Traditional retail segments show positive trends, while Kuwait's e-commerce market undergoes rapid expansion

 

Kuwait has a small retail sector compared to larger GCC markets like the UAE and Saudi Arabia, but consumers are quickly catching up with their regional peers in their tastes and demand for international food, brands and shopping experiences.

Despite a recent economic slump due to low oil prices, the retail sector continues to evolve with regional and global trends. Retail and wholesale trade accounts for a sizeable percentage of Kuwait’s nonoil GDP, and there are solid growth forecasts for the coming year. Kuwait has one of the highest per capita incomes in the world at $68,500 in 2017, according to the World Bank. There is strong demand for luxury and imported goods among wealthy locals and foreign residents, who now make up around 70% of the population. Kuwait’s retail sector saw significant growth in 2017 as new and old players rushed to adapt to changing tastes and demands.

Innovative malls and increased competition from e-commerce retailers have started reshaping the local market. These trends are expected to continue into 2019 as stable macroeconomic fundamentals and government infrastructure programmes boost growth and encourage investment.

Key Players 

Kuwait’s retail sector is overseen and regulated by the Ministry of Commerce and Industry (MoCI). Its main objectives are to support commercial and industrial activities in the country, and to provide a standard of consumer support for goods and services. The Kuwait Chamber of Commerce and Industry (KCCI) is another key non-government institution which represents businesses in the country. It currently has over 79,000 members and engages in numerous activities, including bilateral trade facilitation and consulting services for the private sector. In late 2015 the MoCI launched the Kuwait Business Centre (KBC), a one-stop online portal aimed at reducing bureaucracy and increasing efficiency. The KBC allows companies to register themselves more efficiently by incorporating all the relevant government bodies under one umbrella. The initiative was well received by stakeholders, reducing the time it takes to incorporate a company from an average of seven to nine weeks, to three to five days.

Sector Breakdown

The value of Kuwait’s retail market was KD3.5bn ($11.6bn), or 9.1% of non-oil GDP, as of February 2018. Wholesale and retail trade in Kuwait grew at an annual average of 4% and hit $5.9bn in 2015, representing 2.4% of the $250.5bn in retail sales in the GCC that year. Food and beverages take make up 57% of total retail value, the highest among GCC countries. It is clear that customers are loyal to cooperatives, as they account for the bulk of the share of food sales in the Kuwaiti market, at 65%. The penetration of large modern grocery stores in Kuwait is low, with the top-five large food retailers – Sultan Centre, the Kuwaiti Union of Consumer Cooperative Societies, City Centre, Carrefour and Géant Casino – comprising only 10% of the market.

2017-18 Trends

Retail inflation started to tick upwards at the end of 2017, following several years of weak consumer spending. The consumer price index grew by 6.5% annually, driven by a 7.3% increase in spending on durable goods, according to a July 2018 report by National Bank of Kuwait. Sales of cars, furniture and luxury items were weaker, while spending on electronics items picked up. Furthermore, household goods saw a 2% rise, and food and beverage consumer price indexes were up 1.4%, impacted by weak inflation in global food prices.

“Uncertainty and pressure on the pocketbook are forcing consumer spending to shift away from purchases in restaurants and cafes, and towards more spending on household items,” general manager of the Behbehani Group, Shahzad Gidwani, told OBG. He also noted some interesting growth dynamics in the apparel and jewellery retail segments in 2017-18. Most mid-level to top-tier brands remained stable, with luggage brands such as American Tourister and Samsonite still growing because of seasonal demand. However, he also pointed out that sales for mid-level watch brands were “hurting” as a result of the economic downturn. “The middle class does not want to spend its money unless there is a very good deal somewhere,” he said. Top-tier international watch brands such as Omega and Tissot, meanwhile, are leading sales and driving consumer growth.

Rise of Hypermarkets

Although market penetration of modern supermarkets and hypermarkets remains low in Kuwait at 45% – the lowest in the GCC – this situation is changing. Large retailers have struggled to break into the market and cooperatives continue to dominate. Co-ops, which are built on the concept of individual contribution and aided by government subsidies, have been able to nurture a strong and loyal customer base.

Nevertheless, significant growth in supermarket and hypermarket penetration is forecast for Kuwait and the wider GCC in the coming years. Wholesale and retail trade in Kuwait grew at an annual average of 4% to $5.9bn between 2011 and 2015, according to a 2017 report by investment bank Alpen Capital. Sales at supermarkets and hypermarkets in Kuwait predicted to grow at a strong rate. Retail sales of personal luxury goods in the Middle East are forecast at $9.6bn in 2021, signifying a growth of 3.2% from 2016. Privately owned supermarket and hypermarket chains are gradually eating into the market share of cooperatives by providing different shopping experiences and a greater variety of products. They are also generally faster at responding to changing consumer demand. Moreover, government subsidies for cooperatives are declining amid the country’s economic slowdown, and supermarket and hypermarket chains are increasingly able to offer more competitive prices.

Willfred Cheprion, operations manager at City Centre, told OBG that importing and selling an assortment of exclusive foreign goods, often in partnership with UK or US brands, is one of the ways “private retailers can differentiate themselves from the cooperatives”. However, lower prices and increased product offerings are not the only way modern supermarket and hypermarket chains are winning Kuwaiti customers over. The Kuwaiti supermarket chain Saveco has enjoyed significant success since opening its first store, a 13,000-sq-metre branch, in 2014.

Targeting predominantly locals and mid- to high-earning expatriates, Saveco has since opened a further two establishments in the country and is pursuing plans to build branches in Qatar, the UAE and Saudi Arabia. Saveco’s partnerships with global retailers have been key to its success, giving it access to a range of exclusive and health-oriented foods, while its distinctive interior design, consisting of palm trees and wide aisles, has also helped to set it apart from competitors. They have also succeeded in engaging with customers effectively online via various social media platforms, and by adapting in this manner they have been able to reach a larger customer base.

Online Footprint

More Kuwaitis and expatriates are shopping online as the country’s e-commerce market rapidly expands. The value of this subsector was estimated at $560m in 2014, and it is expected to rise to almost $1.1bn by 2020, according to Marmore MENA Intelligence. There are approximately 2.4m people actively shopping online in Kuwait – 65% of them are adults in their 30s.

Most retailers in Kuwait have been slow to launch online stores and engage with their customers on social media. In the past, locals and expatriates tended to make purchases from international online platforms like Amazon and Net-a-Porter, or department stores like Bloomingdale’s or Nordstrom. Local retailers are now trying to make up for lost time. Growing demand is being met by both global delivery service providers and traditional retailers.

In May 2017 DHL launched its EasyShop service in Kuwait, offering customers a 50% discount on clearance and Customs fees on their first shipment. Retailers like City Centre, meanwhile, have started offering online purchasing by partnering with a local online platform and distributor. The rapid growth of the high-end Kuwaiti retailer Boutiqaat further demonstrates the growing importance of e-commerce. Started in 2015, within three years it had grown from a local e-commerce cosmetics and goods distributor into one of the largest online sellers of cosmetics, skincare products and perfumes in the Middle East. Key to its success is an innovative marketing strategy built around engagement between customers and social media influencers from the Middle East, who market products sold in virtual stores that are hosted by Boutiqaat.

Foreign Investment

In recent months, several large multinational retailers have announced expansion plans in Kuwait. The high-end French department store chain Galeries Lafayette is set to open a 7500-sq-metres store in Kuwait City’s Assima Mall in 2019. In March 2018 LG Electronics opened a two-storey premium store, also located in Kuwait City. The same year saw some US fast-food restaurant chains, including Wendy’s, ramping up their presence in Kuwait, opening two additional stores, one in Kuwait International Airport and the other in the new $400m Al Kout mega-mall. A host of international brands – including NYX Makeup, South Korea’s Etude House and H&M Group’s Monki, among others – also made their entry into the market at the time of the March 2018 opening of Phase IV of the $900m Avenues mall. Meanwhile, domestic restaurant chains have also been making inroads into international markets, with the Kuwaiti burger outfit Rock House Sliders opening a branch in Los Angeles, California in July 2018.

Mergers & Acquisitions

Kuwait’s food retail subsector has seen several already established local players consolidate their holdings through acquisitions. In May 2018 Kuwaiti wholesaler Oncost Cash & Carry reportedly agreed to buy a 100% stake in local supermarket chain Gulfmart for an undisclosed sum. City Centre also reportedly acquired a local cooperative and is planning additional acquisitions.

Further afield, Amazon’s $650m-750m acquisition of UAE-based Souq.com in July 2017 is expected to shake up the regional retail market. The e-commerce giant commands almost 78% of online retail sales in MENA. Kuwait is one of Souq.com’s major markets, and with Amazon reportedly eyeing further regional acquisitions, the country’s e-commerce market is likely to become increasingly competitive.

VAT Increase Postponed

An agreement to introduce a 5% value-added tax (VAT) from January 2018 has been delayed until at least 2021 as higher oil prices ease pressure on the Kuwaiti government’s finances. “The originally proposed VAT introduction was too early and new for the Kuwaiti market to understand, and was likely to have a negative impact on already difficult trading conditions. As a consequence, postponing the decision was preferable,” Behbehani Group’s Gidwani told OBG.

In 2017 the six GCC countries initially agreed to introduce a VAT of 5% amid region-wide economic pressure. Although significantly lower than the OECD VAT average of 19%, the 5% tax was still expected to have a significant impact on the retail sector; requiring retailers to obtain VAT registration certificates, establish tourist refund schemes and absorb the cost of the tax within their margins. At the time, international consultancy Deloitte recommended that GCC retailers “consider undertaking a detailed price modelling analysis [...] to understand what effect the introduction of VAT could have on demand for their product”. With three years until the new VAT rate is introduced, retailers entering the Kuwaiti market now have time to plan their pricing strategies and factor in anticipated inflation increases. Although the introduction of VAT has been delayed, the government is still expected to implement excise taxes in 2018 or 2019 on certain goods, including tobacco, energy beverages and carbonated drinks, something grocery retailers will be keeping a close eye on.

Challenges Ahead

While a delay to the introduction of VAT might be a welcome reprieve for retailers and consumers alike, Kuwait remains a challenging market due to factors like import delays, government regulations and limitations to the availability of commercial space. According to City Centre’s Cheprion, all retailers are affected by delays due to port capacity constraints and strict Customs regulations.

Kuwait currently has three major commercial ports, all of which are reportedly congested. “Today the demand for imported products exceeds the capacity and ability of the ports and authorities to get them in,” said Cheprion. While government infrastructure projects to expand port capacity are expected to reduce congestion, in the meantime port congestion and capacity shortfalls are compounded by strict regulations on imports. “Every product imported to the country needs to be validated by the municipality,” Cheprion said, adding that importers “need to get approval for each product for every shipment”. Quality checks on imported food items are stricter in Kuwait than in Europe, he noted, and retailers have to “anticipate and organise themselves accordingly”.

Limited retail and warehousing space is another concern in Kuwait. “There are very few good opportunities to open new stores, and when they arise they tend to be very expensive,” Cheprion said, adding that “finding retail space, especially for hypermarkets, is a big challenge”. Zoning laws in the country are also strict, something which further squeezes the availability of retail space. This often impacts smaller firms the most, making it harder for them to increase their market share. Interest rate increases in Kuwait in line with the US Federal Reserve rate hikes have similarly raised borrowing costs, which again will most likely have the biggest impact on smaller firms that have limited access to adequate capital.

Opportunities

While commercial space in Kuwait is limited, the traditional brick-and-mortar retail space is not yet saturated like it is in other GCC countries. Consequently, even though traditional retail outlets may come under increasing pressure from e-commerce alternatives, there is still considerable room for growth. However, to stay competitive in the long term, retailers looking to enter the Kuwaiti market could observe similar companies in more mature markets like the US, where traditional retailers have been hit hard by the growth of e-commerce.

Dynamic customer experiences and engagement are key attributes of some of the modern and successful retail outlets emerging in the wider GCC region and globally. Some retailers have adopted a so-called omni-channel strategy, which unites all sales channels into one customer experience, including physical stores, websites, phone apps and telephone orders. Innovative malls that enhance the customer experience and sell the establishment as not just a shopping centre, but rather a new downtown with a whole host of cultural and entertainment facilities – such as concert halls, art galleries and spas – are also likely to be successful. These malls typically combine modern architecture, spacing and lighting to create a positive experience, and have been tried and tested in the UAE, and more recently in Kuwait, with the opening of the Avenues mall.

With Kuwaitis increasingly seeking out international brands and foreign foods, there is also considerable scope for specialist supermarket and hypermarket chains to grow their market share. Food retailers that are flexible and quick to adapt to changing consumer tastes have enjoyed the most success in the market so far. Organic food sales currently make up around 5-10% in Kuwait, but interest in these types of goods is increasing. Nonetheless, there is still a dearth of dedicated organic food shops and health stores, and therefore businesses can see that there is considerable room for significant growth in this area in Kuwait.

Outlook

In 2019 all eyes will be on how the retail sector continues to rebound following several difficult years following the fall in international oil prices. With the 360 Mall extension and the Assima Mall set to open in 2019, there will be ample opportunity for brick-and-mortar retailers.

Competition from modern supermarkets and hypermarkets is also expected to heat up in the coming year as consumers increasingly demand foreign brands and healthy lifestyle alternatives. Retailers that can respond to local demand for new international products more quickly are likely to enjoy the greatest success. Traditional retailers are beginning to realise that they cannot afford to be complacent in the face of growing e-commerce.

As more consumers in Kuwait turn to online shopping, retailers will need to start looking into these platforms more and see how they can integrate them into their customer experience models. Otherwise businesses risk losing out on a wide customer base.

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The Report: Kuwait 2018

Retail chapter from The Report: Kuwait 2018

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