Navigating thenew retail realityViews of Middle Eastern Retail CEOs
ContentsOnline retailgathers pace6What’strending?10Macroinfluences133
SurveymethodologyIn 2018 and 2019, PwC Middle East, in associationwith The Retail Leaders Circle conducted 10interviews with Middle Eastern retail CEOs to gaintheir perspectives on the market and their outlookfor the year ahead. We interviewed a mix of retailers,online players and mall operators.We combined the views of our retail CEOs with whatwe are hearing from our recent 22nd Annual GlobalCEO Survey and the 22nd Annual CEO Survey Middle East Findings. For ease of navigating thisdocument, we will refer to the CEOs interviewed asretail CEOs.4
ForewordChange is the one constant for retail CEOs in theMiddle East. Like retail leaders across the world,they must keep pace with new technology that ischanging the way people consume products andservices. But in the region, the changes go farbeyond the disruption of online retailing: consumersare more price sensitive, they are less brand loyaland economies are reforming.Despite the breadth of their experience and theproducts they sell, the retail CEOs interviewed forthis survey all identified very similar concerns: first,how to develop the agility to respond quickly tomarket changes and new customer demands;second, how to attract and retain talent; and third,how to keep up with the pace of advances in digitaltechnology, all against the backdrop of macrostability in the region.Almost all of the retail CEOs we spoke to haveexperienced a softer market in recent times andmost said they were targeting low single-digit growththis year, at best. While this would be consideredvery acceptable in mature markets, it’s a far cry fromthe region’s double-digit growth of years gone by.list of planned activities to drive profitability in thenext 12 months.The retail CEOs we spoke to are similarly focusedon streamlining costs, however they also identifiedexpanding areas giving them plenty to be optimisticabout. The beauty sector, for example, continues toexperience phenomenal growth, helped by socialmedia influencers such as Dubai-based HudaKattan, who has more than 33m Instagramfollowers.One online retail CEO we spoke to said 2018/19would mark the ‘coming of age’ for online retail in theMiddle East and expects e-commerce to account forclose to 40% of the market in the future. This view isfurther supported by Amazon’s recentannouncement to create a Middle East marketplace.Our report sets out the views of retail CEOs acrossthree broad categories: technology, changingconsumer behaviour and macro influences. Wewould like to thank our contributors for theirinformative responses and we hope you enjoy theinsights they provide.Some believe the sector is in decline: macro issuessuch as oil prices and geopolitical instability havecreated unpredictability, which has had a directimpact on retailers.According to PwC’s recently launched 22nd CEOSurvey - Middle East Findings, 28% of Middle EastCEOs across all sectors believe the global economywill improve over the next year – a decline from 52%in the prior year. This cautious outlook is reflected inthe fact that more than two-thirds (68%) of regionalCEOs put operational efficiencies at the top of theirNorma TakiConsumer Markets LeaderPwC Middle EastPanos LinardosExective DirectorRetail Leaders Circle5
Online retail gathers paceIn the Middle East, online retail still accounts for asmaller share of the market, at an estimated 2-3%compared with 10-15% in developed westerneconomies – yet that share is growing quickly. Our2018 Middle East Total Retail consumer survey forexample, found that 53% of respondents now shopwith Amazon, up 4% since 2016. Using the site alsoinfluences customers broader shopping habits:45% start their product search on Amazon, and41% use it to check prices.Demographics in the region also support thegrowth of online: 60% of the population in theMiddle East and North Africa (MENA) is aged under301 and this young population is eagerly adoptingnew technology. In the Gulf Cooperation Council(GCC), smartphone penetration was at 77%2 in2018, according to the mobile-phone industry bodyGSMA.Online retail growth is also being boosted by globale-commerce giants competing for shoppers’attention and spending. Amazon bought Souq.comin 2017 to become the biggest e-commerceplatform in the region at that time, and its recentannouncement to launch a new marketplace herewill no doubt ramp up the level of onlinecompetition.Noon.com, a local online retail start-up backed bySaudi Arabia’s sovereign wealth fund, haspartnered with eBay this year and offers a platformfor local and international franchise brands to sellonline without them having to invest in their owne-commerce presence in the region.12Creating a multi channel experience that includesonline is a priority for all the retail CEOs we spoke to.They are committed to continuous investment in theirdigital channels; this investment should not onlyprovide another way to reach consumers, it shouldbuild on the experiences retailers provide to theircustomers.Mumzworld is a growing Middle East online-onlyretailer that has built its business by providing a fullrange of products for mothers and babies, some notavailable anywhere else in the region, at competitiveprices. Its website also hosts an online communitywhere parents can come together to share theirexperiences, building a different kind of customerrelationship. This year the company aims to expandits online customer community and to focus onoffering the best value while customers remain pricesensitive.Noon.com offer aplatform to sellonline for localand internationalbrands that donot have theirown e-commercepresence in theregionInternational Monetary Fund - Opportunity for All, Promoting Growth and Inclusiveness in the Middle East and North AfricaGSMA - The Mobile Economy, Middle East and North Africa 20186
Mumzworld hasbecome an onlineextension of amother’s life in theMiddle East, formothers from diversedemographics andwith varyingparentingapproachesMona AtayaCEO, Mumzworld7
Key issues retail CEOs identified around technological changeChallenges around the lack of digital talent in the market, including recruitmentof people with data analytics and artificial intelligence skills. This is part of abroader issue in the region with more than a quarter of Middle Eastern CEOsacross all sectors believe hiring outside of their industry is a potential solution toaddress the skills gap.Delivery and logistics continues to be a challenge for some retailers. Whileservice is improving, change is happening slowly. Same-day delivery is no longersomething that can be ignored as some retailers are delivering orders purchasedonline within 2-4 hours. We are also seeing some retailers investing in locallogistics firms to improve their customer journey and create a competitiveadvantage.Retailers urgently need to pursue technological solutions to allow consumersquick and easy return options for unwanted goods bought online.Managing stock and the volume of products to buy is a challenge when anexcess of supply is available online.Online copycats: replica items or designs are being sold online for a fraction ofthe price, creating price wars and undermining quality.Customers seeking greater value are opting to use delivery platforms such asAramex’s ‘shop and ship’ to purchase the same item outside of the Middle Eastmore cheaply. eeping pace with changing demands: mobile access to online informationKsuch as new product offerings, product reviews and price comparison sitescontinue to influence customers’ buying decisions and retailers need to be ontheir toes, monitoring these trends to stay relevant.8
What’s trending?Hybrid retail has created an empoweredconsumer: they know what they want, where theycan get it and how much they can get it for. As aresult, loyalty is diminishing, making it moredifficult and somewhat expensive to retaincustomers. Value is also becoming an incrediblyimportant trend in the region.Notable growth areas in the Middle East,according to the retail CEOs surveyed, includeexpansion in the beauty sector, driven by the eraof the social-media influencer, ‘ath-leisure’(wearing workout clothes outside the gym) andhealthy eating, spurred by millennial interest inwellness.How are regional retail CEOs responding to thesechanges? One answer is to create a more vibrantexperience within physical stores. ChalhoubGroup, for example, is working to reduce ‘painpoints’, such as arriving at a store and findingproducts out of stock, by focusing on the hybridjourney – i.e. making it simple for people to orderor reserve a product online and collect it in-store.The company’s Greenhouse acceleratorprogramme is an opportunity to supportentrepreneurship and answer the retail challengesby bringing tech solutions to the brands.Another trend having an impact is Black Fridaydiscounting. The November sales event, whichbegan in the US, is becoming more and morepopular with Middle East consumers. Mumzworldsaid it had its best week of the year in the BlackFriday period, with revenue growth five timeshigher than the year before. Yet the event iscreating unpredictability for some retailers asconsumers tend to hold off spending until theysee what mega discounts or promotions are onoffer, resulting in an knock on effect to Decembersales.Our 2019 Global Consumer Insights Survey, to bepublished in March 2019, highlights the need forcompanies to focus on “return on experience”(ROX) as well as the longstanding measure ofreturn on investment (ROI). The experiencecustomers have in a store or using the company’swebsite, and the feedback they share online, nowaffects the buying decisions of all its otherpotential customers too. Some 32% of surveyrespondents said they bought a product becauseof positive reviews on social media.Building a sustainable business for the future alsomeans prudence, according to most of the retailCEOs interviewed. There is a need to focus oncash flows and optimise costs – one retailer weinterviewed has opened a shared service centrein Jordan to manage its back-office and staffcosts. With few stores showing like-for-like growthin revenue, some retailers are looking into newmarkets and new investment opportunitiesoutside the region to help them continue toexpand their portfolio.10
The key learning isthat bricks-andmortar is still verystrong in the region– the brands thatfocus on customerexperience coupledwith newness andinnovation inproducts andservices will alwayswinHisham Al AmoudiCEO, KOJ Group11
Other trends impacting retail CEOsThe retail market in the Middle East is heavilyreliant on the franchisee model, however asthe market matures the joint venture modelmay become a more attractive option. Oneretail CEO said the shared risk allows bothparties to have more control of the businesswhile continuing to invest and grow in theregion.Food is becoming an intrinsic part of people’sexperience in malls and good restaurantsare a reason to pick one over another. Mallsas well as individual stores must offer acomplete shopping experience, not just aplace to shop and escape the heat.Smaller ‘community’ malls are becomingincreasingly popular as places to buygroceries, have lunch, go to the pharmacyand buy a child’s birthday present, all underone roof.Traditional loyalty cards are becoming lessrelevant – instead, retail CEOs are seeingloyalty to trends rather than brands. Thatsaid, having exclusive access to privateevents and discounts remain attractive tobricks-and-mortar consumers in the region.Some retailers, such as Noon.com with theintroduction of Noon East, are investing inprivate label and white labelling to helpdeliver better margins in a more pricesensitive market.12
Macro influencesEconomic and social reforms in the Middle Eastare “moving at an unprecedented pace”, as ourGlobal CEO Survey notes. Retailers have alsoweathered the impact of an oil price slump andnow partial recovery, and geopolitical threats inparts of the region. These macro factorscontribute to the following issues highlighted bythe retail CEOs in our survey:TaxThe UAE and KSA both introduced VAT at 5% forthe first time on January 1, 2018; Bahrain did soon January 1 this year, with Qatar and Oman dueto follow. According to the latest Middle East CEOSurvey, the number of CEOs in the regionconcerned about increasing tax burdens fell to55% from 85% the previous year. For the retailerswe surveyed, they acknowledge it is a cost theysimply have to accept – some absorbed it at thebeginning while others compensated with costbenefits from reorganising their supply chain.However, they all acknowledged its direct impacton consumers’ level of disposable income.Talent‘Saudization’, the policy of setting a legal limit onthe number of foreign workers employed in KSAcompanies, was a rapid change that continues tochallenge the retail sector, which employs manyforeign nationals. But some have taken it in theirstride – Saudi retailer KOJ Group, which hasbrands such as Nayomi, The Body Shop, Mikyajyand Early Learning Centre in its portfolio, hasinvested in Saudi Arabia over the past 10 yearsand already has a programme for hiring andtraining local people to work in its stores there.Beyond the unique circumstances in the Kingdomof Saudi Arabia, across the region all ourrespondents placed a high value on recruitingdigitally oriented candidates. Data analysis skills,to glean insights into customer shoppingbehaviours from the millions of transactionscarried out each year, were particularlymentioned.13
PwC Middle East 12No two assets are equal. TheDubai mall is a place like noother. It’s not just a mall, it’s adestination that providesexperiences for everyonewhether it be diningoverlooking The DubaiFountains or shopping in ournewly extended FashionAvenue. At Emaar Malls, wefocus first and foremost on thecustomer experience and weare continuously evolving andupgrading our proposition tobring the most compellingexperiences to our customersPatrick Bousquet-ChavanneCEO, Emaar Malls14
Rent pricesMost of the UAE retailers we spoke to agreed thatmall operators need to look carefully at rentalprices, as it was felt current operating models arenot viable because rents are too high. One retailCEO said, “The need to continue to open severalstores in every ‘new’ mall has tapered downmaterially.” With the continued development ofnew malls, retailers can be choosy with theirinvestments and decide where they think they willsee the greatest footfall.One retailer we spoke to said that given themacro environment and continued onlinepressure, landlords are working with retailers,offering incentives to entice certain brands in tomalls to maximise store space and occupancyrates.However, market-leading mall operators such asEmaar continue to grow their gross leasable areaand are confident of forward demand for qualityassets. Forward rental costs have increasedhistorically based on revenue growth and inflationand other local government costs. Now, everyoneis looking at productivity per square metre andwhile historical rents may not be sustainable asthe macro-economic context has changed, malloperators believe, in general, rents are fairlypriced at around 15-20%. However, this dependsentirely on the asset age, location or experienceprovided - and that is what retailers need toconsider.15
Key priorities for Middle East retail CEOs16Digital88%Cost optimisation and restructuring50%Talent and training50%Product offerings13%VAT13%Acquisitions13%Growth and franchises13%
ConclusionThe three top priorities for the retailCEOs in our survey are digital (88%),followed by cost optimisation andrestructuring (50%), then talent andtraining (50%).As one retail CEO highlighted, “competition iscoming from everywhere” – the region’s retailersare now battling global e-commerce sites, socialsellers and influencers, as well as rival stores, towin sales and brand loyalty. As a result, there isno five-year plan, companies must be continuallyready to respond to change.Better last-mile logistics to meet customerdemand for fast, flexible deliveries to (andreturns from) a convenient location at areasonable price is also a crucial part ofbroadening e-commerce in the region. PwC’s2018 Global Consumer Insights Surveyhighlights approaches taken in more matureonline shopping markets, such as delivery bydrone to remote parts of the UK or packagecollection from lockers in Germany. Amazon haseven trialled enabling delivery people to accesscustomers’ homes when they are out, using asmart lock and camera to leave the packagesecurely inside.Retail CEOs in the region are very aware thatdigital transformation requires new kinds of talent– traditional bricks-and-mortar retailers and malloperators we spoke to have hired data scientistsskilled in gathering and analysing the vastamount of data generated by sales online (andoffline) in order to offer the most personalisedexperience and best value to customers.Following several years of a tough macroeconomic environment in the region, retailers arealso scrutinising every opportunity closely andtrying to keep the organisation as lean aspossible. “We are choosing our battles well andwe’re not scared to close down a store [which isnot profitable enough],” one retail CEO told us.The response to our retail CEO survey makesclear that Middle Eastern retailers want to buildsustainable businesses for the future; this meansretailers embracing the hybrid retail model byproviding a fully integrated and seamlessexperience through all touchpoints of theconsumer journey.17
Contact usNorma TakiConsumer Markets LeaderPwC Middle Eastnorma.firstname.lastname@example.orgPanos LinardosExecutive DirectorNew York Institute of Management - Retail Leaders Circlepanos.email@example.com
www.pwc.com/me/retailceoAt PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 158 countries with over 250,000 peoplewho are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us atwww.pwc.com.Established in the Middle East for 40 years, PwC has 22 offices across 12 countries in the region with around 5,200 people. (www.pwc.com/me).PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. 2019 PwC. All rights reservedCDC 1768 032019
Navigating the new retail reality Views of Middle Eastern Retail CEOs . 2. Contents What’s trending? Online retail gathers pace 6 10 13 Macro influences 3. In 2018 and 2019, PwC Middle East, in association with The Retail Leaders Circle conducted 10 interviews with Middle Eastern retail CEOs to gain
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