Purchasing power: Stable growth is drawing in local, regional and international developers and brands

Despite having different consumer patterns and a less developed domestic retail market than some of its GCC neighbours, the Omani retail sector nonetheless continues to experience stable growth, attracting investment from local and regional developers, as well as interest from leading global brands.

According to preliminary figures produced by the Central Bank of Oman (CBO), the wholesale and retail segments of the services sector contributed OR2.1bn ($5.4bn) to the Omani economy in 2014, equivalent to 6.6% of total GDP. This figure represented growth of 2% on 2013 figures, down from the previous year’s 4%. The growth figure is also less than half that for the economy as a whole, at 4.6%, or indeed the average across the services sector of 13.1%.

Regulation

Part of the explanation for the slowdown in retail growth may have to do with changes to the regulatory environment. Since 2011 Oman’s retail sector has been subject to strict price controls, enforced by the Public Authority for Consumer Protection (PACP). The controls were motivated by a rapid increase in prices occasioned by the boom in commodity markets following the global downturn. As an oil exporter that imports many of its consumer goods, Oman is heavily exposed to such cycles, and the controls have had the positive effect for consumers of suppressing consumer price inflation (CPI) in recent years. Having peaked at around 4.5% in 2011, CPI has since fallen to 1.1% in 2013 and 1% in 2014.

In recent years the government has attempted to overhaul the price control system established in 2011, and the situation currently remains in flux. A Cabinet decision in March 2014 attempted to limit the PACP’s responsibility to controlling the price for 23 essential products, including rice, flour, meat, fish and other staples. The price of other commodities not included in the list would thus be set by market forces. However, a royal decree issued shortly after stated that the implementation of the Cabinet decision would be delayed until a new Consumer Protection Law had been issued. In fact, three laws regulating the sector were passed later that year: a new Commercial Agencies Law, which came into effect in July 2014, significantly liberalised the Omani market, enabling foreign principals to now act through multiple agents in Oman, or even sell directly to consumers. This was followed later in the year by a new Consumer Protection Law, and Oman’s first Competition and Anti-Monopoly Law.

Consumer Growth

A.T. Kearney, a management consultancy firm, estimates total retail sales in the sultanate currently stand at $11.9bn per year, with a compound annual growth rate of 7.6% since 2010. Recent growth in consumer spending has been boosted not only by price controls – which have arguably kept retail prices below the prevailing rate of inflation – but also wage increases. In July 2013 the government raised the minimum private sector wage for Omanis by 60% to OR325 ($841) per month, while CBO figures show that government spending on wages, salaries and allowances grew by 35.3% in 2014 to reach OR3.3bn ($8.5bn). The combination of the two factors has resulted in an increase in purchasing power for Omanis, which is in turn translating into rising consumer spending, though it is likely to also be squeezing retailers’ margins.

Companies are looking to increase productivity through new technologies. “There is also room for more e-commerce. Growth here is slow, but it is clear that mobility will be key when it takes off,” Satish Moorjani, CEO of Mustafa Sultan Group told OBG.

Not all regulatory reforms have favoured an increase in consumption, however. Recent changes to bank regulations have lowered the ceiling on personal loans from a maximum of 40% of total bank credit to 35%. Partially as a result, car sales have fallen by an estimated 25-30% over the past 12 months, while consumer confidence also declined by 10 points in the final quarter of 2014 (the last period for which figures are available). Despite the fall, the absolute value of the index remained high, with two-thirds of the sultanate’s citizens believing their financial conditions will improve in 2015 and the future in general.

Underlying these recent figures is more than a decade of strong growth in consumer purchasing power. According to figures released by the National Centre for Statistics and Information (NCSI) in early 2014, average household income had risen by 83.9% over an 11-year period, reaching an average of OR1172 ($3034) per month, and as high as OR1459 ($3777) in Muscat. The same figures show that average household spending hit OR930 ($2408) a month, with around 30% of spending going on food.

According to Sridhar Moosapeta, CEO of the consumer products group at Khimji Ramdas, one of Oman’s oldest companies, local consumer habits remain quite different to those in neighbouring GCC countries, and particularly the UAE. “People in Oman are still somewhat diffident about indulging in malls,” he told OBG. “They are reluctant consumers, although habits are definitely changing. We’re finding though that malls are tending to become weekend destinations, while there isn’t much organic growth in the new hyper- and supermarkets. They seem to be cannibalising each other’s market share.” As such, he sees more potential in what he describes as the “friendly neighbourhood store” segment, with Khimji Ramdas planning to launch nine such stores in partnership with Spar International by 2016.

Real Estate

Muscat has seen rapid growth in capacity in recent years, although it remains a small market in comparison with the neighbouring UAE. A.T. Kearney’s annual Global Retail Development Index, which ranks the top 30 emerging markets for retail investment, placed Oman in 26th position in 2015. While concluding that the outlook for Oman remains “fairly positive”, the company nonetheless highlighted the comparatively slower pace of retail development as the reason for the fall.

OBG estimates current gross leasable area (GLA) in air-conditioned malls to stand at approximately 353,000 sq metres as of end-2015, with two new developments entering the market during the year. The Avenues Mall, a 105,000-sq-metre (80,000 sq metres of GLA) Lulu Group development located in the Ghubrah district, opened its doors to the public in May 2015, while Panorama Mall, a 21,000-sq-metre development by Allied Business Corporation, opened in late 2015 just a stone’s throw away.

Indeed, Ghubrah looks set to become the retail hub of Muscat, with Muscat Grand Mall, a 65,000-sq-metre development by Tilal Development Company which opened its doors in 2012, also located in the neighbourhood, and set to add an extra 100 retail units in a new expansion. While experiencing less rapid growth than the neighbouring UAE and Qatar, Oman’s retail sector is attracting significant investment from both domestic and foreign investors.