuwait’s macroeconomic growth outlook is solid. GDP growth is expected to pick up, expanding by 2.9% in 2016 and 3.3% in 2017, up from 1.5% in 2015, according to the National Bank of Kuwait (NBK). Kuwait’s economic buffers are robust: it has ample foreign reserves, a cash-rich government ready to invest counter-cyclically and excellent credit ratings. The government has indicated that it plans to continue with ambitious infrastructure investments despite lower oil prices, helping maintain economic momentum and creating jobs for Kuwaitis and expatriates. As Mohammed F Alghanim, group general manager of Ali Alghanim & Sons Automotive, a dealership specialising in luxury cars, told OBG, “The Kuwaiti economy often behaves in a cyclical nature, and is currently on the verge of an uptick resulting from strong government spending. This will bode well for crucial economic indicators including investor confidence and consumer spending in the short-term.”
Meanwhile, the country’s efforts to diversify the economy – particularly by developing knowledge-intensive sectors – should help create new jobs for young people and ensure long-term sustainable growth. Non-oil sectors are an increasingly important source of growth. The NBK expects non-oil growth to reach 4% in 2016 and 4.5% in 2017, up from 3.5% in 2015. The bank noted that the fall in energy prices had not affected the government’s investment programme, and that it had, in fact, accelerated efforts to diversify the economy. Indeed, government hiring – with nearly 20,000 new jobs for Kuwaitis in 2015 alone, according to the NBK – and the quickening pace of implementation of major projects have played an important role in supporting growth and consumer spending. The NBK expects oil prices to recover over the coming two years, easing pressure on the government’s fiscal position.
In 2015 household income from salaries grew at 3.3% thanks to increasing government employment and salaries, in particular, according to the Public Institute for Social Security. In May 2016 the government agreed to a 7.5% average wage increase for those employed in the key oil and gas sectors, and the NBK expects that government wages are unlikely to be cut in the foreseeable future.
Another factor that is likely to benefit Kuwait’s retailers is demographics. The population is forecast to grow at a CAGR of 2.8% between 2015 and 2020, and market research company Euromonitor expects it to reach 5.1m by 2030, up from around 4m at present. Almost a quarter of the population is under the age of 15, providing a base of enthusiastic future consumers and making continued population growth likely. Kuwait is also home to many expatriates, who make up 70% of the population. These workers come from diverse locations – including Europe, South Asia, East Asia and Africa – and bring with them not only extra demand for retail, but also their own shopping cultures and tastes in goods. This has helped shape the Kuwaiti retail market and add to its diversity.
Furthermore, as one of the richest countries on earth, Kuwait is home to thousands of high-networth individuals, with significant disposable income and substantial spending power. This has created one of the region’s liveliest markets for luxury goods. While the segment has been impacted by lower economic growth, it is expected to rebound in 2016 and beyond. “The impacts of low oil prices have been felt across many economic sectors, the automotive retail market included. Although sales have weakened and more consumers are looking into leasing as an option, Kuwait continues to outspend the remaining GCC markets across most luxury retail segments”, Alghanim told OBG. Efforts to encourage the private sector could also widen the pool of wealthy consumers. Across the Middle East as a whole, the affluent segment is expected to grow by 30% between 2013 and 2023, according to Alpen Capital.
While Kuwait is not an established leisure tourism destination, it receives around 300,000 visitors a year, a number that is expected to rise to a total of 461,000 by 2025, according to the World Tourism & Travel Council. Many of these are either from the Kuwaiti diaspora or business tourists. The volume of business visitors is likely to increase as Kuwait rolls out big-ticket projects from transport to energy, attracting international investors and contractors, and looks to increase private sector foreign direct investment.
A broadening range of payment options also promises to benefit retail. Termed plastic money, debit and credit cards have become more widely accepted in Kuwait, and credit providers, banks and retailers are increasingly innovative in developing offers for consumers. Zero-interest offers are particularly popular. These allow credit card users to repay purchases in fixed-term instalments of, for example, three, six or 12 months, with no additional cost. This makes it easier for less affluent customers in particular to make large purchases, even if they cannot cover the up-front cost. Loyalty cards and branded credit cards are also increasingly widespread, allowing retailers and credit providers to track customers’ purchasing habits and tailor offers to them, while encouraging regular repeat business.
E-commerce is relatively underdeveloped in the Gulf region, and thus provides significant potential opportunities for retailers – as well as challenges for those competing directly against online businesses. E-commerce accounts for 2% of retail sales in the region, and just 15% of retailers have an online presence, according to Alpen Capital.
Kuwait’s young, tech-savvy population is ready to take up e-commerce services, particularly given the competitive offers available. Increasing credit card penetration and a broadening range of secure payment options are making online shopping accessible to a growing proportion of the population. Kuwait’s internet penetration rate of around 80% suggests a substantial market for online retailers, and one that is likely to grow over the medium term. Going online also makes commercial sense for retailers, as it allows them to reach customers with less capital investment and overhead cost, thus strengthening margins.
Major players active in the market in Kuwait include Amazon; online bulk-coupon retailer Groupon; online furniture store Wysada.com; electronics, home goods and clothes retail portal MarkaVIP; peer-to-peer platform Etsy; online auction company Tradus; and Souq.com, an English- and Arabic-language shopping platform described as the Amazon of the Middle East. Some e-commerce firms are working to tailor their offerings to the local market. Malaysia’s Zilzar, for example, offers halal products in categories such as fashion, food and beverages, medicines and media.
Kuwait is also seeing the rise of m-commerce, as transactions shift towards mobile devices. The country’s high smartphone penetration rate, which is around three-quarters of the population, again provides opportunities for retailers, some of whom have developed applications to allow customers to browse, purchase and track orders on their mobile devices. Souq.com and PayPal are among the international players who have introduced Arabic-language apps. Souq.com has been a leader in innovative marketing ideas. Under its “White Friday” scheme, popular brands can launch special offers via online platforms.
The shopping mall model has proved a huge success in Kuwait and continues to develop around the country. The format, which offers a mix of shopping and socialising, suits not only Kuwaiti cultural norms but also the climate, which is not conducive to outdoor shopping during the summer.
Large-scale malls operating in Kuwait include Marina Mall, 360 Mall and The Avenues. Owned by United Real Estate Company, Marina Mall, which opened in 2002, has 150 units with a total gross leasable area (GLA) of 35,379 sq metres and can draw on visitors to the adjacent marina, yacht club and five-star hotel. In 2009 Tamdeen Group opened the 82,000-sq-metre 360 Mall, anchored by a Géant supermarket and a Marks & Spencer department store. The mall features a food court with 1200 seats and extensive leisure facilities.
The Avenues, which opened in 2007, has expanded in various phases and now has seven different areas, each with its own theme, including The Souk, which is laid out as a traditional souq; Grand Avenue, a replica of a tree-lined European boulevard; and Prestige, a concentration of luxury outlets. The Avenues is now in the process of constructing its fourth phase, due to finish in early 2018. Work will include expansions of existing districts and a digital retail area inspired by Hong Kong’s Kowloon and Tokyo’s Ginza district. Two high-end hotels are also part of the new development. Once complete, phase four will add 100,000 sq metres of GLA at a total cost of KD265m ($876.5m), taking total investment in the mall to KD600m ($2bn). The Avenues’ luxury offerings compete with other high-end developments, such as the Al Hamra Luxury Centre, located in the Al Hamra Tower office complex. With more than 100 units and 34,000 sq metres of GLA, the mall is owned by Al Hamra Real Estate Development and is close to the Al Hamra Fort Hotel and the six-star Waldorf Astoria Palace Hotel.
Other major malls in Kuwait include The Gate, which opened in 2014 and was developed by Al Kuthban Construction Company, and Al Salam Mall, which opened during the same year. The Gate has 37,000 sq metres of GLA over six floors and around 275 units, which range in size from 40 to 300 sq metres, while Al Salaam Mall has around 27,000 sq metres of GLA.
The new KD70m ($231.5m) Al Kout Mall, which will replace the Al Manshar Mall and is being developed by Tamdeen, is scheduled to open by the end of 2017. With over 100,000 sq metres of GLA, it stands to be one of the largest malls in the country and is already 50% leased. Major brands are expected to include Zara, Sephora, the GAP and Victoria’s Secret. It will be integrated with a seafront along Fahaheel Beach and the Marsa Al Kout marina, and will benefit from its position adjacent to the luxury Rotana hotel.
In the coming years, Alpen Capital expects smaller malls to proliferate in the Gulf region, providing “community shopping” in new and existing residential areas, with more convenience for daily errands. This should help local brands and small and medium-sized enterprises, which can be crowded out of mega-malls, place their products in modern retail space.
Hypermarkets & Supermarkets
The dynamics driving the growth of the broader retail market in Kuwait – including urbanisation, a growing population, a substantial expatriate community, rising purchasing power and increasing penetration of international retail brands – are also driving even faster growth of modern retail, including supermarkets and hypermarkets. Across the region as a whole, hypermarkets are the fastest-growing retail format, according to Alpen Capital, which sees “huge growth potential” in the Kuwaiti market in particular.
With the food market dominated by imports, foreign retail chains have been drawn to the sector, benefitting from their existing international supply chains and experience with the hypermarket format. The major players are French chains Carrefour and Géant, and Emirati-owned Lulu, part of EMKE Group. Lulu opened a 13,945-sq-metre hypermarket at Sama Mall in Egaila in 2016, its sixth in the country. Local media reports indicate that the firm plans to open another four stores in the country in the next two years, as part of its regional expansion strategy.
Domestic players in the food market include Sultan Group and the Union of Consumer Cooperative Societies (UCCS). Kuwait-listed Sultan operates large wholesale centres and convenience stores, and has branches elsewhere in the Middle East, while UCCS, founded in the 1970s, largely operates small neighbourhood stores, closer to the consumer than hypermarkets, but with less variety.
Kuwait’s affluence has attracted a range of high-end luxury brands. Chanel, Burberry, Louis Vuitton, Prada and Christian Dior are all present and multiplying, while others are moving to join them. In June 2016, for example, De Beers, a South African-owned global market leader in diamonds, opened its first store in Kuwait. Located in The Avenues mall, the shop was only the third to open in the Middle East – following regional shopping capital Dubai and financial centre Bahrain – indicating Kuwait’s leading position in the MENA region’s luxury market.
Alpen Capital forecasts that Kuwait will have one of the highest rates of luxury retail growth in the region, despite the traditional preference of wealthy Kuwaitis to shop abroad and a recent downturn due to the economic slowdown. The expansion of global luxury brands and high-end malls is indicative of the positive outlook for the segment. “Internal and external forces combined have caused a slowdown in the luxury segment, which is down around 12% across the board,” Shahzad Gidwani, general manager of the trading division of Behbehani Group, which has brought a range of luxury brands to Kuwait, told OBG. “But recovery is targeted for the end of 2016. Kuwait is a mature market and one of the leading luxury retail markets in the world. Luxury will continue to fare well because, when buying something of significant monetary value, potential customers will always want to feel part of the buying process, so e-commerce will not impede this market as it will others.”
Kuwait’s retail market may be relatively small population-wise, but it is affluent, under-penetrated by modern retail, increasingly diverse and forecast to grow steadily. Despite the economic slowdown, the sector retains a solid outlook based on recovering GDP growth, a rising population and economic diversification. While risks from the oil price to the broader economy are real, the government has continued to invest, even during leaner times. Household disposable income, already high, is expected to continue to rise. Growth opportunities lie in the continuing expansion of existing popular formats and in new niches, including e-commerce and airport retail.
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