Piazzas of the Gulf: Mall culture is at the forefront of a thriving sector

For retailers banking on a population with high per-capita spending capacity, Kuwait remains a destination of choice. Catering to an increasingly sophisticated and demanding consumer demographic, Kuwait’s mall culture is currently at the forefront of a resilient and growing retail sector that continues to draw the interest of both international brands and foreign investors.

BY THE NUMBERS: From 2008’s high of $54,550, Kuwait’s gross national income per capita dropped to $46,670 in 2012, but its wholesale and retail sector has maintained its momentum through the post-2008 global financial crisis and recent political instabilities. The sector grew 28.5% from KD1.2bn ($4.28bn) in 2006 to KD1.6bn ($5.7bn) in 2011, according to KIPCO Asset Management Company (KAMCO), accounting for an average of 4% of GDP and 7.3% of the non-oil-and-gas economy between 2006 and 2011. Reaffirming its resilience to global economic pressures, the sector also posted 9.4% year-on-year (y-o-y) growth in 2009-10.

Across the Gulf, many now appear to be taking a more cautious approach to the sector’s prospects, although they remain largely positive. International management consultancy AT Kearney’s (ATK) “Global Retail Report 2012” reveals a seven-place y-o-y drop in Kuwait’s rankings from fifth to 12th. Its market attractiveness remains strong, though, scored at 81.1%, but near-term saturation pressures in the market are high, according to ATK analysis. This has seemingly not dented the enthusiasm of retailers and investors, who are pushing ahead with retail expansion plans.

BOOSTING CONFIDENCE: Local sentiment remains positive, with consumer confidence reaching its highest level since March 2011, at 128 points in February 2013, according to ARA Research Consultancy. Spending per capita is expected to reach $17,085 by 2014. This saw a further boost in April 2013 when the government agreed to buy $2.6bn in private bank loans of about 47,000 citizens. While not a debt waiver, interest will be wiped and repayments rescheduled over 15 years. Additionally, private sector salaries rose by about 5.4% in 2012, although this was a modest gain given inflation of 4.5%. But a proposed increase to $5250 per month for public sector employees, who make up 70% of the workforce, was tabled in parliament in February 2013, and was dealt a further setback following the parliament’s dissolution in June 2013.

While Kuwait’s “cash-in-hand” retail habit is evident from the banking sector, in which household consumer loans and credit card advances constituted just 2.5% of their 2011 capital portfolios, 2012 witnessed a 12.4% increase in the volume of retail loans against a 2.3% rise in consumer prices, according to ARA Research.

STRONG FOUNDATIONS: Catering to a highly concentrated and urbanised population – just 20% of the country’s 17,818 sq km is inhabited and more than 90% of residents live in urban areas – Kuwait’s 630,000 sq metres of gross leasable area (GLA) in 2011 is expected to increase 87% by 2020, expanding by an additional 550,000 sq metres, according to analysis by Alpen Capital Investment Banking. Although there are already over 50 covered malls in the country, according to real estate services group DTZ Global, the past year has reaffirmed investors’ confidence with new openings and the entry of several international brands into the market. Expansion has been led, foremost, by Kuwait’s largest mall, The Avenues, owned by the Mabanee Company, which is itself majority owned by Al Shaya Group.

KEY OFFERINGS: Opened in 2007 by the Emir of Kuwait, Sheikh Sabah Al Ahmad Al Jaber Al Sabah, The Avenues has a footprint of 270,000 sq metres following the completion of the KD150m ($525m), 95,000-sq-metre Phase III in 2012, which doubled its portfolio of retail options. Opening with 95% of the 400 Phase III stores occupied, The Avenues now has over 650 shops, 150 food and beverage (F&B) outlets, and parking for 10,000 cars. The mall attracted over 24m visits in 2011 and 2012, and is expecting a 41% increase to 34m in 2013.

Over 8m visitors visited in the first 14 weeks of the year.

The Avenues is set for further expansion, with approval granted by Kuwait City Municipality in February 2013 for the development of Phase IV, which will use the remainder of The Avenues’ 382,805-sq-metre plot.

The Avenues’ closest competitor is a third of its size. The circular 360 Mall was opened in 2009 by Tamdeen Shopping Centre Development Company, a subsidiary of Tamdeen Real Estate Company (TREC). It has successfully carved a niche in the market, sporting seven separate shopping zones and winning the Retail & Leisure Internationaltrade magazine’s award for “International Shopping Centre of the Year” in June 2011.

While The Avenues and 360 Mall are prominent stand-alone centres, many other shopping malls are part of larger mixed-use developments. TREC’s 15,300-sq-metre residential development, The Eight, in Sabah Al Salem, for example, includes retail outlets and a range of F&B facilities. United Real Estate’s Kuwait Water Front Phase 5 Project, which includes the 2002 Marina Mall, is adjacent to the Kuwait Marina and has retail, F&B and five-star hotel facilities. The Al Hamra & Firdous Tower by Al Hamra Real Estate also includes the Al Hamra Luxury Centre, a 24,000-sq-metre retail space that houses cinemas, F&B facilities as well as a health club.

Retail contribution to GDP, 2006-11 SHIFTING SANDS: Demand remains strong and fortune has favoured new and larger developments that catch the attention of both retailers and customers. “Because Kuwait’s market is fixed in size our growth is at the expense of other malls. There is otherwise little to no growth opportunity in the domestic market other than that offered by nominal organic gains,” Waleed Al Shurian, The Avenues’ deputy general manager, told OBG. Limited real estate availability for further development has precipitated a market consolidation favouring larger malls, leading many older facilities to invest in renovations and upgrades.

This trend has accelerated since the global financial crisis, when retail landlords responded by offering lower rents, allowing shorter leases and even providing 50% discounts on overall fees. This played to the advantage of larger firms and mall operators with the necessary capital and footfall to support such moves.

Average retail rent prices of KD24 ($84) in 2012 remained well below their peak of KD35 ($122) per sq metre, although they range from KD20-45 ($70-157) per sq metre in prime locations and KD15-20 ($52-70) per sq metre in secondary areas.

There is likely to be expansion of retail offerings in the suburbs and secondary areas given population growth and traffic congestion in the inner city, but near-term activity is expected to remain focused on Kuwait City’s central districts afford prestige locations. However, the anticipated green light for the Kuwait Metro Rapid Transit project 2013 may see developers eyeing outlying destinations in time for the scheduled Phase I opening in 2020, which will connect the airport to the city centre (see Transport chapter).

INTERNATIONAL FARE: Kuwait’s retail market has a clear international flavour, and this is evident in the design of many malls, which borrow elements from Europe, America and Asia. The Avenues’ Phase III 500-metre-long and 22-metre-wide Grand Avenue is based on contemporary European boulevards, while the adjacent SoKu is modelled on New York’s SoHo district. In 2014, 360 Mall will host a new department store concept that merges retail with public event space, designed by global architecture firm OMA, which has launched similar projects in New York, Los Angeles and Paris.

In parallel, malls are also moving to incorporate elements of local shopping culture as well. This has been spearheaded by The Avenues, which opened a traditional souk as part of the Phase III development. This has catered to local retailers and entrepreneurs working from 15-to-20-sq-metre shops. Initial indications are that the concept may soon be replicated elsewhere, creating further drawdown on ex-mall retail centres. “Traditional souks certainly have a place in the market. With 50% of The Avenues’ souk operational and the rest committed, its success has been driven by the fact that we have not tried to modernise or re-engineer the concept, which has been positively received by both retailers and customers,” Shurian told OBG.

While many malls have used international brand names to build their reputation as retail destinations alongside family-friendly facilities and entertainment complexes, amidst escalating competition and narrowing market opportunities the sector is increasingly placing emphasis on customer loyalty as a key component of long-term success. This has required a greater sophistication in market placement and product.

POSITIONING: Distinct segments are now rising to the fore as market leaders for growth. Announcing its best year yet with a 32% increase in net profits after tax, equivalent to $48.6m, Kuwait’s Jazeera Airways has shown this potential. Although technically a low-cost carrier, it has avoided connotations of “cheap” in its marketing, which has appealed to Kuwaitis, who are considered frequent travellers that take three to four flights per year. “‘Low-cost’ is not a respected phrase in the Kuwaiti market,” Captain Falah Al Shammari, the vice-president of operations, told OBG. “Jazeera Airways markets itself as ‘cost-controlling’ and has created a market for itself by providing an availability of choice and opportunity to travel that Kuwaitis are exploiting.”

This underlines growing consumer sophistication and a cost-conscious outlook in Kuwait. Standards and quality have improved, and emphasis has switched to focus on the end-consumer. “The Kuwaiti consumer, especially in the technology market, is becoming more sophisticated,” Aref Easa Al Yousifi, vice-chairman and managing director at Easa Husain Al Yousifi and Sons, a Kuwait City-based electronics distributor, told OBG. “Quality and after-sales services are more important; therefore, it is becoming harder to compete.”

Jazeera Airways has leveraged these consumer trends, launching dedicated iPhone and Android booking apps that have been quickly adopted, delivering one in 10 bookings in 2012, and it was the first airline to introduce self-check-in kiosks at Kuwait International Airport. The airline’s success is partly symptomatic of a tech-literate population that has delivered rapid growth in internet penetration since 2000, reaching 64% in 2013, according to consumer research firm Ipsos.

ELECTRONICS & THE WEB: Consumer electronics are seen as one of the retail sector’s strongest performers. Regional trade liberalisation may also be a boon for the electronics sector, with Business Monitor International forecasting growth of 29% between 2012 and 2016 to $1.36bn.

Kuwait’s tech-hungry consumers have shown strong demand for smart TVs and smartphones, and the takeup of these technologies is supporting the growth of online commerce. Ipsos calculates that the penetration of e-commerce among internet users is 35% in Kuwait, with 53% using e-commerce to transfer money. While only a few stores currently maintain an online presence, the growing importance of the internet for retailers is evident in the proliferation of retail web portals, such as Sheeel.com, which is expanding beyond the GCC to markets such as Jordan, Lebanon and India.

FOREIGN BRANDING: International brands have earned a coveted place in Kuwait’s retail market for several reasons. While the nation’s historical links with the UK have been beneficial, as has a strong American influence in the region since 1990, educational ties with Western countries have also instilled a close familiarity with lifestyles and brands, particularly among the large younger generation. Foreign firms are not permitted to open branches in Kuwait, however, unless they have partnerships or joint ventures with locally registered firms that serve as guarantors. This has led to a proliferation of franchise operations and major retail groups, which occupy around 79% of Kuwait’s GLA.

Foremost among these is the Al Shaya Group, majority shareholder of The Avenues’ parent Mabanee Company with a 35.8% stake. Operating in 19 countries, Al Shaya Group has over 70 brands within its portfolio, including Starbucks, IHOP, Victoria's Secret, the Cheesecake Factory and as of January 2012, the UK arm of Canadian lingerie firm La Senza. Notable major companies and franchise holders include the Al Homaizi Group with IKEA, Al Tayer Group with Prada and MAF with Carrefour. Other players include Azadea Group, Al Ostura International, Al Yasra Fashion, Habchi & Chalhoub and the Apparel General Trading Company.

OFFERING AN ALTERNATIVE: Niche segments such as cooperatives are becoming a popular alternative to hypermarkets. “Most people immediately think of hypermarkets to satisfy their shopping needs, which is a global trend,” Abdullaziz Al Samnan, the chairman of the Union of Consumer Cooperative Societies, told OBG. “The co-op society caters to a difference niche: convenience and the lower-income base.”

MUTUAL OPPORTUNITY: Local firms have been keen to offer foreign brands in the market, and this is often a win-win proposition for both sides across the wider GCC region, Shurian explained. “International brands are already well established in the local market, but are now facing greater competition. The Middle East remains an attractive market for international brands facing economic difficulties back home, and having explored the market post-2008, we are now seeing an aggressive drive into the GCC region by foreign brands.”

Opening branches in the GCC has been quite lucrative for many firms, with McDonalds reporting that GCC customers were spending $2m per day at its outlets. Al Shaya most recently brought IHOP to Kuwait, following its debut of the Cheesecake Factory in Dubai in 2012; it has plans for 22 new outlets in five Middle Eastern countries by 2016. In the past year Kuwait has seen new stores from UK high-street retailer Marks & Spencer (M&S), which has successfully marketed itself as a premium brand in other foreign markets, and a second store from Prada, while US-based BurgerFuel is set to open locally through Al Khayyat Investments following debuts in the UAE, Saudi Arabia and Iraq.

FASHIONISTAS: Fashion has taken centre stage in Kuwait, pushed by local as well as expatriate demand. Bruce Bowman, head of Gulf operations for M&S, which is considering doubling its stores to four, told local media, “The key difference between Kuwait and other countries, and what makes it unique in the GCC, is that Kuwaiti women don’t generally wear abayas, so there is a much more open attitude towards fashion. While there is a particular taste among Gulf women, Kuwaiti women can be very edgy in terms of the clothing they wear, but are still able to maintain the degree of modesty they need.” This has helped secure Kuwait’s prominence in the market, ranked third by ATK in its 2011 Retail Apparel Index and named a future “fashion hub”.

Yet tapping into this market has been difficult for some. Pricing products, particularly clothing, in Kuwaiti dinars based on home market prices without adjusting the monetary value – a roughly threefold difference in the case of dollar conversions – has been exposed by customers. This has led several brands to redesign labels and pricing displays, tailoring them to each specific market, industry executives said.

RICH PICKINGS: Despite the profusion of high-end fashion brands in Kuwait, the luxury segment typically relies on a relatively small elite in the top 10% of earners. While luxury sales in some segments were down in 2012 due to ongoing economic concerns, 2013 may yet prove to be a more promising year for retailers, with consumer confidence high and a raft of new luxury investments. This outlook was supported in February 2013 when the ARA February Purchase of Durable Goods Index reported a 77-point y-o-y increase to 187.

If they are in the mood to spend, high-end shoppers will have plenty to choose from in the local market. The Avenues’ Grand Avenue sports a profusion of designer labels, including Chanel, Burberry, Prada, Louis Vuitton and Christian Dior, but has also recently secured a department store from British luxury brand Harvey Nichols, an affirmation of the confidence in the market’s potential. However, industry executives speaking with OBG emphasised the need for and attention to personal service, particularly in after-sales care.

The automobile industry has also performed well, with annual growth of 8-9% on the back of solid fundamentals. “A variety of factors play into auto sales in Kuwait. High disposable income, poor public transportation, the car culture, and cheap oil and gasoline make it a strong market,” Adel Behbehani, general manager of Mohammad Saleh and Reza Yousuf Behbehani, told OBG.

This is also true of the luxury segment. Rolls Royce, for example, saw a 30% jump in sales, compared to the 26% rise in the Gulf and 1% growth worldwide, and alongside a 21% uptick for Mercedes Benz distributor Abdul Rahman Albisher & Zaid Alkazemi. Purchasing choices are largely dictated by family or style considerations, safety, space, after-sales service and customer satisfaction. While fleet and commercial sales are usually derived from the government, these can be significant: North Gulf Trading, the sole distributor of Hyundai Motors, gets around 60% of its sales from fleets.

OUTLOOK: Since 2008 Kuwait’s retail sector has demonstrated its resilience to global economic pressures. While it remains sensitive to oil prices, both retailers and consumers are eyeing the future with confidence. Substantive investments from global and domestic brands in the past 12 months reaffirm this. However, the market is evolving. With greater consolidation and concentration of visitors to the larger malls, competition is growing to define retailers’ respective market positions. Facing a newly cosmopolitan consumer base with mature demands, customer service is now the emerging hallmark of success in Kuwait’s retail sector.