How retailers in Abu Dhabi are innovating to meet e-commerce demand

 

In 2019 Abu Dhabi’s retail sector continued to adapt to a 5% value-added tax (VAT) that came into force in early 2018, with consumer confidence picking up as residents began to factor the new levy into their purchasing behaviours. Malls continue to dominate the retail space, which saw some 200,000 sq metres of gross leasable area (GLA) added to the emirate’s stock in 2019. Meanwhile, developments like the construction of a digitally enabled smart shopping mall on Reem Island indicate Abu Dhabi is positioning itself at the forefront of innovation in the retail sphere. Though these types of malls are well placed to compete with the growing tide of e-commerce, the Covid-19 pandemic led to the shuttering of many physical retailers around the world in the first half of 2020, prompting consumers to shop online.

Oversight & Regulation

All retailers operating in Abu Dhabi require licences from the Abu Dhabi Department of Economic Development (ADDED). They are also subject to wider regulations enforced by other government agencies, such as the Ministry of Interior, the Abu Dhabi Food Control Authority, and the Department of Municipal Affairs and Transport. Other relevant organisations include the Abu Dhabi Chamber of Commerce and Industry (ADCCI), whose Commercial Sector Committee works with food and beverage companies, among others.

In July 2019 the UAE government released a longawaited clarification regarding which sectors would become eligible for 100% foreign ownership as per a 2018 law (see Trade & Investment chapter). The new law is widely expected to be a boon for retail, attracting regional and international brands. Previously, foreign companies operating in most sectors outside free zones had to work with local partners who held at least 51% of the equity of the business. In practice, international retail brands with a presence in the UAE have either formed joint ventures with local partners or sold exclusive franchising licences to Emirati companies such as Majid Al Futtaim and Ahmed Seddiqi & Sons, and retail groups including Landmark, Rivoli and Apparel.

Performance & Size

The UAE has established itself as a global retail and shopping destination, hosting international brands and some of the world’s largest malls. The retail sector is a key component of both the national and emirate-level economy, accounting for an estimated $55bn of the UAE’s GDP and $12.6bn of Abu Dhabi’s in 2018. According to projections released before the outbreak of Covid-19, the UAE’s retail industry was set to grow to $63.8bn by 2023, bolstered by the fact that premier global brands are increasingly establishing themselves in Abu Dhabi’s growing number of malls.

Prior to the pandemic, the number of mall visitors across the UAE was forecast to increase at a rate of 5.8% per year through to 2021. Though 2020 should see a notable downturn due to Covid-19, the emirate has an ample retail footprint to leverage as more normal shopping patterns resume. The stock of retail space in Abu Dhabi rose from 2.7m sq metres of GLA in 2018 to 2.9m sq metres in 2019, aided by the $1bn, 33,000-sq-metre expansion of The Galleria mall (previously known as Al Maryah Central mall) and construction of other mixed-use retail spaces. The opening of The Galleria’s expansion in September 2019 added several premium international brands to its portfolio of tenants, including Waitrose, MAC Cosmetics and Victoria’s Secret.

With the opening of new malls, concerns have been raised about the glut of retail space anticipated in the coming years. Vacancy rates across Abu Dhabi’s malls increased to 23% in the second quarter of 2019, while average retail rents dropped by 5% year-on-year (y-o-y), according to the most recent sector report by global real estate consultancy JLL.

While the economic effects of Covid-19 could weigh on consumer spending, Abu Dhabi and the broader UAE have traditionally enjoyed solid demand. Household consumption expenditure on durable and non-durable goods per capita across the UAE showed strong growth in 2019, rising by 14.1% from Dh55,000 ($15,000) in 2018 to Dh63,000 ($17,200). The rise in total annual household expenditure has been consistent, increasing from Dh513bn ($139.6bn) in 2017 to Dh586bn ($159.5bn) in 2018 and around Dh669bn ($190.3bn) in 2019. Apparel has shown some of the strongest sales growth, bringing in $12.3bn in 2018 and registering an annual growth rate of 4.8%.

Consumer Confidence

While new foreign ownership laws hope to encourage foreign investment, the 2018 introduction of a 5% VAT continued to have some effect on the retail sector throughout 2019, though its negative impact is diminishing. The year witnessed a slight turnaround as the short-term volatility following the introduction of VAT eased and consumers began to price it into their decision-making process. In a survey of 1347 UAE residents run by the financial website yallacompare, 19% of respondents said that they felt more confident about their finances in the second quarter of 2019 than 12 months earlier. Meanwhile, the percentage of respondents who said that they had not noticed any changes in prices because of the new VAT rose to 30.9%, compared to 29.8% in yallacompare’s first quarter 2019 survey. Consumer anxiety over the 5% tax has fallen alongside prices, with the passing of the initial shock of its introduction. The consumer price index fell just over 2% y-o-y between August 2018 and the same time in 2019. While consumer confidence will be rattled, at least in the short term, by the economic headwinds engendered by the Covid-19 pandemic in early 2020, it is hoped that it will steadily recover as commerce normalises.

E-Commerce

In the meantime, many consumers are shifting their purchases online. The UAE is already the region’s fastest-growing e-commerce market, with growth in the segment averaging 30% in recent years. E-commerce transactions in the UAE were forecast to increase from $2.5bn in 2014 to around $16bn in 2019, and grow at a compound annual growth rate of 23% in 2018-22; however, this rate is expected to rise further due to heightened online demand amid Covid-19. For the 2018-19 period the average e-commerce purchase value was $144 – much higher than the averages in mature and emerging markets, at $79 and $26, respectively.

In recent years various e-commerce sites based in the UAE have emerged as significant contenders in the retail market. Most are based in Dubai, but recent changes to the licensing system in Abu Dhabi are expected to spur growth in the emirate. In March 2019 ADDED extended eligibility for its Tajer Abu Dhabi licence – which previously allowed UAE nationals to establish companies without having a physical presence or an office – to GCC nationals and UAE residents. While Abu Dhabi-based companies still need to receive separate permission to conduct electronic trade for e-commerce activities, the new rules have already led to an uptick in the issuance of business licences. ADDED reported that the issuance of such licences in the emirate, including Tajer licences, was up 44% in the second quarter of 2019.

The share of e-commerce has been growing steadily, in line with global trends. According to a report by Visa and Dubai Economy, e-commerce transactions in the country accounted for 28% of all payments between March 2018 and February 2019, compared to the averages of 14% and 29% in emerging and mature markets, respectively. The report forecast e-commerce sales would rise to $27.1bn in 2022.

With 99% of the country active on social media, marketing on this platform is now one of the most common forms of advertising. Consumers are increasingly relying on social media influencers. According to a 2018 report by the World Bank, 71% of UAE residents seek online advice before making purchases, and 63% of online consumers are more likely to buy beauty, fashion or food products after an influencer’s recommendations. These influencers often have exclusive partnerships with particular local or international brands, and post on social media platforms like Instagram, Snapchat and YouTube for fees typically ranging from $1000 to $5000.

Supermarkets

Abu Dhabi’s supermarkets are also having to focus on blended strategies, balancing between physical stores and electronic platforms. According to a 2019 report by Dubai-based financial services firm Alpen Capital, supermarkets comprised the largest retail segment in the UAE in 2017 in terms of sales, at 49.2%. The segment is shaped by supermarket and hypermarket chains such as Lulu Group (6%), Carrefour (4.1%) and Spinneys (1.2%).

In 2019 the average single purchase value was Dh95 ($25.86) at hypermarkets and supermarkets, and Dh40 ($10.89) at smaller markets. Sales across the UAE’s fast-moving consumer goods segment fell by 3.2% y-o-y in the first quarter of 2018, according to the latest data from Nielsen Holdings. E-commerce has had a notable effect on the segment, and many market players have had to adapt by offering promotional events to increase footfall or by creating their own online platforms.

Supermarket giants like Carrefour and Lulu have also started offering online shopping to cater to the growing e-commerce market. Carrefour now offers one-hour delivery for everyday basics and same-day delivery for its hypermarket goods. While the online grocery market is still in its infancy in Abu Dhabi, the segment experienced a spike in demand in the first half of 2020, as residents increasingly stayed home and made purchases online amid Covid-19.

Modern Malls

The growing popularity of digital channels is pushing malls to find innovative ways to maintain and increase foot traffic. Malls comprised 97% of Abu Dhabi’s retail space, or 2.8m sq metres of GLA, at the start of 2019, and modern mall offerings have only increased. With the growth of e-commerce and increasing vacancy levels, traditional and less-diversified malls have come under financial pressure. To counter this, Abu Dhabi has looked at sales and festival events as a means of increasing retail foot traffic and purchases. In 2019 the Department of Culture and Tourism – Abu Dhabi (DCT Abu Dhabi) launched Retail Abu Dhabi (RAD), a series of annual festivals involving 300 outlets across 15 of the emirate’s smaller malls. DCT Abu Dhabi hopes that RAD and other festivals, like the annual Abu Dhabi Food Festival, will also help increase the emirate’s tourist arrivals, which the department estimated reached 11.4m in 2019. As in most of the world, events across the country were halted in early 2020 due to Covid-19, which will have an impact on both the retail and tourism industries, and could spur stakeholders to pursue new strategies to drive revenue and engagement if social-distancing measures persist.

Other malls have been attempting to increase their footfall by creating new and unique experiences for their customers. Dynamic customer engagement and experiences are key attributes of some of the most successful modern retail outlets emerging in the GCC and globally. Some have adopted an omni-channel strategy, which unites all sales channels into one customer experience, including physical stores, websites, phone apps and telephone orders.

Located on Reem Island in the heart of Abu Dhabi City, the new $1.2bn Reem Mall – a 186,000-sq-metre space slated to open by the end of 2021 – is set to be a leader in omni-channel retail design. Reem Mall is poised to offer the region’s first fully digitally enabled smart shopping centre, providing offline and online commerce via an integrated 2100-sq-metre logistics centre capable of delivering over 30,000 parcels per day. The mall’s developers have integrated the internet of things, big data, machine learning and artificial intelligence, and other Industry 4.0 capabilities to provide personalised service to consumers while enabling retailers to comprehend and react accordingly to customer needs. “Retail is at the heart of the UAE’s economy and culture,” David Boesley, executive chairman of Al Farwaniya Property Developments, the company developing the mall, told OBG. “Through leveraging insights generated by big data, we will be able to predict consumer needs and provide personalised content.”

Outlook

As the retail segment increasingly shifts its focus towards e-commerce and consumers look to social media marketing for guidance, retailers in the emirate are finding ways to adapt. Government-led initiatives focused on attracting consumers and tourists to shopping festivals are helping reinvigorate smaller and less diverse malls, though progress will understandably be slowed by Covid-19. The emergence of smart malls presents intriguing prospects for the predominantly brick-and-mortar retail sector. Retail spaces that can successfully match shopping, entertainment and dining with digital technology –and in so doing create personalised experiences – may be the ones best placed to succeed in the future.

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The Report: Abu Dhabi 2020

Industry & Retail chapter from The Report: Abu Dhabi 2020

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