Cash tills ringing

The onslaught of consumer into the region’s shopping malls shows no sign of stopping, writes David Robinson.

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By  David Robinson Published  October 2, 2005

Cash tills ringing|~|51-Mercato-05-pic-200.jpg|~|BOOM TIMES AHEAD: The Middle East is experiencing a massive influx of money in the retail sector tied to the rise in visitors to the region. |~|THE MIDDLE EAST ECONOMY IS to continue soaring as cash-rich customers are set to fuel the retail boom for years to come, according to one of the region’s leading industry analysts. And the region’s shopping malls are bracing themselves for record visitors and profits as they look to expand their retail space to meet the burgeoning demand. The bright outlook for the region is in stark contrast to the US, where high unemployment, coupled with rising fuel costs, is threatening a huge economic slowdown. But according to consumer analysts, AC Nielsen, the roaring retail sector in the Middle East is unlikely to be dented for at least the next three years. “The region is awash with money at the moment and a lot of it comes from Saudi Arabia following the upturn in the price of oil,” says Piyush Mathur, managing director of AC Nielsen in the Middle East. “There has been a substantial switch towards inward investment whereas before a lot of investment was made in the US and Europe. One of the biggest trends within the GCC currently is the growth of modern trade, the top end of the marketplace.” Piyush also says the region is providing excellent property returns. “Another market in which the Middle East is leading the way globally is real estate,” he adds. “We are seeing a very distinct downturn in the UK and Australia and within a year it will be the same in the US. “Although the property market in the UAE is aligned with the global market, it can quite clearly stand alone. “Some cynics say the property boom in Dubai has shot up too quickly, but we’re of the opinion that there was a pent up demand. Clearly at some stage in the future the growth will slow, but it certainly won’t slide in the near-future.” Piyush said that despite the liquid-conditions, the Middle East industry still had many challenges to face. “Across the GCC, you can easily meet the top-line, the problem is tackling the bottom line,” he adds. “Competition is high, the growth opportunity is there and targeted revenues can be achieved, but the bottom lines are being squeezed and the profit margins are being squeezed. Our indicators are all positive, there is nothing imminent that will hinder the boom, nothing on the radar screens that signifies a downturn in any of the regional economies. “The only area that needs updating impacts the middle-class consumer who is seeing education and rental costs increasing and the price of FMCGs such as coffee, tea, sugar, milk and petrol rising, but the private organisation salaries are not growing at the same proportion. That means living expenses are being cut from savings but that doesn’t seem to affect the GDP growth of the UAE which is 17%.” He adds: “There is lots of growth potential over the next three years as Dubai continues to build its reputation as a global centre.” The bright outlook is in stark contrast to the US, where many analysts believe consumer confidence was sliding, even before Hurricane Katrina slammed into the Gulf Coast last month. Now with unemployment rates racing up in tandem with gasoline prices and real estate markets cooling, many economists fear America is teetering on the edge of a massive spending slowdown. And as the gloomy data continues to confirm the staggering economic costs of the deadliest storm in a generation, the outlook for the US appears bleak. “If things were turning down before Katrina, what’s it going to be like now?” questions Nick Colas, director of research at Rochdale Securities in New York City. “I think we have to be careful about the US consumer and our expectations for the New Year.” Marc Heilweil, manager of the Marathon Value Portfolio, believes US consumers are “on their deathbed,” adding: “Even apart from the price of gas, Katrina may have a psychological impact on the confidence of the American public and its willingness to spend in as free a way as it has.” As the Middle East continues on its spending spree, the latest data on consumer spending in the US shows retail sales fell by 2.1% in August, mainly from a drop in auto sales. And in mid-September, news of a huge jump in first-time jobless claims was released, although an estimated 68,000 out of the 398,000 came from Katrina victims. A surprising plunge in the so-called Philly Fed Index, a report on economic activity in the mid-Atlantic states conducted by the Philadelphia Federal Reserve, was particularly anxiety producing to investors, many of whom sold their shares after the report came out. Temporary weakness would fit into a typical economic pattern whereby when a recovery gets a little long in the tooth, consumption slows temporarily before picking up again, says Dan Boone, portfolio manager of the Calvert Social Investment Equity Fund. If energy prices don’t fall further, Boone admits he’ll feel a bit more apprehensive. Although the price of crude oil retreated from a high of US$70 a barrel immediately after the storm, it jumped by US$2 on September 14, to US$65, sending the benchmark Dow Jones industrial average down more than 50 points that day. “It defies common sense to think the consumer can eat that much of a bounce in gasoline prices and not cut spending in other areas,” Colas says. “You have to sit down and be realistic.” But as America struggles to keep its cash registers ringing, the Middle East has never had it so good. Shopping malls across Dubai are already scrambling to expand space and some even anticipate doubling in size within the next three years to keep up with the surging demand. The recently opened Ibn Battuta mall on Sheikh Zayed road, near Jebel Ali, presently has about 300 stores, spread over 1.2 million square feet. However, mall manager Murray Scanlan says it is “very likely” that Ibn Battuta will have to double in size within the next three years to match the clamour for retail space. “There’s a very good chance there will be expansion in that period and we would expect any plan for redevelopment would double the size of the mall,” he says. “It won’t be a problem. We’re in the middle of the desert, giving us a huge advantage over other malls.” This would take the size of Ibn Battuta to an enormous 2.4 million square feet, encompassing more than 500 retail outlets and stores. At the smaller end of the scale, Lamcy Plaza, the oldest shopping centre in Dubai in a heavily urbanised area close to the Creek, has expansion plans that are equally grand in scope. “When we first built [the mall] seven or eight years ago there was nothing around us, just desert. This place has grown exponentially,” explains Lamcy Plaza general manager Tim Jones. “We are looking at how we can pick up on that, but as space is eaten up there are fewer and fewer possibilities we can examine.” Lamcy Plaza presently takes up about 500,000 square feet holding 150 retailers. About 100,000 people visit the mall a week, amounting to five million a year. One option, the Lamcy group is looking at is building a multi-story car park, of over 800,000 square feet site across the road from the existing site to expand overall capacity. “It’s still difficult to charge for parking in this part of the world, but we’re already short of parking,” adds Jones. “The big problem we have with our existing site is how do you increase car parking? If you don’t increase it, you’re not going to achieve full potential.” Now Jones says his company is looking at building a new mall, with the Lamcy name in the Mirdiff area. “We’ve realised there’s only so much we can do here. It’s a compromise.” Like Lamcy Plaza, the group’s mall in Mirdiff will be open planned — a cross, in Jones’ words, between a department store and shopping mall. Like the existing site, shoppers will be able to move between one shop and another without crossing boundaries, he says, keeping focused on its mid-market section of mall business. The new, as yet unnamed Lamcy mall will lump retailers in the same area of business together to achieve this. The new mall will be double the size of the current one, encompassing about 1 million square feet and have about 250 outlets. It is due to open in a couple of year’s time. In an ideal world, Jones says, the company would like to double their current number of visitors at the new mall, but says, with the advent of so much competition in the opening up in he next few years they are staying realistic. Another option Lamcy is considering is to build on a 1.2 million square-foot area beside the existing site, but again, Dubai’s rapid urban expansion presents many problems. “When we originally got dispensation to build five floors [for the existing mall] the planning regulations were relaxed, but now they are a lot stricter,” explains Jones. “The maximum the authorities will now allow is three floors. The rules were easier and less bureaucratic back then. “It would look strange to build another Lamcy mall beside the existing site if it wasn’t the same height. These are some of the dilemmas we are facing. We are looking at ways of going forward with the Lamcy name, but there are restrictions around here.” Moreover, the cost of land has gone up exponentially. Jones says about two thirds of floor space is leased to retailers in an average mall. “It works on the basis that 65% is usable. The rest is the space taken up by corridors, walkways, atriums, services and storage. “If the parking is going to be a problem, then why not look at an area where we can maximise the Lamcy name, by taking another site offering plenty of parking in a way that won’t hurt the business [at the existing site],” he says. “It’s a moving feast. We could do both, but we might have to go underground to create the parking.” Lamcy Plaza charges an average monthly rent of about 250-275 dirhams per square foot. But some of the newer and bigger malls opening in Dubai are charging between 350-400 dirhams per square foot, he says. An attractive incentive for retailers in anyone’s book. ||**||

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