Market shifts as the influence of Jordan's modern retail sector grows

 

One of the least-saturated markets in the MENA region for modern retail, Jordan is set to see a new crop of major malls and outlets open throughout 2018, consolidating its reputation as a growth country for the industry. Yet, as with other areas of the economy, prospects depend on overall growth, which has slowed amid regional uncertainties and softening markets. Domestic costs – such as for power and transport – continue to be a factor, as well as taxes and import duties. These costs have largely been passed on to consumers, with consequent impacts on demand in a highly price-conscious market. Still, with the government’s development programme beginning to roll out, forecasts for retail look healthy in the near term.

By the Numbers 

According to data from the Department of Statistics (DoS), in 2016 wholesale and retail trade contributed JD1.04bn ($1.5bn) to Jordan’s JD11.6bn ($16.4bn) GDP in constant prices – nearly 9%. These figures are up slightly from JD1.02bn ($1.4bn) in 2015, out of a total GDP of JD11.41bn ($16.1bn), with wholesale and retail comprising roughly the same percentage. In the first three quarters of 2017 the sector generated JD819.6m ($1.2bn) compared to JD807.5m ($1.1bn) in the same period of 2016, representing growth of 1.5% and accounting for 9.3% of GDP. The 2016 figure showed 1.3% year-on-year (y-o-y) growth over the JD797.1m ($355.6m) recorded for the first three quarters of 2015. Overall GDP expanded by 2.01% y-o-y in the first three quarters of 2016 and 2.03% in the same period of 2017 – a moderate acceleration. While wholesale and retail growth may reflect economic underperformance, it has continued to expand in recent years despite the general slowdown.

Regional Status 

Jordan’s slowing growth is not an anomaly in MENA. According to the “2017 Global Retail Development Index” published by management consulting firm AT Kearney, the Middle East suffered from ongoing regional conflicts and the adjustment to cheap oil in 2016. Conflicts in neighbouring Syria and Iraq have closed borders – with the Iraqi road reopening in late August 2017 after two years of unsuitable conditions – and expanded Jordan’s large refugee population, most of whom are low-income or no-income earners. Conflict is also an issue in the Palestinian Territories and Israel, while 2016 also saw a deterioration of the security in Egypt’s Sinai Peninsula.

The impact of this situation can be seen in inflation, among other metrics. DoS figures show the consumer price index (CPI) rose 3.3% in 2017, while it contracted by 0.8% in 2016. According to the Central Bank of Jordan, this reversal was due to a rise in global oil prices and a series of government measures. The latter included the cancellation of tax exemptions on many goods and services, and the increase of imposed tax rates on other commodities. The CPI for alcohol, tobacco and cigarettes, for example, was 7.9% in 2017 but only 3.2% in 2016. Jordan is attempting to tackle a debt-to-GDP ratio of approximately 95% with an IMF-backed austerity programme focused on cuts to public expenditure and attempts to raise government revenue (see Economy chapter). AT Kearney reports that Customs fees now sit around 20%, sales tax is at 8% and duties on luxury goods have increased by 16%.

Lower oil prices have had both positive and negative effects on the economy. While the fall in prices that began in 2014 reduced the cost of energy imports – an important benefit, as Jordan holds no significant hydrocarbons resources of its own – it also reduced the purchasing power of the oil and gas-based economies of the GCC. Cutbacks in projects, investment and employment in the Gulf led to lower remittances from Jordanians working there – which totalled $5.14bn in 2016 – as well as fewer contracts for Jordanian companies. Fiscal austerity has also restricted the ability of GCC visitors to spend when visiting Jordan.

Personal Finance 

Though the slowing local economy had consequences for retail expansion, credit growth has remained strong. The year 2017 saw total credit facilities extended by licensed banks increase by 8.1% over 2016. Interest rates have also climbed, however, with the weighted average interest rate on overdraft accounts standing at 8.8% in December 2017, some 120 basis points higher than in the same month of 2016. This results in Jordanian consumers paying more for their goods and services, both in terms of purchase price and in subsequent interest when items are bought on credit.

Furthermore, income growth has been mixed in recent years. World Bank figures show 2016 gross national income per capita at purchasing power parity of $8980, down from $9210 in 2010. While classified by most studies as a middle-income country, Jordanian consumers are going through a period of heightened price sensitivity with income growth remaining uncertain, leading to increased caution. Despite this, a 2016 study by the University of Jordan indicated that consumers are inclined to overspend, suggesting that the average Jordanian household suffers an annual shortfall of around JD1000 ($1400). This goes some way in explaining the recent growth in credit, as households are accumulating more debt.

Stacking Up 

The 2017 Global Retail Development Index placed Jordan 15th in its index of 30 emerging retail markets, down from its rank of 13th in 2016. The kingdom tallied total retail sales of $14bn in 2017, on a par with 2016. The sales figure that year was a 2.5% increase on 2015 and followed a compound annual growth rate of 4% for the 2013-15 period. Meanwhile, retail space expanded by 7% in 2016 to reach 158,000 sq metres, yet Jordan remains among the least-saturated Middle East countries ranked.

The index takes several different criteria into consideration. First is market attractiveness, on a 0-100 scale, with 100 being extremely attractive. Jordan scored 51.7 in 2017, down from 52.3 in 2016. The second criterion is country risk, measured on the same scale, with 100 representing no risk. Jordan scored 53.2 in 2017, an improvement from 47.5 the previous year. Third is market saturation, with 100 representing a completely unsaturated market. Jordan scored 64.7 in 2017, making it less saturated than the year before when it scored 60.2. Several other MENA countries are included in the index – Morocco, Algeria, Tunisia, Saudi Arabia and the UAE – with Jordan judged more attractive than the North African countries.

Abdali Mall 

Several major developments in retail space came on scene in Jordan in 2016, with Amman being at the centre of development. One of the biggest projects to open its doors was the award-winning Abdali Mall, covering some 227,000 sq metres. The project, which forms part of a massive downtown mixed-use redevelopment valued at over $5bn, was realised by Kuwait’s United Real Estate Company (URC) and is managed by the Abdali Mall Company. It has a gross leasable area of 73,000 sq metres and five basement floors offering parking for 2400 vehicles.

There are 111 tenancies at the complex, with indoor and outdoor restaurants, food courts, a multiplex cinema and a major supermarket. Azadea, a key regional franchiser, has brought 13 of its brands to the mall, including Zara, Massimo Dutti, Calzedonia, Pull&Bear and PAUL. Fashion outfitters Tati, Matalan, Boggi and Tezenis have also opened outlets at Abdali. The mall has also signed a lease contract with C-Town supermarkets. Also of note is Adidas’ HomeCourt retail concept store, which provides a stadium-like environment in its 471-sq-metre retail space.

The mall also includes a number of sustainable and innovative design features, with integrated solar-power facilities and passive cooling via indoor waterfalls. These helped it win the Best Retail Project Award (BUILT) for an emerging market at the 2016 Cityscape Global event. In February 2017 URC also announced that it had signed an agreement with Jordan’s Al Adani Group to add a 929-sq-metre women’s spa to the mall. This move emphasises forward planning, as malls vie to offer consumers a destination-type experience in an increasingly competitive market.

The mixed-use development where Abdali Mall stands contains residential and other commercial real estate, both of which provide it with a large customer base. These residents – generally higher-end consumers and office workers – can also shop along Abdali Boulevard. This 370-metre-long, 21-metre-wide outdoor pedestrian way is bordered by 12 buildings with cafes, restaurants, stores, apartments and office spaces. The Boulevard opened in 2014 and two years later saw a new, 150-sq-metre Canali boutique arrive, maintaining the high-end identity of the development.

Taj 

Another major shopping centre in Amman is the Taj Lifestyle Mall, which saw expansion in April 2016 with the opening of Jordan’s first Emporio Armani Caffè. The mall hosted a pop-up Tesla store in early 2017, marketing its Model S and Model X electric cars and underscoring the Taj’s status as the first of Amman’s malls to offer a full “lifestyle” package.

The pop-up store indicates increasing interest in electric and hybrid cars. “The hybrid car market shows great potential in the short to medium term thanks to competitive advantages in fuel consumption, cheaper annual registration and tax incentives,” Mohammad Fuad Al Anaswah, CEO of the Commercial & Industrial Company, told OBG, noting that Customs duties are 25% for hybrid vehicles, instead of 60% for petrol cars.

The Taj has approximately 190 retail outlets on 150,000 sq metres of indoor and outdoor space, hosts the country’s largest cinema complex and contains the Magic Planet family entertainment centre.

Other Malls

The capital has two additional large shopping centres: City Mall and Mecca Mall. The former is owned by the Al Khayr Real Estate Investment Company and was established in 2007. The complex spans approximately 160,000 sq metres – 55,000 sq metres of which is leasable – and a three-level parking lot with a 2400-car capacity. City Mall offers a 10-screen cineplex in addition to its retail, dining and entertainment facilities. The mall has also housed services for medical diagnostics since Biolab opened a branch there in April 2017. Customers can have tests performed and shop while they wait for their results. This is a unique approach to the kingdom’s push to attract and retain consumers in malls. City Mall has also run campaigns such as the “Once Upon a Summer” promotion, which used displays and performances with child-friendly fairy-tale themes to attract families during the summer season. Indeed, with temperatures topping 40°C, air-conditioned malls offer a major attraction for Jordanians during the summer months.

Mecca Mall, meanwhile, is owned by the Kurdi Group and opened in 2003 on a 195,000-sq-metre site. There is indoor parking for approximately 1000 cars, a seven-screen cineplex, and a variety of stores and services. The mall is located across from City Mall, between the Medical City Circle and the Al Sha’b Circle, in a more traditional, outer location than Abdali – which is downtown – or the Taj, which is south of the centre in the high-end Abdoun district.

Business Factors 

Location is a key element for malls, reflecting city settlement patterns. In general, Amman is divided between a more densely populated, poorer eastern half and a wealthier, less-populated western half. The most upscale neighbourhoods of the west have traditionally been Abdoun and Shmeisani, with recent years also seeing some movement of wealthier families to the north-west of the city. Therefore, it was in the western part of the city and its suburb of Abdoun that Jordan’s first modern mall was launched – Abdoun Mall, also owned by the Kurdi Group. Having opened its doors in 2001, it is now permanently closed, eclipsed by the Taj Lifestyle Mall when it began operations nearby.

Mall owners have had to face the challenges of high energy costs and taxes. Owners point out that their power bills receive no discount in the way hotels’ do, despite their structural similarities. Furthermore, malls are charged property taxes on their total area, even though roughly 70% is used for revenue-generating activity. These factors contribute to relatively high rental fees for retail space, hitting retailers’ bottom lines and causing several brands to contemplate exiting the market, according to local media.

High taxes and prices are also a concern for more traditional retailers. Sultan Allan, president of the Garment Traders Association, reported in January 2017 that sales of garments in traditional markets had fallen by 40% in 2016 – and 50% in malls – while the dip seen in the governorates outside Amman was even more pronounced, at 60%. Uncontrolled sales and offers were cited as affecting supply and demand, with consumers generally mistrustful of prices and discount percentages. Retailers face additional back-office challenges as well, in the form of increasing rents and tariffs. However, with Jordan attempting to pay down a large debt-to-GDP ratio, tax and tariff relief may be a difficult package to push through in the near term.

Additional Developments 

One of Amman’s largest real-estate projects has been the Jordan Gate project. Stalled for almost eight years due to fallout from the 2008 global financial crisis and a series of workplace accidents, this $400m development saw a new lease of life in mid-2016. Its combination of residential and commercial units near the city’s 6th Circle will be supplemented by retail space. The project includes two towers – one 44 storeys high and the other 37 – which will become the tallest structures in the city when completed in 2018.

Other major real estate projects with retail space include the Abdoun Towers project, a JD50m ($70.5m) development consisting of two, 15-storey towers which, while largely being made up of apartments, will contain shops and markets. Abdoun Towers saw its cornerstones laid in May 2017 on a 45,000-sq-metre site, and is expected to be completed by 2020. Another project is the Golden Gate development, costing some JD40m ($56.4m). In addition to residential and office units, three areas are reserved for supermarkets, restaurants, and other retail and hospitality outlets.

Other real estate projects include Manazel Amman, a new residential development comprising 1253 apartments and villas, the first such project carried out by Abu Dhabi-based developer Manazel outside the UAE. Initially named Amman Gardens, the project has been downsized from its initial 1863-unit plans due to market feedback. The development, which is a 10-minute drive from Queen Alia International Airport (QAIA), is being realised on a 300,000-sq-metre site, and will include retail space, pharmacies, a kindergarten, medical centre, gym and mosque. The transport corridor to QAIA is also developing as a retail centre, with large stores such as IKEA locating on the airport highway. In partnership with the Jordan River Foundation, the Swedish giant has begun a project to employ Syrian refugees in production centres in Jordan, with some 400 people to be employed by summer 2019.

Going Online 

While online retail is a relatively new phenomenon in the kingdom, it may see a surge after the Cabinet decision in July 2017 to exempt local online retailers’ profits from income tax. The move aims to support the kingdom’s ICT and retail sectors, following an April 2016 decision to lower the income tax rate of the IT sector from 20% to 5%, while exempting sales tax and Customs on production inputs.

The move was welcomed by online retailers and the ICT Association of Jordan. Many online retailers have used the kingdom as a base for software and IT development, but largely sold products to consumers abroad. Advocates hope the news will lead to more online retailers operating sales outfits within Jordan.

Outlook 

Increasing economic growth and per capita income usually translate into higher retail footfall, as do tax breaks, and easing tariffs and Customs duties. With the outcome of regional conflicts uncertain, 2018 may be another slow year for retailers, while increasing capacity may drive competition between existing players. If stability returns – leading to the gradual easing of financial constraints on the economy – the retail sector could make a significant leap forward. Online retail is certainly a trend to watch, as government plans to boost the ICT sector could have positive spillover effects on employment and trade.

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