Destination: shop: Potential is high pending the completion of new developments

As developers rush to cash in on Abu Dhabi’s retail market, which they deem to be relatively untapped and undersupplied, total retail space is expanding at one of the fastest rates in the region. International brands are looming larger, especially at the top end of the market, where expensive cars and other luxury goods are being sold at record volumes.

Food retailers, by contrast, are facing tougher times, as government price controls weigh on profit margins. Yet even here, as in much of the retail scene, new chains continue to enter the market. In this increasingly competitive sector, both developers and retailers are thinking more carefully about their business models.

PURCHASING POWER: Retailers in Abu Dhabi are operating in one of the wealthiest markets in the world. According to the Statistics Centre – Abu Dhabi (SCAD), per capita income increased by around 6.4% in 2011 year-on-year – one of the highest increases in the world, albeit still less than the 20% growth that was seen in 2008. When ranked alongside other Arab nations, it comes in second only to Qatar. This is especially remarkable in view of the rapid population growth, at around 7.7% between 2005 and 2010.

As well as being among the world’s wealthiest, Emiratis are also among the highest spenders. A report released in early 2012 by the Arab Monetary Fund stated that domestic consumption in the UAE stood at a total of $176.9bn in 2010, the highest in the Arab world. With a population of 8.2m, that averages out at $21,577 in spending per person per year.

CONSUMER CONFIDENCE: Surveys of consumer confidence have presented mixed data. A quarterly survey conducted by YouGov and Bayt.com shows that consumer confidence in the emirates was falling in the second half of 2011, but rallied considerably in the first quarter of 2012, although not to the levels seen in 2007 and 2008 (see graph). Another survey, run by MasterCard between December 2011 and February 2012, found that optimism with regards to quality of life, regular income, the state of the economy and employment was at lower levels than it had been in the first half of 2011, though it was still positive overall.

Current inflation rates are unlikely to be of concern to upper-income groups. The consumer price index (CPI) registered a moderate average increase of 1.3% in the first nine months of 2012, compared to the same period in 2011, according to the SCAD. Restaurants and hotels increased by a remarkable 18.1% year-on-year, but this is an indication of the health of what is agreed to be a highly buoyant industry.

However, lower-income groups will certainly be feeling the pinch, as the cost of food and beverages increased by 1.9%, in the same period. On the other hand, government subsidies are keeping utility costs very low, and prices in the group – which contribute a substantial 42.1% of the overall change in the CPI – actually declined by 1.3%.

EXTRA SPACE: To judge by the statistics, developers continue to see Abu Dhabi City as holding a wealth of retail opportunities. After a more halting 2010, total retail space in the city grew by around 10% in 2011 and is expected to grow by 16.5% in 2012, according to Jones Lang LaSalle, a real estate consultancy. While several projects have suffered major delays, the improving conditions in local property markets should quicken the pace of development (see analysis).

Malls have been looming ever larger on Abu Dhabi’s retail scene. A comparison of Jones Lang LaSalle’s figures from 2011-12 reveals that non-mall retail space shrank from 54% of gross leasable area (GLA) in the second quarter of 2011 to 50% by the third quarter of 2012. This is expected to shrink still further as a number of new retail centres begin to come on-line over the course of the next three years.

UPCOMING ARRIVALS: Among the projects scheduled for 2012 is the $190m Deerfield’s Town Square. This will be a relatively small development compared to some of its competitors, with around 80,000 sq metres scheduled to be built by the fourth quarter of 2012. The company’s general manager, Banu Tas, conceded in early 2012 that without Yas Mall – which is scheduled to be constructed nearby by 2013 – there would have been more interest in the square’s leasing programme, but that ultimately a larger “destination” mall would have a positive effect on business by helping to attract customers to the area.

Located outside Abu Dhabi Island in a prime position on the highway between the capital and Dubai, the mall has potential to see its annual footfall grow in coming years, as the number of residents in the neighbourhood hit 90,000 in 2012 and is expected to jump to an estimated 200,000 by 2016, Gulf News reported. As of early 2012 more than 50% of the space had been leased. The developers are targeting the mid-market, including the hypermarket Carrefour and the Landmark Group, a lifestyle retailer. Food retailers are to make up 15% of the space, while entertainment – including a Grand Cinema – will occupy 18%.

Also opening in 2012 is Capital Mall, a $270m development by Manazel Real Estate at Mohammad bin Zayed City outside Abu Dhabi Island. The mall is part of a 230,000-sq-metre master plan called 9712BMC that will itself offer just over 60,000 sq metres of retail space to be filled by fashion, jewellery and electronics stores, among others. The French hypermarket chain, Geant, is opening its first store in Abu Dhabi as the anchor tenant of the mall. The developers are hoping that its location – next to Abu Dhabi International Airport – will draw in visitors from all around the emirate, as well as Dubai.

The third mall is under development by Paragon Malls, a subsidiary of the UAE-based retail giant Tamouh. Their first project, Paragon Bay, overlooks the popular Marina Square on Reem Island and is within a short distance from residential, office and hotel space.

The biggest project under development is the $2bn, 235,000-sq-metre Yas Mall. Set to open at the end of 2013, more than 50% of the space has already been pre-leased. The mall is part of the larger Yas Island development which includes an IKEA and ACE Hardware that are both already open.

Not all of the new space is to appear in stand-alone malls: other retail offerings are being incorporated into mixed-use developments. A prominent example is Etihad Towers, which opened mid-2012. Catering to the luxury market, the high-rise residential towers include around 900 apartments, next to which stands an office tower. The retail “avenue” has already attracted dozens of luxury brands in clothing, jewellery and accessories. All of the outlets were pre-let – an indication of the high uptake. In addition to Etihad Towers, the Boutik on Reem Island, the Galleria at Sowwah Square and the retail mall in Nation Towers will also see retail space incorporated with residential and commercial properties, as well as – perhaps most importantly – hotels.

TOURISM BOOST: In a nod to the growing interconnection between the emirate’s tourism and retail sectors, a luxury 382-room Jumeirah hotel is a part of the Etihad Towers. There is little doubt that retail developers will be highly encouraged by the emirate’s currently expanding hospitality sector. Many new and upcoming developments look to engage the tourist market, choosing sites that sit close to hotels or providing easy access from the main airport.

Abu Dhabi has been receiving unprecedented numbers of tourists in recent years and is undergoing a massive expansion in the hotel industry: 30 new properties are set to be built within the next three years, according to the Abu Dhabi Hoteliers Group. Total spending from tourists is higher in the UAE than anywhere else in the region, accounting for 54.6% of all tourist spending in the GCC, according to a 2011 report on retail markets compiled by Alpen Capital.

Some have voiced concern over the sustainability of a retail sector that is increasingly reliant on a steady flow of tourists into the country. Still, in an emirate where the population growth rate of UAE nationals is 4.8% per year, according to the SCAD, retailers can also be confident in the potential of the home market.

There may also be further opportunities in less touristy areas outside of the capital, in Al Ain and Al Gharbia. Oil-and-gas centres in the west, such as Ruwais, have also demonstrated particularly strong potential. Demand in Al Gharbia is expected to grow from 62,800 sq metres in 2010 to 165,000 by 2030, according to the Western Region Development Council. This would depend, however, on the success of a government drive to reverse population migration from the region.

NEED TO INNOVATE: Most observers agree that much of Abu Dhabi’s current retail offering could be of better quality: layouts can be inefficient and unattractive, variety limited and accessibility poor. New developments look set to make a more appealing offering to Emiratis and tourists alike. But as GLA increases apace, developers are likely to find that innovative designs and unusual features will be more important than ever in winning tenants and keeping annual footfall high.

In a country where extremely high temperatures for more than half the year render outdoor entertainment unpalatable to all but the most hardy, there is a huge demand for an indoor leisure experience. One major trend in mall designs has therefore been to integrate entertainment venues and other attractions – cinemas, food courts, children’s play areas and ice rinks, to name a few – into malls, along with the more traditional retail outlets. Building on models that enhance a holistic leisure experience will likely become more important. However, Abu Dhabi’s relatively underdeveloped retail scene may mean that more traditional models are still successful for some years yet.

Retailers, as well as developers, must adopt strategies for a competitive market. According to the Sacha Orloff Group, a consultancy that advises on retail in the GCC and other markets, it will become more important for retailers to analyse and understand their customers’ needs, such as through loyalty schemes. They may also have to put more resources into customer services, equipping their staff with the skills and knowledge necessary for presenting the brand to the customer in the best way possible. This could prove a challenge, given that one of the key issues faced by the retail sector in the Gulf is a shortage of skilled labour, according to the 2011 report by Alpen Capital.

INTERNET SHOPPING: One segment that could be explored in an increasingly IT-savvy population is that of e-commerce. Online shopping currently makes up a fraction of total retail revenues, but this could change. According to Euromonitor, a research firm, this market will double from $1bn to $2bn between 2012 and 2016 in the UAE, Saudi Arabia and Egypt.

“With increasing internet penetration, consumers in the GCC are gradually showing an inclination towards online purchasing,” concluded the findings of the 2011 report conducted by Alpen Capital.

Others are more sceptical about its growth potential. They note that while shoppers are IT-savvy, they may not necessarily be IT-oriented: getting out of the house to go to the mall has become an important pastime and social outlet for many in the population, even as richer families often have the necessary staff to go and do their shopping for them.

A recent survey by Onecard, an online payment provider, found that consumers’ concerns over internet fraud are the greatest obstacle to further growth in e-commerce. On the side of the retailer, too, there may be disincentives, such as the very high charges reportedly made by banks for payment services.

LUXURY BRANDS: While the potential future uses for e-commerce remain unclear, matters are less ambiguous when it comes to the rise of brands. According to a 2012 report by Bain and Company, a US consultancy, the Middle East will be a key component of growth in global luxury branded sales. As such, the likes of Abu Dhabi are set to play a more prominent role in international retail chains’ networks. While franchise retailers occupy the majority of market share in the Middle East, global brands have also created joint ventures with local companies in order to enter the market directly.

Encouraged by reports of strong growth, many new developments in 2012, such as Nation Towers, the Galleria at Sowwah Square and the Avenue at Etihad Towers, are bringing a host of luxury brands to the emirate. The Chalhoub Group – which distributes Christian Dior and Louis Vuitton – reported sales growth of 35% in 2011, due in no small part to spending sprees in the likes of Saudi Arabia, the UAE and Qatar. Other major players in the UAE’s luxury market include Al Tayer Insignia, the distributor of luxury international brands, such as Bulgari and Dolce & Gabbana.

AUTOMOBILES: Figures released by luxury carmakers suggest that the market in Abu Dhabi and throughout the UAE has been more than healthy in recent months. BMW reported that the UAE accounted for 51% of total sales volumes for its BMW and Mini cars in the Middle East during the first half of 2012 – the best first half on record for the firm. Audi had a similar story to tell, with more vehicles sold in the Middle East than in any other first half, with the UAE ranking top in sales volume. Mercedes saw sales grow by 19% in Abu Dhabi, compared to 13% in Dubai and 44% in Oman.

Mid-market brands appear to be faring no worse. Toyota, a Japanese brand, is the market leader in the UAE, and its sales have increased by 27% in the first half of 2012. Ford Middle East declared in July 2012 that its sales in the UAE had grown 38% over the same period. Not surprisingly, car dealerships are also doing quite a brisk business as well.

Despite strong prospects for the market in Abu Dhabi City, retailers will no doubt be looking to other urban centres in the emirate, such as Al Ain and major towns in Al Gharbia. In Madinat Zayed, the regional capital of Al Gharbia, Renault and Nissan now have larger showrooms than in Abu Dhabi City. The Emirates Motor Company, the authorised distributor for Mercedes in Al Ain as well as the capital, reported it had seen record-breaking sales in the first half of 2012.

PRIVATE LABELS: Despite the fact that lower-income groups in Abu Dhabi – including large numbers of migrant workers – feel the pinch from the rising cost of food, some retailers report that their customers prefer international brands to private labels. This situation could be changing: a 2011 survey by Datamonitor found that 22% more respondents from the UAE were willing to buy store labels in household care products in 2010 than they were willing to do so in 2009.

But with the economy now looking in better shape and consumer confidence still positive, “own” brands may now find it harder to penetrate the market. Another report, released in April 2012 by Euromonitor, found that sales of packaged foods are heavily fragmented, with private labels competing against strong multinational and national companies. While own brands are thriving in countries like the US, their future in Abu Dhabi remains the subject of speculation.

HYPERMARKETS: Perhaps the only subsector in Abu Dhabi’s retail scene with a more clouded horizon is that of food and beverages. First introduced in mid-2011, government controls on 400 basic commodities – most of which are for foods or related to food – have resulted in some of the lowest food prices in the world.

According to a 2011 study conducted by The

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