Retail Top Issues

8/13/2019 Retail Top Issues

1/26

1

Over the first three months of 2011, Acuity Middle East interviewed 22 prominent UAE retailCEOs and MDs to get their thoughts on the key issues facing UAE retailers this year. Their

concerns, strategic priorities, and Acuitys recommendations are synthesized in this whitepaper.

UAE Retail Imperatives 2011

Q3 2011For restricted release ONLY

The big issues keeping UAE retail executives up atnight and how to put them to bed


2/26

2

In this thought piece, Acuity Middle Eastoutlines the top 10 issues facing UAEretailers in 2011 as defined by the retailcommunity and offers recommendationson ways to manage them.

By outlining industry concerns, Acuity alsohopes to direct the discussion of policymakers both in Dubai and Abu Dhabi, andhelp shape agendas at regional fora andwithin industry associations.

Introduction

It is no secret that the UAE retailenvironment has changed significantly since2008. In the latter weeks of 2009 leadingretailers made this explicit; well regardedCo-CEO Patrick Chalhoub stated publicly inDecember 09 that the market hadtransitioned from a mood of [growth] and

spending to a totally different consolidationphase.

Fifteen months on, these sentiments remaintrue. The prosaic stack it high, sell it low ethos is now largely confined to thediscounters, struggling line-stores andmass-market FMCG operators.

Market share and profitability growth, ratherthan the top line, are en vogue at board-level. Retailers now struggle with a broaderarray of social, economic and technologicalquestions all linked intrinsically to ranging,pricing architectures marketing initiatives,

and service levels and are commissioningsignificantly more research, both internallyand externally, as a result.

Richard Adams (BA/MA Cantab)Consultant, Acuity Middle East


3/26

3

1. Rationalizing store portfolios

Commission cross-mall industry benchmarkdata which help you identify strategic pointsof sale.

2. Optimizing mall mixes and

agreeing sustainable rentsShare market data with operators andschedule formal stakeholder researchprograms to drive appropriate terms.

3. Attracting the right staff

Use the UAEs stability to provide career

opportunities for well trained personnel fromneighbouring countries.

4. Dealing with commodity priceinflation

Bolster your bottom line through selectiveprice increases, logistics enhancements and

lean operating structures.

5. Managing the rise of the mono-brand retailer

Identify and support third party retailers whotake your products to new demographics.

6. Dealing with currencyfluctuations

Sit down with principals and agree annual orbi-annual pricing reviews within re-negotiated pricing bands.

7. Fully utilizing retail technologyConsider rolling out wireless point of saleterminals and smart CRM and advancedbusiness analytics software.

8. Leveraging the Internet

Strike multi-channel option clauses with

suppliers which allow for an onlinepresence.

9. Improving the DSS

Lobby to transform the DSS into an indoorentertainment festival.

10. Liberalizing GCC tradeEncourage policy makers to turn tointernational best practice to acceleratetrade liberalization and maximize inwardinvestment.

ExecutiveSummary: 10issues facingretail CEOsand 10 action

pointsrecommendedby Acuity


4/26

4

Rationalizing store portfolios1Retailers need to identify strategic points of sale. Spreading resources too thin creates a majormanagement challenge.

~Joe Nahas, Brand Director, Montblanc Middle East

All surveyed retailers felt that identifying strategic points of sale, cutting underperformingstores, and opening new stores in line with market demand were key priorities.


5/26

5

Retailers also need to open new storesand plan for growth; and the questionremains: where? While the bigger [UAE]malls are [generally] doing well not all ofthe small to medium locations aredestined to be left behind.

~ Stewart Gissing, Regional Director,

. Colliers Middle East

Ultimately, the retail industry needs cross-mall industry benchmark data which, byproviding a more transparent competitivecontext, facilitates retailers search forstrategic points of sale and helps malloperators optimize mixes and offerings. A

more structured retail sector wouldadvance stated Government policyobjectives by increasing tourist inflow,promoting a more diversified and broaderrevenue base, and aligning retail offeringsmore closely with community needs.Based on discussions, the follow outputs

would be of value to industry players:

Recommendations:

The necessary culling of stores is alreadyhappening in earnest. It needs to continue.Three types of stores should be targeted:the recently launched store which hasproduct offerings and price points ill-suited

to local catchment wants; the over-sizedunit with high rental rates and poorrevenue generation per sq foot; and theold store located in tired malls withchanging catchment demographics.

Retailers should scrutinize Dubai andSharjah operations particularly closely.

Areas like Deira have experiencedsignificant changes in catchmentdemographics and competitive dynamics,while districts like Sharjahs Al Mamzar,contain malls which, to the naked eye atleast, are approaching, or have reached, acritical mass of hoardings. Many Sharjah

developers have been unwilling to acceptthat the competitive environment haschanged and have resisted dropping rentsin peripheral malls, which has produced adomino effect where hoardings havegathered momentum and malls have lostretailers and foot traffic.

1

1. total mall spend/footfall figures (byemirate) and mall share ofspend/footfall;

2. shopper dynamics/profiles (by mall);3. inter-mall catchment definitions; &4. a comparative mall satisfaction index.


6/26

6

2Optimizing mall mixes and agreeing sustainable rental rates

Great malls work because they are the result of effective collaboration between professional landlordsand their tenants. The two are inter-dependent on each other for success, and getting the right mix inmall is key because that is what will drive the customer into the mall... Sadly, there are too manyexamples in this region where pursuit of the highest rent in the short term does not support the long-termperformance of the mall.

~ Mohammed Alshaya, Executive Chairman, Alshaya Group

Leasing rates are the second most significant issue reported by retailers and the key priority formall operators. They are also the major factor inhibiting mall mix optimization.


7/26

7

Some operators have offered (mainly toanchors, majors, and mini-majors)advantageous leases within favourablelocations, rent free periods, and even profitsharing arrangements to lock in importantcontracts.

However, for many of the smaller players,operators and developers have not beenwilling to re-negotiate rental contractsAnnual rental increases have ceased but,for line shops, rents can still be doublewhat is sustainable.

~ Keith Flanagan, General Manager, AlGhurair Retail

UAE property developers have historicallychased the highest rents and this hasproduced some perverse retail mixes andincredible leasing contracts. Retailershave compounded mall operatorsproblems. In the heady days of 2007 and2008, many doors were opened which

were completely unjustified.

While operators are selectively droppingrates, and while retailers are culling stores,much still needs to be done to refine mallmixes and establish mutually acceptablerental rates. With retailers on tightmargins, mall operators facing long returncycles and tight credit conditions, andboth seeking alpha, co-operation is key.

2


8/26

8

The success of the retailer is key tothe mall. The retailers need to knowwho is in the malls while the malloperators need to know who is in theshops. Some data is made available bya limited set of malls. At the momentthe mentality is to go with who paysmore and not think more strategically.This hurts the retailer and sometenants suffer due to miss-management.

~ Mohammed Al Fahim, Group CEO,

Paris Gallery

Recommendation:

Once malls identify an optimum mix,parties should look to collaborate to keepthe right retailers in the right locations atsustainable rental rates. Three elementswill help parties reach this end point:

1. Mall operators and retailers should startsharing data;

2. Operators should consider conducting,internally or externally, structuredstakeholder research;

3. Retailers should use structuredstakeholder programs to outline tooperators areas for potential mallimprovement across leasing, marketing,management/operations functions andprovide guidance on relative store sales,profitability, transaction values, traffic etc.

2


9/26

9

Attracting the right staff3The freedom to change your employer after two years will enhance competitiveness and movementwithin the [UAE] jobs market

~ Jackie Wilks, Group Services Director, IIR Middle East


10/26

10

Meanwhile, attracting, retaining andnurturing Emirati talent remains a seriousstructural issue for the retail sector. Lownational participation rates are typicalacross retailers, particularly in customer-facing shop floor functions.

I would love our workforce to be primarilymade up from local people. Sadly, in manyof the countries we operate, nationalsremain hesitant about choosing a career inthe private sector. Some believe thatgovernment roles are less demanding andoffer a more secure option. For others,there is a sense that serving others isdemeaning and wrong.

~ Mohammed Alshaya, ExecutiveChairman, Alshaya Group

Retailers broadly accept that the statusquo is not in the national interest but

largely feel that it is up to Government toprovide the impetus for change.

Revised UAE labour laws haveaccentuated staff poaching problemsand recruitment is seen as a seriousissue for many retailers

Under the revised labour law, which cameinto effect on 1 January 2011, once an

employee completes a two year workingperiod, employers have no right to requireemployees to stay on the job or enforceany type of six month ban on UAEemployment by refusing to provide a noobjections certificate.

Workers who end their job contracts

legally and complete at least two years ofservice [can] get a labour permitoutright.

Humaid Bin Deemas, Acting Director-General , UAE Ministry of Labour

In the short term, revised laws have

resulted in a wave of poaching. Numerouswell trained staff have reportedly moved,largely from value and mid-tier retailers, tobetter paying jobs higher up the retailvalue-chain and into other serviceindustries like hospitality.

3


11/26

11

Recommendation

Regulatory change has heightened shortterm staff churn and shortenedrecruitment cycles, especially amongplayers with low employee engagementand poor remuneration packages.

In the interim, the most savvy retailers aremaking use of regional instability to poachwell trained, often bi-lingual(Arabic/English), employees fromneighbouring states. Tunisia, Syria andeven Egypt are fertile recruiting grounds

3

Solving issues around Emiratization issignificantly more complex. Somecommentators urge greater restrictions onforeign labour mobility. The danger of thisapproach is that it could reduce thecompetitive advantage of the UAE retailsector. Given the weight of retailing in the

UAE economy, anything that retardedgrowth in the sector would impact onGovernment revenue and limit theGovernment's capacity to invest in humancapital development over the mediumterm.

Subsidizing private sector jobs is analternate approach and, if combined withchanges to public sector incentives, couldproduce a shift in national employment.Emiratization is a prize worth seeking andmost retailers see less draconianapproaches as the way forward.


12/26

12

The unknown [future cotton prices] has bread a psychology of blind panic in the market. You are gettingthe whole supply chain elevating prices more than you would see based on simple economics.

~Robert Antoshak, Managing Director Olah

Dealing with commodity price inflation4


13/26

13

Most retailers realize that, barringcalamity in the world economy,commodity prices are generally set torise further in 2011

While price inflation in the UAE last yearwas mainly due to increases in transport

and logistics costs associated with risingfuel bills, this year we expect high oil andelevated cotton and natural commodityprices generally to adversely affectretailers.

Recommendation

The biggest retailers are in a position toconsolidate non-oil suppliers to improvepurchasing power and leverage rawmaterial buying power.

For the rest, the focus should be onsupporting the bottom line though very

selective price increases, logisticsenhancements and the maintenance oflean operating structures designed tosqueeze out costs.

4


14/26

14

Managing the rise of the mono-brand retailer5There is no other way to express the brand [than] in a boutique. You cannot do it with a shelf.

~ George Kern, CEO, IWC Schaffhausen

(Quoted in Executive Magazine, 14 December 2010)


15/26

15

Recommendation

Roll out mono-brand stores but alsoidentify and work closely with strategicthird party retailers who can bring yourproducts to a different marketdemographic.

The logic behind mono-brand roll out iscompelling. While opening mono-brandboutiques widens a manufacturers costbase, company owned stores offer greatercontrol not least over product pricing anddisplay and enable manufactures toaccess direct feedback from customers.

Flagship stores also raise brand profile.

However, department stores often have adifferent portfolio of customers to mono-brand retailers. By going in to departmentstores, mono-brands can get extra share.It is not just a case of cannibalization.

The businesses should grow side byside.

~ Mohammed Al Fahim, Group CEO,Paris Gallery

5

The rise of the mono-brand retailer is adivisive issue with many mono-brandretailers viewed as threats by thirdparty retailers.

The economic downturn strained relationsbetween brand owners and retailers. Many

owners found that sales through their ownstores held up better than sales thoughexternal retailers. To a degree, this wasbecause third party retailers wereoverstocked and discounted heavily toclear inventories. This antagonizedmanufactures who saw this as branddamaging and accelerated own-store roll

out as a result.

Department stores (and particularlyfashion heavy department stores) havebeen the major casualty. With UAEleisure-lifestyle malls already generatingfootfall and providing almost limitless

choice under one roof, it isunderstandable why roll-out has beenparticularly pronounced here.


16/26

16

Dealing with currency fluctuations6Historically Middle East operators were invoiced in the currency of origin. Due to the volatility ofexchange rates [many] agreed with the brands to invoice in US$ to allow margin maintenance. Duringthe past two years brands have increased COGs in some cases two or three times a year and [in]certain categories by up to 25% in one move.

~ Anonymous

(Quoted in The Moodie Report, 12 April 2009)


17/26

17

Recommendations

Retailers should sit down with principalsand agree annual or bi-annual pricingreviews within re-negotiated pricing bands.Given the state of the dollar, now is thetime to have these discussions.

To protect brand capital, the morestrategic and well positioned retailersresisted the urge to make significant pricealterations in 2009 and 2010 while themore sanguine suppliers kept cost ofgoods within broadly agreed boundaries.This remains the ideal scenario.

However, having in-built contractualflexibility is critical commercially andfrom a relationship perspective. While theglobal footprint of most major brandowners provides them with an effectivehedge against currency fluctuation, localand regional retail partners are more at the

mercy of markets. By defining the extentof potential price flexibility with partnersand setting fixed dates for reviews,franchise partners protect their interestwhilst reducing the potential for emotiveand destructive negotiations.

Large currency swings and volatilecurrency markets have hurt a numberof UAE retailers and remain a keycause for concern.

Over the last two and a half years the USdollar has twice hit or approached 25 yearlows to rebound, months later, to multi-year highs against a trade weighted basketof currencies.

Currently US dollar weakness is providingwelcome relief to retailers but how longthis will continue remains moot. Arguably,US inflationary pressure, Fed-level

discussions on the merits of continuedquantitative easing, and the nascent signsof recovery in US non-farm payroll figuresshould result in some dollar buying,particularly against the Euro (givenausterity measures being rolled out in non-core Euro states).

Any dollar strength would once more hurtUAE retailers with tourist and, to a lesserextent, domestic spend being crimped much as it was between Q4 2008 and Q12009 and again in Q2 2010.

6


18/26

18

Fully utilizing retail technology7Cost and operation efficiency relieves pressure on margins while new technology options can bedeployed to enhance customer experience leading to revenue generating opportunities and improvedcustomer loyalty.

~Kevin White, Research, Advisory & Consulting Director Technology, Ovum Dubai


19/26

19

The technology concerns of UAE retailersare manifold. Retailers fell into three maingroups:

1. Those who feel they are not spendingenough on technology and are being leftbehind;2. Those who worry that existing systemsare not being utilized effectively; and3. Those who are looking for new ways toleverage technology but are unsure whichsystems to use.

Recommendations

Because Groups 1 and 2 predominate,

differentiating by effective use of IT is asensible option for Group 3. Only about 1per cent of total retailer spend in the UAEis devoted to IT systems so companieswilling to spend wisely can developsignificant competitive advantage in thisspace.

Ultimately, serving front line staff is thekey; technology should be focused onselling, not on process. Recommendedbusiness oriented tools include:

7

1. Wireless point-of-sale (POS)terminals

Once wireless POS terminals are rolledout, retailers can reconfigure store layoutswithout rewiring. New check-stands can beconnected to store controllers to reduce

queue times at peek periods.

2. Smart CRM

A range of systems are on offer. All allowretailers to capture data, personalizecustomer response and identify purchasepatterns. The best allow sales personnel

to interact with clients by showingpurchase history and likely furtherpurchases.

3. Business Analytics Software

Most scale retailers already use business

analytics software to understandprofitability at the SKU level. Moreadvanced systems integrate logisticssystems and business analytics softwareto help retailers across the operationalspectrum.


20/26

20

Leveraging the Internet8Retailers perceive e-commerce as a threat but e-retail is not some imagined phenomenon. We havemoved a very substantial number of orders via Shop and Ship.

~ Hassan Mikail, Manager E-Commerce Services, Aramex


21/26

21

Recommendations

1. Because so many customers now cometo stores with product knowledge superiorto sales staffs for particular products,sales staff (and luxury-brand sales staff inparticular) need greater product

knowledge, and need to be trained in theart of in-store theatre. The experientialaspects of in-store sales have never beenmore critical.

2. Retailers should consider utilizing socialmedia sites and incorporating internet-based word of mouth marketing intocampaigns. At the moment, traditionalmarket activities predominate.

3. Retailers should look to strike multi-channel option clauses with suppliers.While the bulk of retail sales will continueto be made in traditional stores, required

investment in online channels is limitedrelative to long-term potential gains. Mostretailers already have sufficiently complexsupply chains to handle online retailingand only lack front-end capability.

The Internet is a niche sales channeland an enabler. Both aspects areimportant. Both are currentlyneglected.

Over the last five years there has been asignificant re-alignment of online and

offline. About 9 per cent of UAEconsumers according to Datamonitorfigures now consistently buy online while38% regularly use price comparisonwebsites to find information about productpricing and establish formulationcredentials.

Nevertheless, retailer attitudes towardsonline expansion have been cautious.Most retailers still favour steeringcustomers towards stores where staff canemphasize value credentials over priceand where products can be displayed tofull effect.

While this approach is rational, we feelthere is an underlying missed opportunity:consumers are looking for choice and areincreasingly comfortable buying a broadrange of branded products online.

8


22/26

22

Improving the DSS9The DSS does very little for us. Look at these charts [pulls out charts]; over the DSS period salesremain flat. If authorities look at one thing, they should consider how to improve the DSS.

~ Anonymous, Director of Shopping Centres (24 October, 2010)


23/26

23

Recommendation

Policy makers should consider making theDSS an entertainment festival geared atgetting shoppers from around the regionand beyond into malls.

With the proliferation of large, leisurelifestyle malls in the UAE over the pastdecade, the physical infrastructure existsto provide regional consumers with uniqueexperiences in-doors over the hottestmonths of summer. Operators andretailers are quick to agree that thiscompetitive advantage needs to beleveraged further.

Views on the DSS range markedly butretailers uniformly feel that the DSSneeds re-vamping.

Many retailers point to limited footfall andlow sales volumes as proof positive thatthe Dubai Summer Surprises (DSS)

festival is not working effectively. Themore reflective accept that the DSS hashelped, but not transformed, the summersales period, but acknowledge that thetime for change has come.

Before DSS[s launch] in 1998, [Dubai] insummer was a ghost town. The authorities

deserve much credit as the DSS hashelped Dubai and the UAE. However, theDSS does need to be updated if it is tosucceed, sandwiched [as it is this year]between Ramadan trading hours andschool exams.

~ Eisa Ibrahim, General Manager,Burjuman

9


24/26

24

Liberalizing GCC trade

The GCC countries are desperately in need of removing boarder controls and paring back red tape.. Fororders less than 300 units, it is often cheaper to purchase outside the GCC.

~Anonymous

10


25/26

25

10

of paperwork are all challenges we face ona constant basis which consume time andenergy.

~ Mohammed Alshaya, ExecutiveChairman, Alshaya Group

Behind-the-border impediments to tradeare generally seen as the key limitation onintra-GCC trade. Onerous paperwork andrelatively slow processes can reportedlykeep merchandise at dock for days, if notweeks, costing retailers both financiallyand in terms of opportunity cost.

An effective common external tariff isviewed as a policy priority by most seniorregional retailers. Nevertheless, theyaccept the political sensitivities involved inmoving to a more uniform system.

While not a pressing priority, tradeliberalization is strongly supported byretailers.

Senior retailers widely applaud the effortsmade by Government agencies to developthe GCC customs union and accept that

any successful union will take decades tocomplete.

Once a political decision is made,infrastructure must be built beforeregulation can be implemented oneshould not be frustrated this takestime.

~ Mohammed Al Fahim, Group CEO,Paris Gallery

Nevertheless, it is also felt that the GCCunion presently works sub-optimally.

At Alshaya, we have a complex andsophisticated supply chain but for us thechallenge of moving our goods is oftendeeply frustrating. Border controls,licensing restrictions and too many layers


26/26

26

10

actions at the border (e.g. harmonisingtariffs, rules of origin, standards etc;and simplifying customs procedures laws, regulations, administrativeguidelines, single window systems forelectronic lodgement of official papersetc.); and

actions behind-the-border (e.g.harmonising rules on investment;removing obstacles generally to settingup businesses; simplifying legalsystems; making it easier to hireinternational professionals etc.).

Recommendation:

Policymakers should turn to internationalbest practice to accelerate tradeliberalization and harmonization andmaximize inward investment.

The GCC countries and retailersspecifically could benefit substantially fromliberalising restrictions on investment andreducing the layers of paperwork involvedin moving goods around the region.

Intra-GCC trade is still relatively small butit is growing as the focus shifts to energy-

intensive forms of manufacturing, servicesand investment. It follows that barriers toinvestment, whether intra-GCC or to FDI,are self defeating because they impedeservices trade among other things.

A range of countries are giving urgent

consideration to reducing transaction costsacross supply chains. Reflecting theirinterest, APEC has done a great deal ofwork on ways to squeeze cost out ofsupply chains through:

Governments often consider APECmodels as possible starting points indeveloping their own best practicetemplates.

~ Dr. Michael Graham Adams, FormerChief Trade Negotiator, GATT/WTO

See: APEC Model Measures forRTAs/FTAs; 19th APEC MinisterialMeeting, 5/6 September, 2007

Documents

Retail Top Issues