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Online vs Offline war at GCCs doorstep

Date : 21/08/2017
Author:  Marmore MENA Intelligence


Despite high levels of disposal income, internet and smartphone penetration and rapidly changing consumer preferences, the e-commerce industry in the GCC continues to remain in its infancy. It is estimated that online sales in the Middle East is at a mere 2% of overall retail sales; while it is much higher at 15% in developed markets (Source: Forbes Middle East). The low penetration of e-commerce is an opportunity waiting to be grabbed, however, it also strokes fear, if this would lead to the decline of the physical segment of retail in GCC.
This fright has turned into a reality in many developed markets like US, where the accelerated shift of Americans shopping via internet has pushed several retail companies into bankruptcy. Approximately 8,640 stores with 147mn square feet of retailing space is expected to close down in US during 2017 (Source: Credit Suisse).  The fact that number of stores expected to close in 2017, surpasses the level of closures after the financial crisis and dotcom bust, signifies the enormity of the threat the conventional retail industry faces from the e-commerce segment.
The current state of the US conventional retail segment prompts the need to address the following questions in the GCC context.
  • Is this fear for real and can the GCC malls face a similar scenario in the near future?
  • Does this present a great opportunity for the GCC retailer to transform and embrace technology to improve their business?
We delve into this incongruity and try to understand if online can really beat offline sales in the GCC as it is feared in the developed markets.
Size matters… 
The GCC e-commerce industry is expected to grow at a CAGR of 30% to reach from USD 5bn in 2015 to USD 20bn at the end of 2020. While, the conventional retail market size in GCC is expected to be at USD 206 billion by 2020 registering a CAGR of 4% during the same period. Though the pace at which the regional e-commerce industry is expected to grow is commendable, it would only account for 10% of the entire regional retail sales. Given the size of the conventional retail industry in the region, it would take the e-commerce segment considerable duration before it poses a major threat. We believe there is enough space for both segments currently and physical stores have time to pull up their socks and think of ways to beat the online competition. The fear is not so near as generally perceived.

Figure: GCC Retail Market Size (in USD billions)

Source: A.T. Kearney, Marmore Research

Malls yet to reach saturation levels
The conventional segment in the region is still in its growth stage. Some of the factors that testify that the industry is yet to reach saturation are the steady supply of the retail real estate, lower concentration of the market, limited presence of international players and consumer spending.

Figure: Ongoing Retail Projects Details

Source: Jones Lang LaSalle, Markaz Research

The numerous mall developments in the pipeline are a testament to immense opportunities in the sector. Unlike, the US market which witnessed dramatic overbuilding of stores resulting in excessive retail space, the retail space density in most of the GCC countries is still sparse. The GLA retail space per capita in US is around 2.3sq m (4.6 sq m, if small shopping centers and independent retailers are added)(Source: Forbes) as against 1.39sq m in Dubai and 1.48sq m in Abu Dhabi. These numbers indicate that there is still enough room for conventional retail space to grow.

Figure: Malls Gross Leasing Area (GLA) per Capita

Source: Jones Lang LaSalle, Markaz Research

Cultural Influence
The divergent cultural and climatic aspects of the GCC region from the US and European markets, emphasize the need to gauge the regional retail industry differently. Larger and well bonded families, regular outings, high per capita spending and lack of other entertainment avenues make malls an exciting place to be. Mall of Emirates is the seventh most productive shopping centre across the world earning USD 1,423 per square feet per annum (Source: International Council of Shopping Centers (ICSC)). Emaar Malls collectively had 125 million visitors during 2016, similar to annual footfall during 2015. While, Dubai Mall being the most visited shopping destination attracted over 80million visitors for third consecutive year since 2014 compared to 65 miilion visitors in 2012. This is higher than the total number of visitors to Niagara Falls & Central Park (NY) put together. Going to the mall is an integral part of the region’s culture. Malls offer a unique proposition of entertainment plus shopping and continue to be the choice of destination for shoppers as it offers a wholesome experience.

Table 6.3: Characteristics of Various Mall Type
Mall Category Features Catchment Area Visitors Frequency
Upscale Mall Mid-Tier Malls Global Audience across countries Monthly / Quarterly
Mid-Tier Malls Leisure Shopping Nearby Regions Monthly
Community Malls Caters to the primary needs of consumer. Adjacent Neighbourhoods Daily / Weekly

The other side of the story-challenges faced by online retailers
While the customers are gradually favouring online purchases there are region specific impediments to the growth. The biggest hurdle for the growth of E-commerce industry in the region is the lack of consumer trust and awareness. The GCC consumers are still wary of shopping online, fearing fraud, data security and privacy issues. Moreover, the e-commerce ecosystem such as digital banking distribution and logistical infrastructure is largely underdeveloped. The GCC banking industry is facing huge challenges in meeting customer expectations in digital experience, relatively few people have credit cards and online payment systems are in their infancy. The region still relies heavily on cash-on-delivery which makes an online shopping operation even more difficult to manage. Cash-on-delivery can result in problems with returns or undelivered items, and often means higher costs, making it an unattractive option.

To adapt or perish
For now e-commerce industry doesn’t pose considerable threat to the GCC region’s physical retail. However, if conventional retailers are too complacent and fail to react to the changing trend, they are likely to lose their market share as witnessed in developed markets. A viable option for the conventional retailers is to adopt to the hybrid retail model, which involves having both an online and offline store presence. Using a brick and click model, retailers can leverage upon their e-commerce sites by providing information about the latest products, sales, and deals in a physical store. This in return attracts customers to the physical store either to look at the product or to collect their purchased product. This way the hybrid model is a win-win arrangement for both the conventional retailers and the customers.

This article is published in "Marmore Blog"

Tags:  economy, online, retail, sector

 Current rating: 4.5 (3 ratings)

Are GCC businesses leveraging social media enough?

Date : 04/10/2016
Author:  Marmore MENA


As social media penetration continues to grow exponentially, so does the opportunity for Gulf businesses to engage their customers

This increasing reach, twinned with the growing presence of young people on social media, has opened up new avenues for companies to interact with their customers of the industries that are currently active on social channels across the region, the retail industry leads engagement on Facebook in almost all of the GCC countries, with over seven million active followers.

This is followed by the telecommunications industry at close to five million users. While the remaining top five industries in the GCC, based on the number of Facebook followers, are e-commerce, electronics and airlines. The most used social media channels for businesses in the region are Facebook, Twitter and LinkedIn.

In terms of the total number of fans on Facebook, the fast moving consumer goods industry is one of the most popular in the region. According to recent industry estimates, the GCC’s FMCG market will likely cross the $270bn mark by 2018, with the regional population expected to expand to around 56.5 million. Faced with ever increasing competition, it is becoming crucial for FMCG companies to increase their visibility in the market by tapping social media and engaging with end users.

Qatar Airways has a significant presence across all social media platforms and the largest number of followers compared to its regional competitors with a Facebook fan following of 11.6 million people. This features news, videos, pictures of the cabin crew at new and interesting destinations, and other elements aimed at engaging with existing and potential customers.

The airline also has a Twitter account with close to a million followers, and a YouTube channel with more than 36,000 subscribers.

In the retail industry, Arabian Oud, with 4 million Facebook and 1.5 million Twitter followers leads the pack. In telecoms, STC and Mobily have a stronger presence on Twitter compared to Facebook, and dominates social media outreach in e-commerce, with 8 million Facebook followers and 380,000 Twitter followers.

The social media presence of SMEs is also on the rise, according to a 2015 survey of 260 regional SMEs by LinkedIn. In the study, 92 per cent of respondents said they were already on social media platforms, with a further 5 per cent preparing to establish a presence. Many of these will surely have taken the plunge since the survey was conducted.

The main driving factor in the adoption of social media was found to be the ease of generating business, with 34 per cent of Gulf SMEs claiming that they gained new customers through social media advertising and 32 per cent directly linking their social ad spend to revenue growth.

However, other industries like banking have a very limited presence on social media platforms, or are not using them to their full potential. Banks in the region should look at social media as more than a simple marketing tool. They should see it as an essential factor to develop actionable insights and gain real value from consumer interaction, especially at a time when fintech solutions are threatening existing business models across the globe.

There are a few exceptions to the overall trend of banks in the region underutilising social media channels. Some such as QNB, Saudi Investment Bank and Emirates NBD have significant fan followings on Facebook. QNB’s posts on Facebook are related to the products and services it offers, the financial performance of the group and its social initiatives. The bank also has a reasonable presence on both Twitter and YouTube, unlike other GCC banks.

Social media can be used as a marketing tool to help businesses achieve growth, improve brand image, procure talent, and become more consumer-centric. Especially by getting, feeding and addressing complaints.

With growing internet and smartphone penetration, and rapid advancements in technology, it has become imperative for businesses to engage with customers or risk losing out to competition. And while challenges exist – such as lack of Arabic content and data security – the benefits outweigh the costs.

But tools used to enhance brand image can also be used to tarnish it. For example, Subaru Emirates paid a hefty price for social media mismanagement after a road accident occurred that claimed four lives. The company was branded sexist and insensitive after posting an image of the accident with the status “woman driver at it again”. By the time it was taken down 26 hours later the damage had been done.

Another issue faced by companies is that it is difficult to quantitatively assess the impact of social media activities on business growth. It can be cumbersome to measure a return on investment, so many do not go through the process.

Digital and social network ad spending in the Middle East and North Africa region is below the global average and significantly lower than other parts of the world such as North America and Europe. It can therefore be said that GCC businesses have not fully realised the potential of social media, despite rapidly growing MENA expenditure.

Businesses in the region have, however, recognised the importance of engaging with their customer base to improve both their reach and operational efficiency.

With penetration figures continuing to rise, and social platforms becoming increasingly prevalent in every aspect of our lives, customer engagement and ad spending is sure to grow in response.

So while GCC businesses might not be leveraging social media to its fullest potential, they are fast making up ground and we can expect much more activity in the months ahead.

The article originally appeared in Gulf Business.

Tags:  GCC, Sector, Social Media

 Current rating: 0 (3 ratings)

KSA Residential Real Estate - Transactions Review (Q3 2015)

Date : 30/11/2015
Author:  Marmore MENA

During the past decade, Saudi Arabia has witnessed rapid economic development, attributable to elevated oil production and prices, vigorous private sector activity and strong government spending on infrastructure, health, and education. The nominal GDP of KSA grew from USD 754.6bn in 2013 to USD 761.9bn in 2014, and is projected to reach USD 791.6bn in 2016. High population growth coupled with rise in per capita income has fuelled the demand for residential units in the Kingdom, especially in Riyadh and Jeddah. Government’s focus has shifted towards the housing shortage in the country, as a result of the increasing growth to the population.

Due to this, strong supply is expected from projects undertaken by the local government agencies. According to Marmore’s report on KSA Residential Real Estate, The Ministry of Housing is developing 15,000 units (handover in 2017) and 15,500 more units being planned. The Ministry of Housing is developing its first project in Riyadh, which includes 675 apartments and 2,200 land plots, which is expected to increase the supply of affordable housing, as a large proportion of the population still does not own a house in KSA. But, demand for residential real estate is expected to be relatively low due to the new mortgage policy, which has reduced the amount of loan permitted on a property. Increasing land prices, lack of construction finance and availability of land, constrain supply especially in affordable housing and middle-income housing segments. As a result a significant percentage of middle-income households choose to rent rather than purchase property. On the other hand, rising income levels and changing lifestyles has led to increase in supply of luxury high-rise residential units, with greater focus on “modern luxury”. But the combination of low interest rates and continued fiscal stimulus has raised concerns of potential asset bubbles, especially in the property markets, with the bank lending to real estate increasing by 31 per cent in 2014.

Value of construction contracts awarded in the first half of 2015 stood at USD 37bn, and despite lower oil price the contracts were awarded at a faster pace in 2015, compared to 2014. Residential real estate, roads, power and healthcare were the primary sectors accounting for close to two-thirds of the total awarded contracts, while Riyadh region captured the lion’s share of awarded contracts. Construction activity also seems to have peaked, with the demand for cement rising at double digits over the last five years.

Real Estate Transactions

In Riyadh, the total value of residential transaction appear to have experienced a YoY decline of around 32.5% in Q3 2015, and a QoQ decline of 17 per cent. A similar pattern is seen in the total number of residential deals, where a 8 per cent YoY decline was recorded for Q3 2015, alongside a QoQ decline of 10.5 per cent. Similarly, in Makkah the number of residential transactions declined YoY by 24 per cent, and QoQ by 25 per cent, whereas the value of residential transactions declined 27.4 per cent YoY and 50.3 per cent QoQ in Q3 2015.

The number of transactions continued to decline due to the new mortgage law, which limits the maximum loan amount to 70 per cent of the property value. Average price per sq m experienced quarterly decline in all three major cities; average price per sqm for land in Riyadh declined 27 per cent YoY, followed by decline of 25 per cent in Jeddah.

These declines accompany a decline in total number of transactions indicating that the sharp drop in recorded prices is not sustainable and are set to adjust after the bottleneck clears, which can only be fueled by liquidity, in the form of credit availability, and a rise in affordability. Only then will the market adjust to fair and long term sustainable values with less volatility. 

Figure: Number and value of residential real estate transactions in Riyadh from July 2010 to 2015-YTD
Source: Ministry of Justice, Marmore Research

Figure: Number and value of residential real estate transactions in Makkah (Jeddah) from July 2010 to 2015-YTD

Source: Ministry of Justice, Marmore Research
Published by: Marmore MENA

Tags:  KSA, Real Estate, Residential, Sector

 Current rating: 0 (3 ratings)

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