How retailers in Dubai are adjusting strategies for cautious consumers

While Dubai’s retail space continues to expand and adapt to global trends, recent years have seen some particular external challenges for the local sector. A sustained period of low oil and gas prices, starting in 2014 and continuing into 2018, has impacted sentiment and disposable incomes in many Gulf states, while economic slowdowns in Asia and elsewhere have also hit tourist and expat pockets.

At the same time, the sector has had to absorb the introduction of value-added tax (VAT), which the UAE, along with Saudi Arabia, rolled out in 2018. The combined result of all this has been a notable reduction in consumer spending, with the emirate’s retail sector feeling the chill.

Growing Pains

While Dubai is much less dependent on revenue from the oil and gas sector – about 95% of the economy is not based on oil and gas – the fortunes of the hydrocarbons market still affect it greatly. Dubai is surrounded by economies in which hydrocarbons are a major determinant of growth, and the emirate to a degree relies on the economic health of its neighbours.

While Dubai is much less dependent on revenue from the oil and gas sector – about 95% of the economy is not based on oil and gas – the fortunes of the hydrocarbons market still affect it greatly. To take an example, a recent survey found that 38% of the population of Abu Dhabi – a much more oil and gas-rich economy – travelled to Dubai at least once every three weeks to shop.

The oil price slump began in June 2014, when Brent crude stood at over $110 a barrel, before falling steadily over the following 18 months, eventually bottoming out at under $30 a barrel in January 2016. Prices did begin climbing again after that, but by the end of 2018 they were turning downwards again, hitting $56 in December 2018. The UAE’s economic expansion followed a similar pattern, with real GDP growth at constant market prices falling from 5.1% in 2015, year-on-year, to 0.8% in 2017, with a World Bank estimate of 2% for 2018. Other GCC economies also suffered. The Saudi Arabian, Omani and Kuwaiti economies all shrank in 2017 (by 0.9% for the first two and 3.5% for the latter), while Qatar saw 1.6% growth and Bahrain 3.9% – the highest in the GCC, but still down on the 4.3% seen in 2014. Qatari shoppers were also excluded entirely from Dubai’s retail market after the start of the Saudi Arabia and UAEled blockade on the country, imposed in May 2017.

Meanwhile, spending by tourists from the wider world has also seen some changes. Mastercard’s Destination Cities Index shows that in 2016 shopping accounted for around 31% of all tourist spending in Dubai, with the emirate attracting 14.87m overnight visitors that year. This rose to 15.79m in 2017, around 6.2% growth. Total visitor spend, however, went from $28.5bn to $29.7bn over the same period, or 4.2% growth. Changes in the visitor profile may be partly responsible for this, but global economic uncertainties have also played a part.

Greater Caution

The Mastercard report also showed that in 2017 Dubai still led the world in tourist spend per capita, at $537 a day. By the first half of 2018, however, the UAE was among the slowest growing markets for inbound international visitor spending in the MENA region.

Locals, too, are a lot more careful these days. A survey by McKinsey in the first quarter of 2018 showed that 42% of UAE consumers said they were curbing their expenditures, while 48% said they had delayed purchases. Some 53% also said they were looking for ways to economise, while the same number said they were looking for sales and promotions and 48% said they were looking much more closely at the cost of products. Prices have also been rising. In the first half of 2018 the Dubai Statistics Centre reported the consumer price index was up 1.99% on the first half of 2017 overall, but the hikes in food and beverages (F&B, up 4.72%), clothing and footwear (up 4.67%) and major household appliances (up 12.33%) were all higher.

The restaurants and cafes group – a very important element for a retail sector where mall food halls are a key draw for many consumers – also saw a 5.86% price increase. Some products, such as tobacco (up 73.8%), underwent much larger price rises as a result of the application of both excise tax and VAT. The latter was first introduced on January 1, 2018 at a 5% rate, and applies to food products, electronic and white goods, clothing, and many other retail items. While the rate is low in comparison to many countries, it was the first time such a tax had been introduced in what many consumers had come to see as an entirely tax-free shopping environment. This attitude has heightened VAT’s impact on consumer behaviour. In the third quarter of 2017, for example, there was a marked increase in retail sales of big ticket items, as shoppers made purchases ahead of the introduction of the new tax.

Excise tax, meanwhile, began to be levied from October 1, 2017. The rate is 50% on fizzy drinks and 100% on tobacco products and energy drinks. The latter product is also due to become subject to a digital tax stamp scheme at the start of 2019, aimed at ensuring tax compliance.

Adapt & Survive

All of these factors produced some strong headwinds for the retail sector in 2018. These have been further exacerbated by a heightened supply of retail malls and consequent hikes in competition, exemplified by major price discounting, while e-commerce is also gradually expanding its market share. Some major retail players have therefore posted losses in recent times. Marka, for example, which is in the retail and restaurant business, posted a 20% rise in year-on-year losses in the third quarter of 2018. Others have done better, however, with Majid Al Futtaim, which operates the Carrefour franchise, reporting a 15% revenue increase in the first half of 2018. Nuts-and-bolts outlets such as super- and hypermarkets that offer cheaper clothing and household goods, as well as F&B, therefore continue to be in demand.

Other retailers, however, have been obliged to look for new strategies that take account of greater consumer caution and lower budgets. Discounts have been one of these, with a range of mega-sales and super-sales now characterising the retail year. The emirate has hosted the Dubai Shopping Festival (DSF) since 1996, with a range of discounts, daily car raffles and firework displays running over an entire month, covering the December-January period. The Festival has been extended to five weeks, with its 2018-19 edition kicking off with a 12-hour sale at six large malls, at which certain brands slash prices by up to 90% and stores stay open until 1am.

The DSF has also been joined by other shopping festivals spread across the year. Dubai Summer Surprises runs from July to August, with six weeks of sales, competitions and spend-and-win promotions. GITEX Shopper, meanwhile, has an IT focus. Sales were up 181%, year-on-year, at the 2018 edition, with 125,000 visitors each spending an average Dh2900 ($789). The Dubai Food Festival sees a range of discounts at restaurants and cafes, Q&A sessions with celebrity chefs and cooking demos. In addition, flash sales and promotional campaigns at particular malls, or across particular brands, are increasingly frequent. Tie-ins with other services are also popular. Emirates Skywards, for example, is to partner with Dubai Mall in 2019 to enable consumers to earn air miles when making purchases. However, while the discount festivals may provide a temporary boost, they can also have a negative effect on sales at other times, as consumers hold off purchases in expectation of a future sales campaign.

Kicking Back

Efforts to offset the VAT hike have also been launched. Aside from general price discounts, there has been a concerted effort to enable VAT-back shopping for tourists and non-residents. As of November 18, 2018, the Federal Tax Authority (FTA) announced a regulation allowing for VAT refunds at Abu Dhabi, Dubai and Sharjah international airports, and the scheme was extended to all international gateways by the end of 2018. Retailers have to be FTA-registered to benefit from the scheme, with tourists presenting their passport, tax invoice and credit card for a refund on departure.

At the same time, the current slow-down in consumer spending has pushed many retailers to change their assumptions about Dubai, as it becomes a more mature market. Indeed, the days of free spending may be long gone, with 2019 likely to see residents and visitors alike counting their costs more carefully.