Retail in Dubai gets a boost in the lead up to Expo 2020

 

For many residents, tourists and developers, retail remains a core part of Dubai’s identity. The sector contributes just over one-quarter of the emirate’s GDP and, thanks to a number of mixed-use retail projects in the pipeline, is set to continue expanding. Local iconic malls are constantly reinventing themselves, searching for new brands and experiences to attract global consumers to spend on fly-andbuy excursions. However, optimism surrounding the influx of new supply is tempered by slower economic growth brought on by a lower oil price environment caused, in part, by increasing global supply and slowing demand from China. This means retailers are having to work harder to maintain high sales levels and retain profitability. In this context, sector stakeholders are looking to Dubai Expo 2020 to provide a welcome boost to footfall and expenditure in the second half of 2020 and into 2021.

At the same time, a city that has made a name for itself by reinventing and redefining shopping is striving to engineer a seamless connection between online and offline experiences. The growth of e-commerce is now being actively supported by the government, whose pro-innovation mindset sees an opportunity to create a regional e-commerce centre within the logistics district in Dubai World Central, which is currently under construction.

Structure & Oversight

Prospective retailers in Dubai are required to consult with various governmental bodies. The Dubai Department of Economic Development (DED) is tasked with providing the necessary permissions to operate as a retailer in Dubai, while renting a premises for retail purposes requires potential leaseholders to acquire permission from the Dubai government. With the exception of those operating in a free zone, all international businesses must find a UAE partner, who will hold at least a 51% share in the company. Promoting retail businesses and festivals domestically and internationally falls under the remit of the Dubai Festivals and Retail Establishment (DFRE), which itself is part of Dubai’s Department of Tourism and Commerce Marketing. The DFRE also seeks to increase Dubai’s standing as a retail destination via a constantly evolving selection of festivals and events. The emirate’s best-known retail events are Dubai Summer Surprises, a six-week shopping festival held in the summer months, and the Dubai Shopping Festival, held in December and January. Both combine live events, giveaways, flash sales and extended periods of reduced prices.

Malls constitute as much as 95% of Dubai’s retail space, with the remaining 5% divided among community malls, open-air centres and special purpose venues, according to research carried out by real estate consultancy Knight Frank in 2019. Malls in Dubai can be loosely categorised as either tier-1 or tier-2 establishments. The biggest malls in Dubai, including The Dubai Mall and Mall of the Emirates, hold tier-1 status, characterised by their ability to function as both major tourist attractions as well as retail destinations for local residents. Tier-2 status malls are located in primarily residential areas and tend to be frequented more by residents, relying less on tourists for their footfall.

Retail activity in Dubai fluctuates throughout the year according to seasonal patterns. Peak retail activity across the UAE tends to occur during the Eid Al Fitr holiday that marks the end of Ramadan. The period during Ramadan itself will generally see very low retail activity due to declining visitor numbers. Just as with Black Friday in the US, the end of November is another key period of sales and high consumption. The emirate’s various festivals also create periodic upticks in the retail calendar.

Performance & Size

Retail is the primary driver of Dubai’s economy, with wholesale and retail trade accounting for 26% of real GDP in 2018, according to the Dubai Statistics Centre (DSC). This was followed by the transport and storage (12%), and manufacturing (9%) sectors. Despite the introduction of a 5% value-added tax (VAT) on January 1, 2018, retail sector growth picked up from 0.9% in 2017 to 1.3% in 2018. Higher economic activity will likely boost retail, with Dubai’s overall GDP expected to reach 3.5% in 2019, up from 1.9% in 2018, driven by the real estate and construction sectors as Dubai Expo 2020-related infrastructure projects gather pace.

Slowing private consumption has been one of the key factors underlying modest sector growth. As a share of GDP, figures have steadily declined from almost 50% of GDP in 2010 to 30.1% in 2018. Slower job growth and lack of wage growth in the private sector have given way to a more cautious consumer profile, even as public spending increased from 10% of GDP in 2010 to 12.2% in 2018. An update released by state-owned bank Emirates NBD in September 2019 showed salary data and employment indicators for the year to date, suggesting that a recovery in private consumption would be unlikely in 2019.

Visitor Spend

Retail sales depend on the emirate’s high numbers of visiting international tourists. Shopping continues to be a key aspect of Dubai’s brand as a global destination, helped by consumer benefits such as tax-free and duty-free shopping. According to the Mastercard Global Destination Cities Index 2019, Dubai leads the list of top global destinations, placing fourth in the number of international overnight visitors, at 15.9m in 2018. This was behind only Bangkok, with 22.8m arrivals, Paris (19.1m) and London (19.1m). However, at $30.8bn, Dubai ranked first in terms of overnight international spend, surpassing second-placed Makkah by more than $10bn in 2018. Mastercard forecast overnight visitor spend would grow by 4.18% in 2019. Dubai also tops the rankings in terms of average daily spend, with visitors typically spending $553 per day. The next-highest cities for daily spend were Barcelona ($301) and Paris ($296). “The city has always been incredibly cosmopolitan,” John Brash, founder and CEO of global branding consultancy Brash Brands, told OBG. “This has been taken into account by the industry, with Dubai brands blending multiple influences to create styles that transcend specific cultures and speak to global citizens.”

The Dubai Mall and Mall of the Emirates maintained their position as the most popular retail destinations among the emirate’s international visitors in 2018, according to the “Middle East Real Estate Predictions: Dubai 2019” report by professional services network Deloitte, together capturing 52% of total tourist retail demand. Meanwhile, retail sales in Dubai Duty Free shopping areas at Dubai International Airport and Dubai World Central airport grew by 4.3%, generating more than $2bn in sales in 2018. In a statement published in April 2019 as part of a GCC retail report by Alpen Capital, Dubai Duty Free’s executive vice-chairman and CEO, Colm McLoughlin, highlighted the importance of the Chinese visitor market to the company’s revenue, noting that visitors from China represented just 4% of passenger traffic but approximately 17% in duty-free sales.

Looking ahead, the close correlation between international visitor numbers and retail sales bodes well for the sector in 2020, as Dubai is hoping to attract over 20m visitors thanks to the much-anticipated Expo 2020. Running from October 20, 2020 to April 10, 2021, the expo is expected to attract a much larger number and variety of visitors to Dubai than it has received to date, boosting retail figures in the periods before, during and immediately after the event. To this end, major investments have been made in new destination malls designed to cater to the influx of visitors to Expo 2020 and beyond.

Supply

This growth in supply, coupled with more cautious consumer spending patterns, however, has led to increasing levels of retail vacancy. According to Deloitte’s “Middle East Real Estate Predictions Dubai 2019” report, in 2019, 72% of Dubai residents thought they would have the same or less disposable income, while only 28% expected to have more spending power. Meanwhile, a number of shopping centres and mega-malls set to come on-line in the short and medium term is likely to put additional pressure on rents and occupancy levels.

Echoing similar sentiment, in the first quarter of 2019, US-based real estate strategists JLL described retail as the most challenging sector in Dubai, citing the rise of e-commerce and a busy supply pipeline. The Souq at Culture Village was the only new mall to be added to Dubai’s retail supply in the first quarter in 2019; however, a further 660,000 sq metres of new supply is currently under construction and expected to come on-line by the end of 2019, with Nakheel Mall on Palm Jumeirah among the headline scheduled openings (see analysis).

While estimates vary, the supply pipeline should be busy into 2020 and beyond, with JLL citing an anticipated 53% increase in gross leasable area (GLA) in Dubai, from 3.8m sq metres in 2019 to 5.8m sq metres, by the end of 2021. Meanwhile, real estate consultancy company Knight Frank UAE told OBG that total GLA of retail supply is expected to increase by 111% from 3.5m sq metres to 7.1m sq metres by 2024. Among the malls scheduled for completion in 2020 are Emaar Properties Dubai Hills Mall and Meydan Group’s Meydan One mega-mall. Together they which will bring a combined 500,000 sq metres of additional supply (see analysis).

Occupancy

At the same time, new supply is putting pressure on shopping centres, with occupancy rates in Dubai’s retail space falling from 88% to 84% year-on-year (y-o-y) as of the first quarter of 2019. Figures are expected to continue their downward trend into 2020. With property owners competing for tenants and seeking to maintain high occupancy, retail rental prices have also fallen. According to the JLL data, rates at tier-1 malls in the first quarter 2019 fell by approximately 15% y-o-y, while rates at tier-2 establishments fell by 22%. Nonetheless, when placed in a global perspective, Dubai’s retail sector continues to offer further potential. Both the US and Hong Kong sustain considerably higher levels of GLA per capita. According to figures compiled by Alpen Capital, in 2017 GLA per capita in Dubai stood at 1.15 sq metres, placing it in third position globally, while Hong Kong and the US (all cities) had 1.51 sq metres and 2.19 sq metres of GLA per capita, respectively.

Location is a key factor in determining the success of new malls. Baiju Kurieash, chairman and managing director at retail communications specialists Buz, believes establishments that serve specific communities represent an important trend in mall development. “As Dubai grows, more communities are springing up with their own ecosystems, meaning residents will not have to travel as far to shop. Malls that understand this are likely to do well because they are not so dependent on international visitor numbers,” Kurieash told OBG. The function of certain shopping malls is also changing as individual retailers come under increasing pressure. While some have been forced to close their operations altogether, in some instances vacant units are being taken over by alternative vendors. At BurJuman Mall in Bur Dubai, for example, a uniCare medical clinic and pharmacy were opened at the end of 2017, providing patients with food, shopping and entertainment facilities while they wait to see a doctor.

Luxury Market

The high spending power of the Emirati population, when combined with a carefully built reputation for luxury shopping among international visitors from the GCC, Russia, the UK and China, means that the high-end segment remains a core part of Dubai’s retail offering. The emirate’s shopping malls act as a destination for retail among wealthy visitors from throughout the GCC region, which has an average per capita GDP of $18,961, compared to the global average of $11,670.

The luxury personal goods segments appears to be recovering from a slump brought on by lower global oil prices, among other factors. According to Alpen Capital, demand for luxury personal goods experienced growth of -2.2% in 2016 and around 0% in 2017. The resurgent high-end goods segment, which is expected to grow by 4% per year in the Middle East between 2018 and 2023, is expected to be driven by improving macroeconomic conditions, as well as the UAE government’s crackdown on counterfeit goods. According to the DED, an estimated 19.9m counterfeit items worth Dh332m ($90.4m) were seized in 2018 by Dubai authorities. DED officials told local media in January 2019 that this hardline approach to policing replica goods had been successful in discouraging importers, with figures for 2018 representing a 79% decrease on the Dh1.6bn ($435.5m) worth of goods seized in 2016.

Among the trends in the luxury segment is a rise in high-end shopping via e-commerce channels in the GCC, which the Dubai-based retailer and distributor Chalhoub Group forecast will grow by 25-30% per year until 2022. In recognition of the segment’s popularity, local retailer Al Tayer Group launched luxury products e-commerce platform Ounass.com in December 2016. The site provides two-hour delivery for residents in Dubai and same-day delivery throughout the UAE. While stakeholders maintain that brick-and-mortar establishments will remain at the core of retail appeal in the region, they are also keen to respond to the shifting behaviours of younger, more digitally savvy shoppers.

Apparel

According to a report released by the Dubai Chamber of Commerce and Industry, total apparel sales in the UAE in 2018 amounted to $12.3bn, a 4.7% increase on 2017. The report, based on data from Euromonitor International, indicated that sales of men’s apparel reached $6.2bn, surpassing sales of womenswear and children’s apparel combined, and accounting for 53% of the market value. The report also forecast that menswear would record a compound annual growth rate (CAGR) of 3.8% between 2019 and 2023 to hit $7.8bn, while womenswear would register a CAGR of 4.9% in sales to reach $5.2bn over the same period. Children’s apparel, meanwhile, was forecast to grow by a CAGR of 3.7% to reach $1bn by 2023.

E-Commerce

Some indicators are pointing to faster growth in the adoption of e-commerce practices in the emirate. According to customers at Mashreq Bank, for example, e-commerce spending across the UAE grew by 48% in 2018. Data released by global payments provider Visa indicated that the shift to digital retail transactions continues across almost every sector. With regard to online sales as a share of total retail spend, the largest gains were seen in the general retail services category, which grew from 6% in FY 2016 to 24% in FY 2018.

Another report published in 2019 by global affiliate marketing network Admitad found that 83% of the UAE’s 8.2m internet users made purchases online, while 60% of those who shop online in the UAE live in Dubai. Similar to patterns in apparel purchasing, men make up 60% of the purchases in online stores, while expats account for 70% of online purchases.

One of the major recent e-commerce trends has been the jump in food delivery services, with major players, including Uber Eats, Deliveroo and Talabat all vying for a share of the market. According to a report issued by professional services network KPMG, the number of food and beverage operators attributing over one-quarter of their revenue to delivery services increased from 21% in 2017 to 32% in 2018. KPMG also reported that 86% of restaurants in the UAE were affiliated with at least one delivery app.

Changing Trends

One of the impacts of the rise of e-commerce has been the creation of a more cost-conscious customer, thereby putting downward pressure on retail prices. While traditionally retailers in Dubai were able to put high mark-ups on their products, customers are now ordering the same products from overseas for less. This also puts pressure on rental rates, according to Taimur Khan, associate partner at Knight Frank UAE. “E-commerce is playing a much bigger role in the sector because many retailers are not able to support the higher price levels they could before, and this is affecting their bottom line. They are having to go back and renegotiate better rental terms,” Khan told OBG.

Further commenting on general trends in the emirate, Kurieash told OBG that malls and retailers are working harder to attract customers than ever before. “One trend I have noticed is that there are more and more flash sales happening in Dubai. Malls are also trying to appeal to a broader cross-section of people,” Kurieash said. “That could mean attracting more value-conscious shoppers with a better-value mall proposition, or appealing to Dubai’s different expat communities by celebrating specific festivals like Diwali, which is celebrated by Hindus, Sikhs and some Buddhists,” he added.

E-Commerce Barriers

While e-commerce is expected to continue growing in overall importance, brick-and-mortar establishments in Dubai and the UAE will likely continue to be relevant as they serve as places for social gathering and entertainment venues. This function is particularly important in a country where outside temperatures regularly exceed 40°C. Indeed, according to figures released by Visa, spending in the general retail goods, and the apparel and accessories categories remains dominated by physical sales, with only 9% and 7% of these purchases occurring online in FY 2018, respectively.

One of the less discussed barriers to greater e-commerce adoption is inconsistencies and gaps in formal street addresses and zip codes, which has traditionally led to missed deliveries and a culture of distrust around postal systems. To address this problem, Dubai-based tech firm Fetchr developed a mobile app to bypass the need for a formal addresses by using mobile GPS locations for pick-up and delivery. The company raised $52m in four rounds of funding between 2012 and 2017, and its investors include Silicon Valley venture capitalists New Enterprise Associates and real estate developer Majid Al Futtaim Group. Fetchr also delivers in the UAE, Saudi Arabia, Jordan, Oman and Egypt.

Realising that some local customers avoided online shopping due to language barriers, some retailers have launched Arabic-language sites. Trust is another factor that is likely to gain prominence as e-commerce becomes normalised. As recently as 2017, 58% of online shopping purchases in the UAE were from overseas vendors, indicating greater trust in established international sites. However, attitudes continue to shift, with a 2019 Visa survey indicating that 66% of consumers in the UAE trusted online shopping and 70% trust online payments. Despite the growing dominance of digital e-commerce platforms, there are retailers that insist that traditional shopping will maintain a strong presence. “I think what you will continue to see is smaller units being leased to serve window shoppers and help brands maintain a presence,” Khan told OBG. “On an international level, we have seen that major shopping districts are still popular, especially in larger cities. However, whereas before a major international retailer would have taken a 200-sq-metre unit, now they will look to maintain their presence with something smaller.”

Digital Strategy

The evolution of e-commerce in Dubai will be helped by increasingly concerted efforts at the government level to grow the segment. Crown Prince Sheikh Hamdan bin Mohammed bin Rashid, chairman of the Dubai Executive Council, launched a new e-commerce strategy for the emirate in September 2019. The targets of the strategy include increasing the segment’s contribution to the UAE economy to Dh12bn ($3.3bn) by 2023, and boosting the regional and global economic contribution of e-commerce companies based in Dubai to Dh24bn ($6.5bn) by 2020. In order to achieve these targets, the government is looking to attract foreign direct investment in e-logistics and cloud computing services, as well as reduce the operating expenses for e-commerce companies by 20% through price reductions in returned goods, storage fees, Customs duties and VAT on transport. The strategy was prepared by the Dubai Free Zones Council in collaboration with Dubai Chamber of Commerce and Industry, Dubai Economy and Dubai Customs.

New Players

Both local and global businesses and investors are also determined to carve a share out of the Middle East’s online market. In November 2016 Mohamed Alabbar, chairman at Emaar Group and Saudi Arabia’s Public Investment Fund, announced the launch of Noon.com, a $1bn e-commerce platform. In April 2019 the company acquired Sivvi.com, a Dubai-based online fashion retailer, while the following September it launched a low-cost e-platform kul. com. Meanwhile, in June 2019 US-based e-commerce platform Amazon.com officially launched branded operations, meaning services like Amazon Prime, Prime Video and the Kindle Store, among others, are available to UAE consumers.

State-owned developer Dubai South announced in February 2019 that it would spend Dh2bn ($544.4m) over four years to build a 920,000-sq-metre e-commerce free trade zone, offering foreign companies 100% ownership. Foreigners operating outside of free zones are generally limited to a 49% stake in local firms. Located within the Dubai Logistics District and in proximity to Dubai World Central airport, the EZD ubai free zone seeks to attract e-commerce, logistics and related industries. The funds will be used to build infrastructure, and construct offices and warehouses. EZD ubai will also offer ready-to-operate facilities to reduce the time it takes businesses to come on-line. A number of international companies have committed to renting space at EZD ubai since it was announced, including global logistics operator DHL Express and FirstCry, India’s largest omni-channel retailer for infants and children.

Outlook

While the outlook for 2020 and 2021 is brightened by the prospect of an Expo 2020-induced boost to the emirate’s visitor numbers, concerns continue to linger that supply increases are outstripping population growth. On the positive side, driven by an expected increase in footfall and spending throughout the emirate, mall developers in Dubai are determined to maintain the sector’s prominence by constructing bigger and better malls, while adapting to a retail market shifting towards omni-channel and digitally integrated retail concepts (see analysis).

In terms of total expenditure and sales numbers in the sector, much will depend on the broader economic trends in the emirate and further afield, as industry stakeholders hope continued stability and growth in oil prices will lead to increased consumer spending (see analysis). The government’s proactive embrace of e-commerce, meanwhile, is good news for the sector, which is waking up to the potential of a complementary approach to online and offline retail.

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The Report: Dubai 2020

Retail chapter from The Report: Dubai 2020

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