Retail space is expanding rapidly and solid growth looks set to continue

Standing apart from markets in neighbouring GCC countries, the sultanate’s shoppers are regarded as being price-conscious and value-driven. Lower per capita incomes and a smaller number of high-income expatriates within the context of a more moderate economic development strategy have placed the sector on a unique trajectory in the region. While the market has been diversifying and growing rapidly over the past decade, the sector is still dominated by household expenditure on groceries and home electronics. A rise in the number of high-net-worth individuals, however, has led to newer niche markets, with an increasing presence of luxury and fashion brands.

Expansion is evident in the rapid pace of growth in the number of malls and hypermarkets being built. Most of these new developments are concentrated in the area around Muscat, but retailers are gradually expanding into smaller economic centres as well. Foreign investors, such as LuLu hypermarkets and Marks & Spencer, have strengthened their presence in the country, due in part to the steady economic growth and favourable investment climate. The rise of modern retail is putting pressure on Oman’s traditional markets, or souks, particularly in Muscat. However, some of these small retailers are now reorienting their businesses towards selling traditional goods, such as fabrics, arts and crafts, and spices. This shift has allowed them to tap into the growing tourist trade. Although Oman is one of the GCC region’s smaller retail markets, the sector is likely to continue benefitting from a stable economic outlook, growing income levels, and increased public investment in infrastructure and tourism.

Regional Context

The GCC boasts a number of rapidly growing retail markets. In the past decade the sector has expanded at a steady pace, especially between 2004 and 2008, when it grew at over 20% per year. The onset of the global financial crisis prompted a major shift in spending patterns, but a more sustained recovery has been in evidence since 2011. This rapid growth has been mainly concentrated in a few large cities, particularly Dubai, which indicates that there is still opportunity for further investment in smaller urban areas. Furthermore, other countries besides the UAE are also attracting investment. Alpen Capital sees Saudi Arabia as one of the biggest destinations for retail investment going forward, forecasting retail sales there will increase by a compound annual growth rate of almost 10% between 2011 and 2016. Supermarkets and hypermarkets are expected to account for a large portion of regional retail sales, estimated to reach some $59bn by 2016, according to Alpen Capital.

Across the Gulf, populations have significant purchasing power supported by oil revenues. While Qatar is one of the wealthiest countries in the world, GDP per capita in the UAE and Kuwait is comparable with the US and the remaining GCC countries, including Oman, are not too far behind major European economies, such as the UK and Germany. Markaz, a Kuwaiti financial services firm, estimates that retail markets in the region will register annual growth of almost 8% between 2012 and 2015, reaching $221bn by the end of 2015.

The UAE dominates the sector, with an estimated $1.6bn invested in retail construction over two years from 2013-14, according to the Ventures Onsite MENA database. It is the leading luxury retail destination and is also estimated to be the fourth-most-attractive market for retail investment globally, according to consultancy A.T. Kearney. Qatar, Kuwait and Saudi Arabia also have burgeoning retail sectors. Extremely high disposable incomes, large expatriate workforces and young, affluent national populations make these countries attractive destinations for global brands.

Local Growth

While Oman will likely remain one of the region’s smaller markets for the foreseeable future, it is now a target for global retailers. A.T. Kearney’s 2014 Global Retail Development Index ranks the country as the 17th-most-attractive destination for retail investment out of the 30 countries in the index. A GDP of more than $72bn, or about $25,000 per capita, supports a stable consumer base of around 3.6m people, including a significant and growing number of high-net-worth individuals. The concentration of wealth in the capital city of Muscat provides retailers with a targeted market for investment. This population is likely to continue growing as the country rapidly urbanises. While population growth in rural areas is around 0.9%, Oman’s urban population is growing at over 2%.

Spending Patterns

Consumer spending in Oman is lower than in some neighbouring GCC states. Cluttons, an international property firm, estimates that the average household expenditure is around OMR900 ($2330) per month, with almost one-third going towards essentials such as food. Spending patterns have been shifting as the nature of food expenditures change, as lifestyles evolve and as the population becomes wealthier. One major change is the number of household members active in the workforce. Where traditionally there would be only one earning member in each household, it is not uncommon now for there to be four or five. Specific public policy interventions have also had a direct or indirect impact on consumption patterns. In addition to a focus on developing infrastructure and increasing tourism, the government has also recently approved a rise in the minimum wage, which may well lead to higher consumption.

In an interview with OBG, Ajay Ganti, CEO of consumer electronics retailer SARCO, put the wage impact in perspective. “Now that government salaries have been raised, more people will start to buy food, cars and phones in that order. 200,000 government employees just got a wage rise of between $260 and $520. That’s $52m in the market for them to spend,” Ganti told OBG.

Counteracting this, however, is a recent decision by the central bank to tighten lending requirements for personal and housing loans. According to the new debt service ceiling limits, commercial banks may not deduct more than 50% of a borrower’s monthly salary for instalments to repay personal loans, with the limit on housing loans slightly higher, at 60%. The new thresholds have affected car sales in particular, which are often financed with personal loans.

Real Estate

The real estate market for retail space in the sultanate is thriving. Muscat alone has over 16 shopping malls, and a number of new projects and expansion plans are in the pipeline that will add a significant amount of retail space. Muscat, the biggest retail market in the country, had an estimated 350,000 sq metres of mall space in early 2014, according to Cluttons. Of this, 40% is concentrated in four malls that have emerged as dominant forces in the market.

Muscat City Centre, one of the first major entrants into the market, opened in 2001 and provides over 60,000 sq metres of leasable space. Following a similar format to many malls in the GCC region, Muscat City Centre is anchored around a Carrefour hypermarket and features more than 140 local and international brands. The mall, which was developed by Dubai’s Majid Al Futtaim Properties, doubled its capacity with a major expansion project in 2007 and is planning to add another 10,000 sq metres of leasable retail space by 2015. The new $70m expansion plan comes on the back of a $21.5m redevelopment project, which included a new 10-screen cinema complex.

Muscat Grand Mall opened in the capital’s Al Khuwair neighbourhood in 2012, and has rapidly implemented an expansion plan that will eventually add almost 65,000 sq metres of retail space. Developed by local firm Tilal Development Company, Muscat Grand Mall is part of a mixed-use development that includes residential and commercial space. The complex is marketed as Oman’s first mixed-use development, marking a shift in the retail concepts being developed in the country.

The mall attracted over 6m visitors between January and August 2014, up 30% over the same period in 2013. In November 2012 Tilal Development Company announced plans to raise $138m through Islamic bonds with a goal of adding a further 35,000 sq metres of space to the complex. The expansion will add space for 100 new retail outlets, more parking and a larger cinema complex, and is also being used to target support for small and medium-sized enterprises, which currently occupy 25% of the retail outlets in the mall. After the expansion daily footfall is expected to increase from 17,000-20,000 to almost 30,000. Following the success of Muscat City Centre, Majid Al Futtaim Properties established a second shopping mall in Muscat’s suburban neighbourhood of Qurum in 2008. The 20, 000-sq-metre mall opened with more than 75 outlets in 2008 and is also anchored by a Carrefour. Qurum City Centre serves a different clientele as a smaller suburban mall. While the new malls are garnering headlines for their size and scale, facilities such as Qurum City Centre are meeting demand for smaller shopping areas that target specific markets and neighbourhoods.

Markaz Al Bahja Mall, Muscat’s fourth-largest mall, has also found a successful model that caters to a niche market. It provides shoppers and retailers with over 20,000 sq metres of floor space along with cinemas, bowling alleys and other attractions. The mall recently shifted its focus from high-end luxury retail to meeting the needs of local Omani families living in the heart of Muscat. The strategy is credited with drawing footfall of 2.6m in the past year, up 10-16% year-on-year.

The focus on developing retail spaces to meet the needs of consumers in Oman instead of importing retail concepts from neighbouring GCC markets is likely to remain a focus going forward. Kim Jepsen, the former general manager of Markaz Al Bahja Mall, highlighted the value of this strategy, noting that the opening of Muscat Grand Mall did not affect footfall levels in Markaz Al Bahja. While the other shopping malls are seen as entertainment complexes where people spend the day, Markaz Al Bahja is perceived as a family-oriented mall that caters to families in the evenings.

Under Construction

While retail capacity is being increased through expansions of existing facilities in the short term, there are several large and mega-malls currently being planned or under construction in Muscat. The Avenues and Panorama Mall, both currently under construction in Bausher, are likely to increase the supply of mall retail space by over 100,000 sq metres. The Avenues Mall, developed by LuLu Group International, is being built on a 105,000-sq-metre plot of land and will eventually offer a total leasable space of more than 80,000 sq metres. LuLu is expected to anchor the mall with a 20,000-sq-metre landmark store. When complete, it will have space for 205 retail outlets.

The Avenues Mall may not be Oman’s biggest shopping complex for too long if plans for Muscat Festival City Mall come to fruition. Dubai’s Al Futtaim Group Real Estate signed a memorandum of understanding with the Oman Tourism Development Company and the Omani National Investment Funds Company to develop a 100,000-sq-metre mall near the planned Oman Convention and Exhibition Centre, which is scheduled to open in 2016. The shopping mall, part of Al Futtaim’s $6bn regional development plan, will eventually house Ikea’s first store in the sultanate.

In addition to Festival City Mall, two other large-scale malls are in the works. Vying for the title of Oman’s biggest mall, Majid Al Futtaim Properties’ $467m Mall of Oman, planned for the Bausher district, will eclipse the competition in terms of sheer scale. The mall is expected to offer space for around 350 retail outlets and will be built on 157,000 sq metres of land. The Al Jarwani Group is also planning a mall in Mabellah that will cater specifically to military families.

Niche Market Growth

While these planned megamalls are sending waves through the retail market due to their size and scale, there are a number of niche market concepts that are also changing the retail landscape in the country. The Opera Galleria, for example, is a small high-end retail outlet offering 6500 sq metres of space to 50 retail outlets. The space opened in 2012 and has already attracted major brands, including Patek Philippe, Mouawad Jewellery and Lalique.

The Al Marsa Village Retail Centre is a smaller-scale concept targeting higher-end customers with 10,500 sq metres of leasable space. Housed at The Wave, which has been billed as Oman’s first integrated tourism complex, Al Marsa is anchored by a 1500-sq-metre Waitrose supermarket and will provide space for 30 retail units and several food and beverage outlets.

Changes are also afoot in another niche segment, souks. Oman’s traditional markets are gradually reorienting themselves to meet the challenges and needs of the modern retail environment. Although souks were once a mainstay for almost all retail needs, consumers are doing more and more of their shopping at malls. In response, souks are moving away from supplying daily household goods and are targeting sales of traditional fabrics, arts and crafts, and spices. The government is doing its part to support retail tourism by working to attract tourists to souks, and key infrastructure investments, such as the new airport and the improved seaports, are aimed at increasing the number of visitors.

Economic Mainstays

The Omani consumer price index shows that a very large portion of household spending goes towards food and related products. According to the “2013 Statistical Yearbook”, 30.4% of household consumption in the sultanate goes towards food. This average is significantly lower in the capital, Muscat, where an estimated 24% of household expenditures are on food and beverages.

There are differences in the breakdown of food-related expenditures between the capital city of Muscat and the country as a whole. Across the sultanate, almost 10% of the average consumer’s annual expenditure goes towards cereals, meat and poultry, according to the “2013 Statistical Yearbook”. In the capital, this figure is significantly lower at approximately 6.5%. This discrepancy likely points to shifting consumption patterns in the rapidly urbanising Muscat region.

There is also a perceptible shift from small corner grocery stores towards supermarkets and hypermarkets. Often categorised as organised food retailing, supermarkets and hypermarkets have been established in the sultanate by several foreign food retailers. Alpen Capital projects that supermarket and hypermarket sales growth between 2011 and 2016 will average 7.6%, higher than its estimates for both the UAE and Bahrain.

A.T. Kearney’s 2014 Global Retail Development Index highlights growth in the grocery market in the sultanate, noting that, “The Omani grocery market is fairly concentrated by Middle East standards, with the top five owning half of the market. Khimji is the clear market leader, followed by Al Safeer, LuLu Hypermarkets, Spinneys and Carrefour. Hypermarkets account for 70% of grocery sales; supermarkets and neighbourhood stores – while still important – comprise around 30%.”

The importance of food sales and the growth of the supermarket and hypermarket model can be seen in the stores that anchor malls in Oman. Several major shopping malls in the country have a supermarket or hypermarket retailer that occupies a significant portion of the retail space as this provides some guarantee of higher footfalls across the rest of the mall as well.

Consumer Electronics

In addition to mass grocery products, electronics have emerged as the other major retail segment in Oman. Business Monitor International estimates that consumers spent around $828m on electronics in 2013. Malls and other retail outlets are bringing global products such as smartphones, tablets and televisions closer to consumers. Combined with increasing disposable incomes, this has made electronics an attractive sector for retailers.

Smartphone penetration has reached more than 65% in the country, according to figures from Business Monitor International, driven in part by investments in broadband and high-speed data networks. Total expenditure on phones reached some $242m in 2013 and is expected to grow to $341m by 2017.

In other categories, the sales of computer hardware were estimated to be worth $222m in 2013 and are projected to grow to $261m by 2017, according to data from Business Monitor International. Tablet computers are leading the segment as the sales of laptops decline. “We are targeting at least a two- to three-fold growth in tablet sales in 2014. Smartphone sales are also likely to see an upsurge with more and more feature-phone users upgrading their handsets,” SARCO Oman’s Ganti told the local press in early 2014.

The market for audio-visual products, however, remains the largest and most attractive for retailers, with sales reaching $364m in 2013. This market is expected to grow to more than $500m by 2017, with sales of LED and 3D LED televisions accounting for a sizeable part of this. The consumer electronics sector is projected to grow by more than 33% by 2017, with sales totalling over $1bn, according to Business Monitor International. “Demand for technology and luxury goods is increasing. With a thriving economy these segments exhibit the potential for continued growth in the market,” Nabeel Jawad Sultan, managing director of Jawad Sultan Group, told OBG.

Outlook

There is an optimism surrounding the sultanate’s retail market due to the strong and sustained expansion of the past decade. Retailers have moved from planning to implementing projects, investing heavily in developing local supply chains and retail outlets. Significant government support in fast-tracking vital investments and policies provides retailers, particularly international participants, with a secure foundation.

However, the retail segment does face a number of challenges. While the investment in building malls and other retail space has been a very positive sign for the retail market, shopping malls in particular have shown a lower turnover per square metre compared with regional markets, such as the UAE.

Competition from neighbouring countries with a more expansive retail offering is also an issue. The ease of access to Dubai in particular means that consumers in Oman can pick from a wide array of retail options and do not need to restrict their spending to what is available locally. Omanis reportedly spend more than OR42m ($108.8m) in the UAE each year.

Nevertheless, A.T. Kearney has singled Oman out as a “small gem for retailers seeking a concentration of wealth and a first-mover advantage”. The global management consulting company debuted Oman in its flagship Global Retail Development Index in 2012, ranking the country as the eighth-most-attractive emerging retail market globally. Other countries have moved up the rankings since then – Oman is ranked 17th in the 2014 edition of the index – but A.T. Kearney remains confident in the sector, noting that the Omani retail market has grown by an impressive 7% since 2011.