Kuwait retail performance rebounds as retailers look to secure larger customer base

 

With a strong fiscal base, a high average per capita income and a strong shopping culture, Kuwait looks set to rebound from a period of stagnant growth caused by declining oil prices. While the local retail sector is small compared to larger GCC markets like the UAE and Saudi Arabia, consumers are quickly catching up with their regional peers in their tastes and demand for international food, brands and shopping experiences. Retail and wholesale trade accounts for a sizeable percentage of Kuwait’s GDP, and there are solid growth forecasts for the coming year. Existing sector players are expecting 2019 to be a year of increased consumer confidence and healthier disposable incomes.

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, and provide a standard of consumer support for goods and services.

Alongside the MoCI, the Kuwait Business Centre (KBC) and the Kuwait Direct Investment Promotion Authority (KDIPA) assist prospective retail sector investors by providing information and facilitating investment. The KBC was established in late 2015 to provide an online portal service for new businesses, aimed at reducing bureaucracy and increasing efficiency. Through it, companies can register themselves more efficiently. In addition, the time required to register a new business was reduced from between seven and nine weeks to three to five days. KDIPA, meanwhile, established the Investors Service Centre Online to function as a one-stop shop that coordinates with various government bodies to provide a streamlined service to foreign and local investors, aiming to approve licences within 30 days of their application submission. Key non-government institutions include the Kuwait Chamber of Commerce and Industry (KCCI), which represents local businesses. With more than 79,000 members, the KCCI engages in bilateral trade facilitation and consulting for the private sector.

Performance

With an average per capita income of $33,500 in 2018, the strong purchasing power of Kuwaiti citizens is a formative influence on the consumer profile, allowing for high average disposable income and driving demand for luxury and imported goods. With the currency valued at KD3.3:$1 as of July 2019, Kuwait’s population has the strongest purchasing power parity in the GCC. As a result, the country is a popular destination among multinational retail brands. According to the “How Global is the Business of Retail? 2018” report, published by real estate services and investment firm CBRE, Kuwait is ranked 19th out of 61 countries in terms of global retail brand presence, with 41.6% of the over 1000 global retail firms surveyed maintaining a presence in the country. With regard to city rankings, Kuwait City placed 15th out of 193 cities, sharing similar scores with Tokyo, Japan and Bangkok, Thailand.

According to Kuwait’s Central Statistical Bureau, in 2018 the wholesale and retail trade sector grew by 0.9% to reach KD1.39bn ($4.6bn) at constant prices, or 3.5% of GDP. This was up from KD1.37bn ($4.5bn) in 2017 and KD1.32bn ($4.3bn) in 2016. While this represents two years of upward movement, figures are still short of the five-year high of KD1.47bn ($4.8bn) experienced in 2014. There are encouraging signs that the short term could see a return to more substantial gains, however. Earnings in the first quarter of 2019 reached KD346.3m ($1.1bn), or 3.4% of quarterly GDP, representing a 2.4% increase on the same period in 2018. Investor confidence also appears to be returning, as sales of commercial property reached KD185m ($609.3m) in the fourth quarter of 2018, the highest quarterly figure in two years, representing a year-on-year increase of 50%.

Positive Metrics

On a legislative level, the sector has benefitted from a programme of business-friendly reforms by the MoCI, the latest of which was the launch of an electronic system for the issue of commercial licences in January 2019. The online process, which is aimed at small and medium-sized businesses, requires only the submission of a lease agreement and receipt to issue a commercial licence to a company or retail premises.

Prospective investors in the retail sector will also draw encouragement from resurgent consumer indicators. Consumer spending broadly declined in the second half of 2018, but according to the National Bank of Kuwait (NBK) consumer spending index, it returned to positive growth in February 2019. In a related metric, consumer confidence on the ARA Research & Consultancy’s monthly index increased to 110 as of December 2018. While this remained unchanged from December 2017, it marked an improvement on December 2016 and 2015, when figures stood at 99 and 95, respectively.

A December 2018 report by the Egyptian investment bank EFG Hermes forecast that consumer confidence would continue to grow in 2019 thanks to public investment and a thriving banking sector. In November 2018 the Central Bank of Kuwait raised the limit for consumer loans, a move that is expected to encourage spending and boost the domestic banking sector, which is already forecast for high growth rates. EFG Hermes estimated that earnings at Kuwaiti banks would rise by 15%, making it one of the GCC’s best performing banking sectors. This growth would be underlined by a 6.4% increase in loans in 2019, the report noted.

Positive sentiment was echoed in credit ratings agency Fitch’s report on e-commerce in Kuwait. The report forecast growth in private consumption to increase by 3.9% in 2019, up from 1.5% in 2018, partly due to the 10.5% increase in allocated public wage spending and low price inflation. Indeed, according to figures from NBK, inflation was forecast to average less than 2% during 2019. Looking to the longer term, market researcher Euromonitor predicted in December 2018 that the value of Kuwait’s retail industry would grow by 9% to reach $15.4bn by 2023. Non-store retail, which includes online shopping, direct selling, mobile internet, social media and home shopping, is expected to increase by 48%, while the store retail segment is expected to expand by 8.5%. The report also outlined positive forecast for the broader GCC, with the UAE, Kuwait, Saudi Arabia and Oman set to grow by $24bn over the same period.

Grocery & Supermarkets

The grocery and food retail segment is divided between government-run cooperatives (co-ops); private sector supermarkets and hypermarkets; and small, informal corner shops. Co-ops are managed and regulated via the Union of Consumers Cooperative Societies. In 2018 such shops accounted for an estimated 65% of food sales and held 55% of the total grocery market.

This enduring predominance is the legacy of a long history of government-subsidised prices and customer loyalty, particularly among the country’s Kuwaiti population. As a result, levels of penetration of privately owned hyper- and supermarket chains in Kuwait are the lowest in the GCC.

While co-ops dominate the broader food retail market, this could be set to change. The market share of co-ops in Kuwait’s grocery segment has been declining, as the period of low global oil prices put pressure on the government to privatise unprofitable branches. Private sector supermarkets also offer a broader range of imported products and a greater focus on customer experience. At the same time, many co-ops are seeking to remain competitive by learning from the private sector. “Particularly in affluent areas, you can see them renovating, working to improve the customer experience, bringing in more gluten-free and organic products, self-checkout units and so on,” Wilfrid Chaperon, operations manager at City Centre, a Kuwaiti hypermarket and supermarket chain, told OBG. “They are evolving and trying to meet new consumer patterns in order to remain relevant,” he added. A similar dynamic is evolving in beverages. “Increasingly, health and wellness have become new trends demanded by the local market, primarily in products with fewer calories, less sugar and no artificial additives,” Fady Elassaad, CEO of the Arabian Beverage Company, told OBG.

Consolidation

As with the retail sector, the expansion potential for large global supermarket chains is limited by a lack of available locations. This is due in part to strict zoning laws and government control over available land. As a result, activity in the sector is characterised by mergers and acquisitions as existing brands try to attract more market share. In November 2018 wholesale chain Oncost acquired well-known competitor Gulfmart. “There are very few suitable locations for central markets in Kuwait, and this was a hurdle to our expansion plans,” Saleh Al Tunaib, CEO at Oncost, told media at the time of the sale. “By buying Gulfmart, we are able to immediately expand our presence in 16 new locations.” Subdued population growth and a departing expatriate population are other factors preventing players from widening their scope. Kuwait’s population grew by 2% in 2017 and 2.7% in 2018. “As options for expansion are limited, the most straightforward way to grow is to eat into competitors’ customer bases,” Chaperon told OBG. “For instance, brands with a traditionally upper-middle-class customer base are becoming more price competitive.”

Silk City

In the long term new markets and opportunities for retailers are likely to open up with the government’s proposed development of Madeenat Al Hareer, commonly known as Silk City, in the north-eastern city of Subiya. The $86.5bn mega-project will encompass the five islands of Failaka, Warba, Miskan, Awha and Boubyan, and is expected to be fully operational by 2035. In February 2019 plans for the $86bn first phase were announced, which included the construction of an airport, a rail network, a logistics and industrial centre, and a free trade zone located at the Mubarak Al Kabeer Port. Additional phases are planned to include residences for 700,000 people, an Olympic stadium and the 1-km-high Burj Mubarak Al Kabir tower. As of early 2019 construction on the $3bn Sheikh Jaber Al Ahmad Al Sabah Causeway linking Kuwait City with Subiya was nearing completion.

Automotive

Further indications of returning consumer confidence can be seen in the automotive sector, which grew by 0.8% in 2018, after three consecutive years of falling sales. Kuwait has traditionally had a strong market for imported cars, with SUVs particularly popular. In 2017 SUVs accounted for 43% of the automotive market. Adel Behbehani, director of MSRY Behbehani, a subsidiary of Behbehani Holding Group and one of the country’s main distributors of imported vehicles, told OBG that the company was witnessing a sizeable boost in automotive demand in 2019. “The government’s decision to increase the upper limit of consumer loans from KD15,000 ($49,400) to KD25,000 ($82,300) is one of the key factors behind this activity. The leasing of multi-car fleets to companies is another segment demonstrating strong emerging potential,” he said. This perspective was confirmed by Mansour Al Mubarak, CEO of A’ayan Leasing and Investment. “The flexibility of car leasing allows for large corporates to fluctuate their fleet size on demand and outsource requirements, whether procurement or maintenance, to other providers,” he told OBG.

Malls

Shopping malls play an important part in Kuwaiti public life, in large part thanks to temperatures that routinely reach above 40°C during the summer. The country’s largest mall is The Avenues in Kuwait City. The $2bn mall, which opened in 2007 and completed a four-phase extension in March 2018, is home to more than 1100 retail units and employs 30,000 people. Other landmark malls in Kuwait include Marina Mall, Al Kout Mall and 360 Mall.

One of the most highly anticipated commercial projects in Kuwait City is Alghanim Industries and Salhia Real Estate Company’s Assima Mall. Upon completion, the mixed-used development will add 40,000 sq metres of gross leaseable area to Kuwait, as well as the 150-office, 54-storey Assima Tower and the high-end Assima Residence. In March 2019 Salhia Real Estate Company’s chairman Ghazi F Alnafisi told industry media that 60% of the retail concepts in the mall will be new to Kuwait, including confirmed spaces for France’s retail chain Monoprix and upmarket department store Galeries Lafayette. Part of the Assima Mall is scheduled to open in February 2020. As of March 2019, around 62% of the available retail space had been leased.

E-Commerce

More Kuwaitis and expatriates are shopping online as the country’s e-commerce market rapidly expands and local retailers look to compete with international online retail giants like the US’ Amazon, the UK’s Net-a-Porter and the UAE’s Amazon-owned Souq.com. One local success story is online cosmetics and skincare retailer Boutiqaat, which was launched in 2015 and has since grown to become the largest online cosmetics retailer in the Middle East. In general, Kuwait’s adoption of e-commerce has been more gradual than other countries in the region. While it has the highest rate of internet penetration in the Middle East, at 98%, the portion of these who shopped online stood at just 36% in 2016, according to a 2018 report published by the E-commerce Foundation. Reasons cited for this include the importance placed on the indoor mall shopping experience, as well as varying levels of trust and familiarity with online retailers. The report also noted that among Kuwait’s e-shoppers, international retailers are generally preferred to local brands.

Online food delivery, however, is proving to be the exception. A February 2019 report from Fitch noted that the UK-based food delivery platform Deliveroo had chosen Kuwait as its second GCC market following its launch in the UAE in 2015. It will join online delivery services like the UAE’s Talabat, and Germany’s Delivery Hero, which acquired Kuwaiti food delivery firm Carriage for $100m in 2017. Deliveroo’s decision to open in Kuwait represents a further vote of confidence in the country’s retail outlook, which the report notes is brightened by rising private consumption, increased public wage spending and a young population, with adults aged 20-39 making up 37% of the total population.

New Taxes

However, a number of additional tariffs planned for the medium term may force retailers to adjust their profit margins and re-evaluate business models. While Parliament has long opposed the introduction of value-added tax (VAT), a report published by the Ministry of Finance (MoF) in March 2019 suggested this may change. The proposed implementation of a 5% VAT was first agreed on by the Supreme Council of the GCC in 2016. It has already been put in place in fellow member states Saudi Arabia and the UAE, and it is set to come into effect in Kuwait on April 1, 2021. According to the MoF report, there were various reasons for the new tariffs. These include recommendations recently made by the IMF, as well as the need to balance expected declines in oil revenues by increasing public revenue inflows. The same report also notes that fees on tobacco and soft drinks will be introduced in April 2020.

Customs Woes

The efficiency with which businesses can import goods also remains an issue. While the government has embraced initiatives that aim to simplify the process of starting a business in the country, retail sector stakeholders maintain that Customs procedures, in particular, could benefit from being further streamlined. “An excess of bureaucracy and red tape tends to make the process slower than it needs to be,” Kian Saadat, CEO of Hassan’s Optician, told OBG. “We have to fill in and sign lots of forms on a weekly basis. I would love to see the government move quicker to digitalise the entire import process.”

Outlook

Kuwait’s retail sector is set to continue its trajectory of solid growth through 2019 and into 2020, when the opening of Assima Mall will provide an influx of new retail stock to the market. Competition from modern supermarkets and hypermarkets is also expected to heat up in the coming year as consumers increasingly demand healthy lifestyle alternatives and foreign brands. Traditional grocers and co-ops are beginning to realise that they cannot afford to be complacent in the face of growing global grocery brands. The introduction of excise duties in 2020 and a VAT in 2021 are likely to have a moderate impact on consumer behaviour, though low pre-existing duties will help inflation limit price increases. While e-commerce has yet to gain a large share of the market in Kuwait, retailers will need to start looking further into integrating these platforms into their customer experience models; otherwise, businesses risk losing out on a wide customer base.

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