Full of confidence: Strong purchasing power and appetite for international brands push up sales

In the world of retail, Kuwait is a heavy-hitter. In a 2011 study by management consulting firm AT Kearney, the country was ranked fifth on the global retail development index and the sector is the highest ranked in the Middle East and North Africa (MENA) region. This is despite a relatively small population of some 3.5m.

The local market is very confident. Kuwaitis have among the top levels of per capita GDP in the world, with the IMF putting the 2011 figure at $45,757, and forecasting a rise to at least $52,267 by 2014. Consumer spending per capita is estimated to have reached $13,886 in 2011, increasing to $17,085 by 2014.

CONSUMER CONFIDENCE: A regional consumer confidence survey carried out in April 2011 by poll researchers YouGov Siraj and regional job search website Bayt.com found that 56% of those polled in Kuwait believed that the country’s economy would be better off in a year’s time. The survey is a measure of consumer expectations, and satisfaction with the economy in terms of inflation, the cost of living and job opportunities. This survey comes behind a similar index of consumer confidence that was conducted by MasterCard Worldwide in July 2010, in which Kuwait’s ranking shot up from 70.9 out of 100 to 96.9 – the highest ranking of any country in the MENA region.

Besides the high disposable income and consumer confidence among Kuwaitis, retailers also benefit from the country’s climate, which helps make shopping a pastime. In summer it is very hot, with temperatures often ranging between 50°C and 55°C, making it unpleasant to be out in the open during the day. Humidity can also rise in August and September and sandstorms can occur throughout the year, though they are most common during spring (February-April). This helps to explain the popularity of large air-conditioned malls with integrated entertainment facilities that shelter shoppers from the disagreeable weather and give them the space to spend both time and money.

DEMOGRAPHICS: The main drivers behind Kuwait’s retail success are the concentration of large numbers of the populace in the main cities and the age range of the population. According to the AT Kearney index, 96% of the country’s inhabitants live in cities and 65% are between the ages of 15 and 39. These demographic trends, the report argues, have led to an 8% annual growth in the sector over the past five years. Retail sales are expected to grow by some 42%, from $8.41bn in 2011 to $11.92bn by 2015. On the index, Kuwait figured in the top five globally, alongside much larger countries such as Brazil and India, and leapfrogging China, which came sixth. Overall, Kuwait scored 80.4% for the attractiveness of its retail market.

The rankings on the index are echoed by independent business research agency Business Monitor International (BMI), which forecasts similar volumes of retail sales over the same period. Given Kuwait’s prosperity and significant retail resources in terms of its existing and planned malls, BMI reports the country will be able to support a mature retail industry in the near future.

According to BMI, the retail sub-sectors expected to show strong growth over the next five years include consumer electronics, over-the-counter pharmaceuticals and vehicles. Sales of consumer electronics are expected to increase from $720m in 2010 to $930m by end-2014, a rise of 31%; pharmaceuticals sales are forecast to reach $60m in 2010, and grow by 32% to $80m by 2014; sales of vehicles were expected to rise by 12%, from $3.4bn in 2010 to $3.8bn by 2014.

INFRASTRUCTURE: Large-scale malls – such as The Avenues, 360 Kuwait and Marina Mall – provide the basic infrastructure of the local retail sector. In terms of total retail space available, Kuwait currently has 570,900 sq metres of gross leasable area (GLA) to offer private firms.

With the completion of future malls this is set to rise by at least 348,000 sq metres, or 61%, reaching a total of some 918,900 sq metres, according to research figures from local financial services firm Kipco Asset Management Company (KAMCO). Real estate consultancy Colliers International stated that Kuwait has the third-largest supply of retail space in the Gulf region.

THE AVENUES: Upcoming development projects include the third phase of The Avenues – a mall managed and owned by local company Mabanee, of which the Al Shaya Group is the majority shareholder with a 35.8% stake. Others include the Mall of Kuwait, Symphony, United Tower, Olympia and Al Hamra & Firdous.

The Avenues has more GLA available to retailers than any mall in the country, and once phase three is completed it will be one of the largest malls in the MENA region. Mabanee has a total of four phases planned for the mall, providing a total area of 371,897 sq metres.

Footfall – i.e. the number of visitors who come to the shopping centre – at The Avenues has risen steadily over the past three years. The average number of people who visited each week in 2009 amounted to 396,000. During 2010 this figure rose to 432,000, and for the first three months of 2011 the average number of weekly visitors reached 462,500.

“We had around 22m visitors to The Avenues in 2010, which was a 10% increase on the year before,” Steve Bunce, the mall director at The Avenues, told OBG.

The development of phase three is estimated to cost KD150m ($540.8m) and is due to open in April 2012. It includes six separate districts, including the Prestige, a 500-metre long, a 22-metre wide Grand Avenue, a Soku district, a souk and a bazaar.

JOINT VENTURES: The mall is home to a diverse range of retailers, including internationally recognised fashion, multimedia, and food and beverage brands. Major retail groups occupy around 79% of the total leasable area, which includes (among others) Alshaya Group, the majority shareholder in Mabanee, owner of The Avenues.

Foreign firms are prohibited from opening branches in the country under Kuwaiti law, and franchise relationships are not specifically recognised. To enter the market, retail chains and brands must form a joint venture (JV) or partnership with a locally registered company. At least 51% of the equity of any JV firm must be held by Kuwaiti nationals, who serve as guarantors to the foreign company. “All franchise operations must have a local partner,” said Bunce. “International brands here are all franchise operations.”

The Avenues, for example, has a total of 417 stores. Major players at the mall which hold these franchises include Alshaya Group, Lebanon-based Azadea Group, Al Ostoura International Company, Al Tayer Group, Al Yasra Fashion, Habchi & Chalhoub, the Apparel General Trading Company, Al Homaizi Group (which has the franchise on IKEA) and MAF retail company (which has the JV for supermarket chain Carrefour). These retailers are also represented in malls across the country.

GROWING MARKET: Competition has increased as more malls have entered the market. For example, 360 Mall, which was opened in 2009 by Tamdeen Shopping Centre Development Company, a subsidiary of Tamdeen Real Estate Company, has seven separate shopping zones on a total built-up area of 82,000 sq metres.

In mid-June 2011, it won the Retail & Leisure International trade magazine’s award for “International Shopping Centre of the Year”. Besides the usual luxury fashion brands, 360 has a number of entertainment facilities including an IMAX cinema, a Cinescape Cinema Complex, a family entertainment centre spread out over 5000 sq metres, a 1500-sq-metre teenage entertainment area called the Freeze Club and a 20-lane bowling alley. Tamdeen has also managed to attract a Marks & Spencer department store and the country’s first French Geant hypermarket to the mall.

TREC’s other developments involve retail elements such as “The Eight” project located in Sabah Al Salem. The 15,300-sq-metre mixed-use project has retail outlets set in a residential complex with a high concentration of restaurants, cafes and drive-through facilities.

Other long-term stalwarts of the local retail market include Marina Mall and Waterfront in Salmiya – developed by United Real Estate Company – which first opened in November 2002 with extensions added in 2004 and 2005. Marina Mall and Waterfront has a number of entertainment and dining outlets, a convention centre and a five-star hotel on its premises.

Though many new mall developers look for larger plots of land to develop on the outskirts of Kuwait City, some firms are competing by redeveloping the city centre and focusing on high-quality entertainment and dining outlets to attract affluent office workers. One such example is the 412-metre-high Al Hamra & Firdous Tower in Kuwait City, developed by Al Hamra Real Estate Company. The new tower has a 24,000-sq-metre shopping area that includes multiplex cinemas, five-star restaurants, a roof garden, a health club and a spa.

CONSUMER SPENDING HABITS: In March 2011 the government gave a grant of KD1000 ($3605) to each citizen to celebrate 50 years of independence and 25 years since the liberation of Kuwait after the first Gulf war. As a result, retailers saw a large spike in sales. “Following the grant we saw a 30% increase in our turnover for the March-April period,” said Ayman El Mostehi, the country manager for Azadea.

For The Avenues, Mabanee’s research analysts saw an increase in spending on consumer electronics and multimedia products. According to El Mostehi, “Multimedia products are the most popular sub-sectors of the market, followed by fashion brands. Kuwaitis are consumers by nature. Most of them have the money to travel to Europe and the US and know the brands they want, so there is already an appetite and thus an incentive for retailers to set up franchises here.”

Online retail activity for such products remains limited, however. “People like the idea of getting out of their houses and seeing the products for themselves, whether it be fashion or multimedia,” said El Mostehi. “Shopping is still seen as a social activity and there is not much interest in online buying.” Although retail firms have websites, they are mainly for advertising purposes; not as a forum for online shopping. However, international sites like Amazon and Ebay are popular, with orders delivered via DHL or Fedex.

Nevertheless, there are some local pioneers in the multimedia, food and beverage segments of the online retail market. Blink.com.kw is a local website and computer product retailer that sells multimedia devices from well-known brands at reduced prices. Another example is “Talabat”, or 6alabat.com, which is a local website that offers a delivery service of popular food and beverage brands such as Pizza Hut, KFC and Burger King. Talabat allows a customer to place an order to the restaurant of their choice through its website.

CHALLENGES: Negotiating rents with landlords is probably the toughest challenge retailers must face in the country. “First market entrants should not find it very hard to negotiate rent as most retail outlets have an interest in attracting the big brand names in order to increase the footfall in their malls,” Wassim El Hayek, the assistant vice-president of KAMCO, told OBG. “On the other hand, existing local and regional retailers might find it a bit more challenging in terms of the limited supply currently available to them.”

In large luxury malls such as The Avenues landlords can afford to be tough on their retail tenants, and lease lengths are often negotiated annually. “I think most people would agree that to some extent the real estate market here is overrated,” El Mostehi said. “Rents here can be 1.4 times those in Dubai and double those in Qatar. Average commercial leasing rents in the centre of town, whether in a mall or on a street, can cost up to KD30 ($108) per sq metre.” Rent in The Avenues can range from KD35-50 ($126-180) per sq metre.

Retailers continue to ask landlords for concessions, including long rent-free periods, break clauses and turnover leases. El Mostehi told OBG, “It is most difficult when negotiating with landlords who have little or no experience or even understanding of the retail sector and make unrealistic demands, wanting to base the price of rent purely on the cost of developing the land rather than accepting rents retailers can actually afford. There is no business lobby representing retailers and there is a need for business development councils to act as intermediaries in some cases.”

With most malls located in or around the city centre, expansion to the suburbs of Fahaheel, some 40 km south of Kuwait City, is one of the most likely options in the near future. Though some retailers have called for greater development of potential retail space in the suburbs, the mall tradition of having many diverse outlets under one roof will continue for some time.

OUTLOOK: The retail sector in Kuwait is robust and its prospects for future growth are strong. It is an attractive market on a global scale and currently number one in the region. Although the country only has limited land available and a small population, the high level of disposable incomes in line with economic growth means retail sales are expected to continue to grow in the near future. Sub-sectors such as vehicle sales, food and beverages, and consumer electronics continue to record strong annual growth figures. Retailers also continue to note the growing sophistication of Kuwaiti consumers as the market steadily matures.

Mall shopping is now ingrained in local popular culture and offers a viable form of entertainment with family and friends, particularly in the simmering summer months. Further investment in mall infrastructure will add more leasable areas to retailers. As this space is added the culture of shopping and the considerable appetite for international brand names from the US and Europe is likely to entice more international chains to set up shop in the country and occupy this new space.