On how Dubai’s retailers are adapting to the shifting market trends
During the first year of its implementation, what overall impact did value-added tax (VAT) have on consumer demand and operating costs in the retail sector?
PATRICK CHALHOUB: On consumer demand, we saw a decline in the luxury items segment in 2018. However, it is arguable how much of this decline can be attributed to the introduction of VAT. The VAT is only 5%, which is low compared to other countries. Nevertheless, the perception of prices being high needs to change, and the reality is it is often mainly due to the high cost of doing business.
In regard to operating costs, VAT is meant to be a cost for the end consumer and is generally not intended to be a tax on businesses. However, businesses are not always able to increase prices to pass off the VAT impact. Absorbing all or part of the VAT adds to the already expensive cost of doing business. There are also compliance costs involved for businesses, as IT systems need to be upgraded, employees need to be trained and arrangements need to be made for regular ongoing compliance with VAT regulations. Businesses ultimately need to absorb the additional costs.
What are the major market trends, and how are they impacting the cost of rent for retailers?
CHALHOUB: The majority of Tier-B and Tier-C mall owners and landlords are revising rent downwards between 15% and 25% in line with current market conditions in order to retain tenants. The retail market has been impacted by a few key trends: lower tourist expenditures; differing tourist profiles for luxury goods; expansion of e-commerce; price discrepancies between UAE retail and abroad; and oversupply in the market. As such, some retailers are clearing their non-profitable stores and reducing the amount of offers in malls to make up for this reduction in demand.
Tier-A mall owners and landlords are starting to slowly revise rental figures, but not to the extent of the less-prominent shopping malls. Regardless of mall category, however, landlords that do not revise rent downwards struggle to retain tenants, and this can be seen through anecdotal evidence such as hoardings across malls and vacant units on floor plans shared by leasing teams.
The majority of retail is trading above the rent-to-sales ratio by 15%, which makes it impossible to sustain business. This has impacted profit margins; thus, big retailers are downsizing their expansion plans, while medium-sized retailers are selling off less-profitable businesses and many smaller retailers are already out of the market.
To what extent is there room for further high-end retail growth, given the shift towards the middle-income segment of Dubai’s inbound tourist profile?
CHALHOUB: The GCC market landscape is going through a general slowdown, yet real estate development continues and ongoing retail expansion is reaching saturation. With the implementation of VAT in the UAE, Saudi Arabia and Bahrain, and a reduction of subsidies in all GCC countries, consumers have become more cautious with their spending. Now, consumers are multi-channel shoppers, who have less brand loyalty, more brand trialling, and are increasingly price conscious and digitally savvy.
There continues to be a growth in the amount of tourists, but their profile has changed. Tourists now have less buying power and are more demanding, as they expect more experiences and better services. Therefore, retail experiences and services need to improve to fulfil the clients’ expectations. The GCC will still be a brick-and-mortar region because retail is not dead, but boring retail is dead. We need to deliver outstanding services and unforgettable experiences.
Since 2017 e-commerce sales have grown from 2% up to 6%. We see more brands going online with e-commerce, with luxury e-commerce set to grow 25% to 30% in the years to 2022. While 2019 will be a challenging year, digital transformation will help answer the new market realities and adapt to the new tourist profile of Dubai and the evolving consumer profile of the GCC.