Value-driven market: Healthy growth provides diverse opportunities for foreign investors

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The retail market in Oman differs from that of the majority of its Gulf neighbours, with a less concentrated urban population and lower per-capita GDP. Furthermore, the majority of the country’s workforce is private-sector-based, which is not the case for other Gulf countries, where the bulk of nationals are employed directly by the government and typically paid high wages. The sultanate’s expatriate segment also contains a lower percentage of high income earners. Shoppers in Oman are therefore more value-driven and price-conscious than elsewhere.

Background

Despite these influences, the retail market has grown considerably. Regular rises in the minimum wage have increased overall purchasing power, and the Shura Council, Oman’s parliament, announced in early 2013 that the minimum wage for Omani citizens would again be raised by more than 60% to OR325 ($847) per month, effective July 1, 2013. While this puts some pressure on retailer margins in terms of their payroll commitment, it fuels consumption habits among Omani shoppers.

Other factors, such as a rising number of expatriates and tourists, the growing appeal and awareness of international trends, low market saturation, political stability and high oil prices have attracted major investments by international retailers that see strong potential for the Omani marketplace. Additionally, large government investments into infrastructure projects, such as new warehousing facilities and transportation networks, add to the attraction for international retailers to enter the market.

By Numbers

Oman made its debut in AT Kearney’s Global Retail Development Index in 2012, and ranked eighth among the world’s emerging retail markets. While it slipped to the 17th spot in the 2013 rankings, the report maintains its assessment that “Oman remains relatively stable, with steady economic and retail growth and strong consumer confidence.” It forecasts that the sector’s compound annual growth rate (CAGR) will rise to 29% between 2011 and 2014.

Additionally, within the category of consumer confidence it is ranked fifth among the entire Middle East region, according to MasterCard’s 2013 Worldwide Index of Consumer Confidence. Oman received a scored of 87.1 for the second half of 2013, compared to the Middle East’s aggregate score of 78.5.

The Oman Chamber of Commerce and Industry (OCCI) put the total value of wholesale and retail trade in 2011 at OR1.95bn ($5.08bn), accounting for 7.2% of GDP, while the total number of companies operating in the sector was 36,640. According to figures from the National Centre for Statistics and Information, the retail sector in Oman grew by 13.5% in 2012 compared to 2011, illustrating higher consumer spending and new entrants into the retail space.

Oman’s consumer price index (CPI) includes nine categories and index weight is heaviest in the following areas: food, beverages and tobacco contribute to 30.4% of the basket; rent, fuel and maintenance services account for 21.4%; and communications and transport represent 22.2%, as per OCCI data.

Strengths

The most successful retail segments include mass grocery, electronics, the food and beverage business, and luxury goods (see box). LuLu, Carrefour and Al Safeer are the major grocery retailers and account for over half of the market share, according to AT Kearney. Hypermarket growth has surged over the past several years, as the model has spread from Muscat to other regions. In May 2012 Abu Dhabi-headquartered LuLu Hypermarket opened its 12th outlet in Oman at a cost of OR20m ($52m) in Buraimi, while in July 2012 Mars International, a leading retail chain in Oman, opened its largest hypermarket on 15,000 sq metres in Barka.

Supermarkets and Omani-based retail chains are also spreading because of pricing demands, and such venues are typically located around malls due to the high footfall. Oman’s two largest malls are Muscat City Centre (MCC) and Muscat Grand Mall (MGM), both of which are undergoing major expansion. In mid-2013 the Dubai-based Majid Al Futtaim (MAF) Group announced that it intends to invest OR11.3m ($29m) to expand the MCC, which will increase the mall’s gross leasable area (GLA) from 60,000 to 65,000 sq metres. According to a Times of Oman report, the expansion should be complete by the first quarter of 2014. Part of the MAF investment will also finance an additional 5000 sq metres of GLA in Qurum City Centre, raising its total to over 25,000 sq metres.

At the same time, Tilal Development Company (TDC) announced plans to invest OR50m ($130m) in a second phase of development for the MGM, which is already anchored by a Carrefour Express. The project is set to increase the mall’s size by 30,000 sq metres of GLA and the number of retail outlets from 150 to 250. Likewise, the current footfall figure is 17,000-20,000 shoppers, and is expected to increase to 30,000 once the expansion is completed before the last quarter of 2015. “At present, the retail outlets boast 25% occupancy from small and medium-sized enterprises (SMEs), and it is our endeavour to take this initiative further,” said a TDC board announcement of the expansion plans. “We recognise that such developments also support the city’s growth outlook and further reinforce its core economic sectors, including retail, tourism and hospitality.”

Shopping Malls

Muscat is home to 16 major malls and plazas in total, and new investments are still being announced, such as the Panorama Mall, expected to open in mid-2014 in the Al Khuwair/Bawshar area. With a constant influx of new entrants, Muscat’s mall market is relatively saturated, and investors are now venturing outside of the capital. Population growth rates are increasing significantly in Oman’s other port cities, such as Sohar and Salalah, with investment bank Alpen Capital forecasting overall GLA in Oman to increase from 346,000 sq metres in 2011 to 541,800 sq metres by 2016.

The final construction phase is nearly complete for Kuwait-based United Real Estate Company’s new Salalah Gardens Mall. Retailers are expected to start operating in various stages, as of mid-2013, depending on their specific requirements. The mall covers 86,074 sq metres and includes 168 serviced apartments branded as the Salalah Mall Residences. The mall is the city’s first fully integrated shopping complex, symbolising the rapid development in Salalah over the past few years. “The Salalah market is under-served when it comes to quality retail,” Kim Jepsen, GM of Markaz Al Bahja Mall & Oasis Lifestyle, told OBG. “Rents are much cheaper than in Muscat, and disposable income is growing as the city develops.”

In addition to mall space, ground floor retail outlets have been in high demand, as many local retailers lack the budget to set up in a mall. According to September 2012 figures from Eqarat.com, an online property consultancy, average ground floor retail units were renting for around OR8 ($21) to OR10 ($26) per sq metre per month, and retail space in shopping malls was leasing for an average of between OR15 ($39) and OR20 ($52) per sq metre per month.

Fashion

Consumer tastes in Oman tend to be more traditional than its Gulf counterparts, due to a historical lack of exposure to international brands and lower tourism numbers. Omani men, for example, typically prefer the dishdasha to new clothing styles or suits, which limits the scope of the men’s retail segment. Yet as the market evolves and new retailers enter the country, preferences are evolving too. Demand for higher-quality value fashion is increasing and international value retailers are quick to jump on board. Dubai-based value-fashion vender RedTag, for instance, which operates over 100 shops across the Middle East, entered Oman in mid-2012, opening its first store in August and its third by November. In mid-2013 the Dubai-based Landmark Group, one of the region’s largest retail conglomerates, opened a new value-fashion Splash store at the Seeb Souk. Splash has grown to more than 200 stores and 50 brand stores across 13 countries.

In line with other new retailers at the entry- to mid-level price point, the mushrooming of value fashion illustrates Oman’s style evolution and its growing demand for international trends. “The presence of retailers catering to the mid-market segment helps Oman to position itself on the global front,” said Faisal Turki Al Said, chief operating officer of the Brand Oman Management Unit. The Landmark Group has grown to over 1600 outlets in 20 countries, and its expansion plans in Oman highlight the country’s growing adoption of international fashion.

Souk Tourism

While Oman’s traditional retailers remain popular outside Muscat, souks are reorienting their sales strategies predominantly toward traditional goods, such as fabrics, incense and crafts, as opposed to mainstay items now found in the hypermarkets and supermarkets. Tourism remains another driver of trade at souks, although the majority of tourist activities revolve around business and nature excursions instead of retail shopping. In order to help strengthen the retail tourism segment, consequently improving SME development in the industry, the government has plans to transform Muscat’s Port Sultan Qaboos into a tourism and maritime heritage facility. While the new facilities will offer a range of luxury services and international brands, the port also aims to promote Omani culture through traditional architecture, boats and markets.

Similarly, Salalah is using port infrastructure to boost tourism and stimulate local SME development. Cruise liner traffic is increasing in the port city, and between 2011 and 2012, the number of passengers rose from 23,202 to 28,159. A $250m investment from the Ministry of Transport and Communication is focused on creating a new northern breakwater that can also serve as a cruise terminal for future passenger traffic. The growing inflow of tourists would help Oman’s traditional souks retain market share.

Auto

The increase in purchasing power and low fuel costs have also supported a growing auto market in the sultanate. Light passenger vehicle sales reached 204,967 units in 2012, 21% higher than in 2011, according to Focus2move, a research consultancy group covering the automotive sector.

Toyota accounts for over 50% of the market share, selling 108,851 units in 2012. Other top car brands include Nissan, selling 28,398 units in 2012, Hyundai (19,384 units) and Kia (14,270 units). Lexus ranked fifth, selling 5935 units, or 2.9% of the 2012 market share, and led the luxury segment.

Looking to make a run to the top, however, is US auto giant General Motors’ (GM), whose Chevrolet and GMC brands ranked ninth and 17th in 2012, respectively. According to a report by Arabian Business, 2012 was GM’s second-best sales year in Oman, with dealers reporting a 28% increase from 2011, for a total of 3501 units. Sales of Cadillacs, a GM luxury brand, nearly tripled in 2012. The firm announced plans to upgrade its services through its dealership partners in Oman, Moosa and Oman Trading Establishment (OTE) Group, by building seven new customer sales and service centres in Al Wattayah, Seeb, Jalan Bu Ali, Bidaya, Ibra, Barka and Nizwa. This is in addition to expansion plans from the previous year, when both Moosa and OTE Group upgraded 10 sales facilities and built a showroom in Sur.

Electronics

Demand for electronic devices is also on the rise, as items such as smartphones, tablets and flat screen TVs are quickly penetrating the Omani marketplace. As higher data transmission speeds are continuously available, smartphone usage has risen quickly. According to a June 2013 interview in the local media with Ashraf Fawakherji, vice-president of Huawei Middle East, 65% of Omani mobile phone users have switched to smartphones, making the sultanate the fastest-growing market for this niche in the GCC. Huawei announced its retail debut in the country in June 2013, partnering with a local distributor, Adhwa Al Billa Trading, to chip away at Samsung’s 70% market share for smartphones. Samsung’s year-on-year growth in 2012 for its mobile devices has surged 120% in Oman and 214% in the Gulf region as a whole, according to the local press.

The pace does not seem to be slowing, and Fawakherji expects smartphone usage in Oman to increase from 65% to 80% over the next 18 months. The availability of 4G mobile services, as well as the growing demand for data, has led to distribution strategies that extend into Oman’s interior, enabling high penetration rates. Tablets and flat-panel TVs also make up a sizable chunk of the electronics volume. As prices are dropping, 2013 has seen substantial growth in sales for these items too. “Demand for technology and luxury goods is increasing. With a thriving economy these segments exhibit the potential for continued growth in the market,” Nabeel Jawad Sultan, managing director of Jawad Sultan Group, a local retail and service group, told OBG.

Food Retail

Across the GCC region, population growth and a rise in GDP per capita are contributing to a jump in food consumption, which is expected to increase by around 3% by 2017. As a result, regional and international food companies are ramping up production and distribution in order to satisfy a growing appetite. Demand for protein is rising the fastest, and Alpen Capital forecasts that meat consumption will be among the fastest-growing food groups, with a CAGR of 3.9% forecast between 2012 and 2017.

The increase in urbanisation rates and the rise of hypermarkets have also triggered demand for high-value processed foods. Oman Fisheries Company (OFC), the largest fisheries firm in the sultanate, aims to establish 60 retail stores across the country to provide processed, frozen fish to the domestic market. According to an OFC director’s report issued in February 2013, the 60 shops should be open within the next three years and 10 of the shops are expected to be fully operational by the end of 2013.

Poultry is another top protein provider, with A’ Saffa Foods, the country’s largest poultry producer, recording a growth in net profit of OR7.29m ($19m) during 2012. The firm’s growth has encouraged diversification of its product range, which now includes red meat, fish products and frozen vegetables under the Taybat and Khayrat brand names, and it plans to enter the egg market in the near future as well, according to Nasser Al Mauli, CEO for A’Saffa Foods.

Growth in the food industry has also led to a call for greater regulation. In April 2013 the Oman News Agency reported that the Muscat Municipality closed 10 restaurants as part of a campaign to promote food safety. Inspectors uncovered large amounts of food in unhygienic conditions and stored improperly. Another 24 eateries were fined due to violations of the regulations for private hotels and coffee shops.

Outlook

With enhanced purchasing power, a growing tourism sector and the rapid evolution of consumer preferences towards international brands, global retailers – from fashion to electronics – can expect growing opportunities to enter the sector.

At the same time, the ongoing influx of hypermarkets and supermarkets is likely to see retailers, both domestic and foreign, continuing to penetrate the country’s interior as the coastal population centres become saturated. These dynamics are likely to shape the Omani retail sector – and the investment opportunities available – in the short to medium term.

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The Report: Oman 2014

Retail chapter from The Report: Oman 2014

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