Demand drivers: Rising levels of disposable income and a growing population bode well for big brands entering the market

Recent years have been tough going for the global retail sector, and the Gulf region is no exception to this trend. As unemployment has risen, bank credit has dried up and consumer confidence has withered. As a result, retail sales have fallen precipitously. In Qatar, however, things look somewhat brighter. Although growth in the sector has slowed, the state has recently seen a significant expansion of both retail brands and shopping outlets.

Indeed, the economy has been expanding on the back of rising hydrocarbons outputs and exports. Furthermore, population growth has helped to create a fertile environment for a broad range of retail segments in the market. With such demand drivers still in place, the prospects for the Qatari retail market are likely to get stronger over the coming years.

RAPID GROWTH: The sector has been expanding rapidly over the past five years, with retail trade almost doubling from approximately QR15bn ($4.12bn) in 2006 to QR29.8bn ($8.18bn) in 2009, according to research by investment bank Alpen Capital. The latest figures for 2010 show a further increase of 8.3% to QR32.3bn ($8.87bn). This dramatic expansion of the retail sector has been fuelled by a thriving economy and a rising population. Between 2004 and 2010, the population more than doubled from 774,000 people to 1.69m, according to the results of the 2010 census. As a result, there has been a vast increase in the pool of retail customers.

While this is likely to slow somewhat, demographic growth will remain above average for developed countries. According to the National Development Strategy 2011-16, authored by the General Secretariat for Development Planning, the population is expected to grow at an average rate of 2.1% between 2011 and 2016, reaching 1.9m people. By 2026 it will have increased again to 3m people, according to figures from the Ministry of Municipality and Urban Planning. This growth alone should ensure robust demand across many segments of the industry.

ENVIRONMENT: This is supported by an attractive retail environment overall. According to a recent report by EC Harris, the global built asset consulting company, Qatar is one of the easiest markets for an international retailer to enter. The September 2012 Retail International Programme Expansion index ranks the state 11th globally in terms of the ease of establishing a presence for an international retailer, ahead of the UAE (15th) and just behind Saudi Arabia (eighth) in the region. The index takes into consideration transport infrastructure, construction supply chain issues, property capability, the business environment and the legal framework.

However, not everybody is convinced that the market can be volume-driven indefinitely. Indeed, given the limited landmass, and the small proportion of Qatari nationals (some 180,000-200,000 of a population of 1.7m), the country is always going to be a relatively small market.

COMPETITIVE WAGES: However, the country’s wealth should ensure that there remains a substantial pool of consumers with plenty of spending power. The rapid rise in retail trade within Qatar has paralleled a large expansion of the country’s hydrocarbons production and its rising liquid natural gas (LNG) exports. The government’s focused pursuit of 77m tonnes of LNG production, which it reached in December 2010, has brought with it impressive GDP growth figures.

According to estimates from the IMF, Qatar’s economic growth stood at 19% in 2011. This was the fifth year in the past six in which the country has recorded double-digit GDP growth, according to the Qatar Central Bank. Such outstanding continuous expansion has pushed Qatar to the top of the global list when it comes to GDP per capita, surpassing Luxembourg in 2011 with $90,149.

Given the limited tax liabilities in Qatar, the levels of disposable income in the country are high. According to the labour force sample survey conducted by the Qatar Statistics Authority in 2010, the average monthly salary in Qatar is QR7800 ($2141).

However, for government sector employees, where many Qatari nationals work, the average salary is QR14,631 ($4018). For senior officials and managers the figure jumps to QR27,616 ($7583). Indeed, outside of blue-collar employment, wages in Qatar are extremely competitive.

WAGE INCREASES: According to PayScale, a company that evaluates wages internationally, a project manager in the construction industry in Qatar earns an average of QR286,503 ($78,673) annually, while an IT project manager earns QR199,727 ($54,845). These competitive wages have been supported by a 60% basic salary hike for Qatari state employees. The new regulation, which came into force in September 2011, also granted a 120% pay increase to military personnel of officer rank and above, and a 60% rise in pensions for retired civilian nationals.

The government’s economic diversification plan should also support job growth and diversity in the market, bringing greater job security and reliability. New regulations, such as a flat corporate tax rate (of 10% against the previous variable rate of up to 35%) introduced at the beginning of 2010 and regulations allowing 100% foreign ownership of Qatar-registered companies in February 2011, should help create new companies and jobs, which in turn will boost consumption in the country.

FRAGILE CONFIDENCE: However, the environment for consumers is not entirely becalmed. An October 2011 survey by Bayt.com and YouGov found that some 65% of Qatari residents believe that their current salary is not in line with the cost of living, while 35% asserted that buying consumer durables is not practical in the present situation.

This suggests that consumer confidence remains reasonably fragile on the peninsula, a fact supported by the proportion of residents (58%) that will avoid investing in property in the next 12 months and the percentage that will not consider purchasing a car (50%) in the year ahead.

Al Fardan Automobiles’ managing director, Mohamed Kandeel, told OBG a small recovery is expected. “In 2012 we believe the automotive market will increase by 12-15%. In a market that has been stagnant over the past couple of years we do not view this as considerable growth,” he said.

According to the National Development Strategy 2011-16, while the average nominal income increased from QR19,912 ($5467) in 2001 to QR41,483 ($11,391) in 2007, the average real income only increased to QR27,000 ($7414).

Indeed, inflation has been an issue as the country has been growing so rapidly. According to the IMF, the average annual inflation rate between 2006 and 2010 was 6.7%, against a GCC average of 5.7%. Although inflation has come down from the double-digit levels of 2007-08 to an estimated 2.5% at the end of 2011, there remain some concerns. According to the IMF, inflation excluding rent, which was having a deflationary effect during 2011, had reached 5.8% in October of that year.

HIGH DEBT RATES: Additionally, the government is concerned that levels of indebtedness are rising dangerously. According to the National Development Strategy 2011-16, average household expenditure had reached QR40,757 ($11,191), just below the average income level of QR41,483 ($11,391). Furthermore, the same report suggests that loans for speculation in the stock market had reached QR297,000 ($81,556) per household, loans for entertainment and travelling had reached QR203,000 ($55,743) per household and the average car loan was QR111,000 ($30,480) per household.

It is difficult to gauge the extent to which this has changed, because at the time of press, the Qatar Statistics Authority was in the process of carrying out its next household income and expenditure survey. However, it is clear that credit for personal use is a growing trend in Qatar. According to the Central Bank of Qatar, credit to consumers issued by commercial banks has been on the rise in the past five years, with the exception of 2009. In 2010 such credit grew by 6.6%, while 2011 saw a further increase in loans of 19.8% to QR67.98bn ($18.67bn).

CURBING CONSUMER LENDING: While this has kept consumption moving steadily along, the residual concern is that such practices could push inflation further upwards and create unsustainable indebtedness amongst consumers. In a November 2011 report on the GCC region’s retail sector, investment bank Alpen Capital suggested that the high level of credit card debt across the region ($7.7bn in 2010) combined with resultant attempts by banks to impose stricter standards for the issuance of new cards has affected retail sales.

In May 2011 Reuters reported new banking regulations to curb consumer lending. According to the report, Qatari citizens are allowed to borrow ($549,200) on loans with a maximum maturity of six years and QR400,000 ($109,840) on loans of four years or less. In Qatar these are likely to remain minor concerns, especially given the strength of the banking sector and its low level of non-performing loans (which stood at 2% of total loans in 2010, according to Qatar Central Bank).

REGAINING CONFIDENCE: While consumers may remain circumspect, at present they are also largely optimistic for the future. The Bayt.com and YouGov survey found that 56% of respondents believe their financial position will be better in the next 12 months, while 58% believe the economy will recuperate in the same timeframe. Furthermore, more respondents’ financial situation had improved in the past 12 months (33%) than got worse (21%).

This growing optimism seems to be shared by the industry. Olaf Warzecha, the director of City Centre Doha, a shopping mall with 300,000 sq metres of built area and 120,000 sq metres of leaseable area, said, “Demand will come obviously from expatriates, with all the ongoing construction works and from tourists and business guests in the future as well.” The sense that Qatar’s brand is improving and that there is potential to boost spending from visitors seems to be shared by many within the industry.

The burgeoning luxury segment is one indicator of this. At present, most Qataris shop abroad for high-end clothing and accessories, but the development of upscale retail areas in mixed-use projects such as Msheireb and Katara Cultural Village may change this. Furthermore, the royal family stepped up the country’s luxury branding efforts with the purchase of Italian fashion house Valentino for €700m in July 2012, a move which should help cultivate an upmarket domestic retail segment.

Indeed, the growth predictions for the market make for happy reading. According to Alpen Capital, Qatar is expected to see retail sales rise at a compound annual growth rate (CAGR) of 7.7% between 2010 and 2015, just below the GCC forecast of 8.3%. Regionally, the strongest growth will come from the supermarket and hypermarket segment, expanding at an average of 10.7% between 2010 and 2015, according to Alpen Capital.

INCREASINGLY INTERNATIONAL: Many retailers are beginning to sit up and take note. Warzecha said, “The retail market is becoming more internationally dominated, as retailers begin to enter this market through Dubai. It’s getting more and more franchise-orientated. We still have a lot of local companies and retailers, but this will change in the future. We have maybe 20% local retailers [at City Centre], but this could drop down to 10% or 15%.”

This trend is likely to become more pronounced as the country’s regulatory environment improves. Guy Sauvage, the CEO of Al Meera Consumer Goods Company, told OBG, “Manufacturers in the past wanted to go directly into the market and grow through agents. This prohibited the growth of many products. However, with the emir aiming to abolish monopolies, large agents controlling the supply of products will soon be phased out. There will be newcomers to the market, and the whole region will see a major shift in market dynamics as the area becomes more stable and regulation is further implemented.”

Qatar has already made significant steps in this regard. For example, in 2006 a law protecting competition and preventing monopolies was enacted. Under the law, the Competition Protection and Prevention of Monopoly Practices Committee was established to develop legal frameworks in conjunction with international counterparts to develop fair competition in the country. In addition, the government has developed a more liberal trade environment; it fully harmonised its tariff regime with that of the GCC in 2003 and is pursuing a number of new .

These steps should encourage retail sector growth and promote competitive pricing in the market. While Sauvage argues that “regulation is currently very protective”, large retailers are still eyeing and beginning to enter the market.

Indeed, in February 2012 it was announced that Al Meera Holding Company signed a joint venture agreement with the French retail firm Casino Guichard-Perrachon (Casino Groupe) to manage proposed retail partnerships in the wider region. This follows the news in December 2011 that Al Meera Consumer Goods Company had signed a deal with the Casino Groupe to franchise the French retailer’s Geant Hypermarket in Qatar and Oman. The Casino Groupe is one of the biggest food retailers in the world with consolidated net sales of $38.26bn in 2010 and 11,663 stores globally.

This recent deal will supplement Al Meera’s current presence in the Qatari market, where it operates a total of 29 supermarkets under its own brand name. According to Sauvage, “We are a little behind, but food is going to be the real growth sector for retail. The natural evolution of food retail seen in other GCC countries where we move from small corner stores to large hypermarkets did not really happen in Qatar. People went from literally having no money to having a lot of money.”

Al Meera is also looking to gain a foothold in the wider retail sector, targeting the middle-income segment of the market. Indeed, in September 2012 it announced that, on the back of a 34% increase in net profit (to QR46.75m, $12.8m) in the first half of the year, it had proposed an aggressive expansion plan. The plan will focus on community and neighbourhood shopping malls in Al Wajba, Jeryan Njema, Muraikh, Azizia, Rawdad Akdeem, Muaither, Rawdad Al Hamama and Al Wakra. The company is very close to opening a 4000-sq-metre neighbourhood shopping mall in Laqtafia, which represents the first space in a three-year plan to bring 60,000 sq metres of community and neighbourhood mall space to urban centres on 15 different plots across the peninsula.

This expansion is indicative of market trends and suggests that retailers have a growing faith in the Qatari market as a whole and are beginning to diversify away from a concentration on the upper segments of the market and the nation’s capital.

Other firms are also looking at establishing a presence in the Gulf state. In November 2011 Chinese retailer Dragon Mart signed an agreement with local developer Barwa to open a store in its Barwa Commercial Avenue project in the first quarter of 2012. Dragon Mart, which is a market for Chinese products, already has a presence in Dubai, where its outlet with 2800 stores is the largest trading centre for Chinese goods outside mainland China.

BIG BRANDS: It is not only in the food, hypermarket and general trading sectors that Qatar is primed to see expansion. A number of big international brands are eyeing the market. For example, the 330,000-sq-metre City Centre Mall in the West Bay area of Doha (with a gross leasable area, GLA, of 110,000 sq metres), which is currently undergoing a QR200m ($54.92m) refurbishment adding 6000 sq metres of GLA, is looking to bring in big international brands and rebuild the mall around them. “We will put the big brand stores here,” said Warzecha. “So far, we do not have the likes of H&M and Zara, but [this refurbishment] will give us a big opportunity.”

Another widely recognised international brand that is about to enter the market is Ikea. The home furnishings brand managed by the Dubai-based Al Futtaim Group in the UAE and Oman will open as part of the QR6bn ($1.65bn) Doha Festival City project. Being developed by Bawabat Al Shamal Real Estate Company, a joint venture including Al Futtaim Group, Qatar Islamic Bank and Aqar Real Estate Development and Investment, the 260,000-sq-metre GLA project is expected to be fully complete by 2014. The project will also bring in the likes of international brands Marks & Spencer and Intersport. In the first phase of the project, the 32,000-sq-metre IKEA is scheduled to open by the end of 2012.

With so many brands across a wide range of segments looking to penetrate the market, the peninsula’s shopping malls are experiencing a welcome boost. The largest and most well-established malls in the market, which account for 50% of the total organised retail supply, according to DTZ, have been doing very good business. A fire temporarily closed one of the major malls, the Villaggio, in May 2012, but it had reopened by early October 2012.

The City Centre and Landmark malls command the highest average rentals, ranging from some QR225 ($63) to QR250 ($69) per sq metre per month for standard line units, according to DTZ. The average weekday footfall in City Centre is 40,000, although on certain occasions it can go as high as 100,000. According to Warzecha, the mall is effectively running at full occupancy and has a waiting list in the range of 12 to 18 months.

DOUBLING GLA: Such performance, coupled with the projections for growth in Qatar over the coming decade, has led to a flurry of developers looking at the possibility of developing retail space on the peninsula. This trend will be encouraged by the indications from new malls. In 2011 both the 55, 000-sq-metre Lagoona Mall and the high-end 24,000-sq-metre The Gate partially opened. According to DTZ, a number of units in both malls were pre-let.

Given these indications, the amount of GLA will probably increase significantly over the coming years. According to DTZ, retail space expanded by 18.4% to 509,000 sq metres in 2010 and is expected to grow by a further 34.4% in 2012. Indeed, there is more than 666,000 sq metres of GLA in the pipeline, which, if delivered on time, would more than double the amount of retail space on the peninsula by 2015, according to DTZ. This has led to questions being raised about oversupply in the medium term.

The associate director of DTZ Qatar, Mark Proudley, said, “There are five shopping malls, totalling in excess of 500,000 sq metres of leasable space, being developed within a 5-km radius of Landmark Mall.

Generally demand for retail is pretty good, but potentially [supply] could go over the top. At the moment, however, the market is stable.”

OUTLOOK: With 300 sq metres of organised retail accommodation per 1000 people, according to DTZ, Qatar’s current retail stock is higher than most European countries (where it averages 200 sq metre per 1000 people). However, the GCC market is very different and Qatar’s current stock is well below the level of Dubai where it stands at approximately 1000 sq metres per 1000 people, the highest ratio in the region. Qatar may not aspire to these figures, but it seems it certainly has some room for growth.

Most established operators seem unperturbed by the market’s possible saturation. “New malls will bring new opportunities to capture new brands and competition will bring better quality,” Warzecha told OBG. “Qatar has a certain growth strategy, which gives the country the opportunity to do worldwide marketing. So far we do not have that many tourists who come for shopping like Dubai. For example, we cannot currently host a shopping festival. But [in the future] we would see the potential to boost footfall [through events like this].”

With such strong demand drivers and the possibility for increased exposure, the prospects for the sector look positive. Although it may become oversupplied in the longer term, the market is thriving.