Executive Magazine

Halls of decadent splendor

by Nicole Walter November 7, 2012

written by Nicole Walter

Although close to $2 billion worth of luxury items have been sold in the United Arab Emirates this year, looking in the windows of shopping malls today will show that luxury retailers in the UAE have redirected their energy to a more minimalist approach, away from the total opulence that dominated their showrooms in the past.

“Since the onslaught of the recession, wary consumers in the UAE have become more price-conscious and, in turn, many have changed their outlook toward luxury products and have taken on a more Westernized attitude to purchasing habits and started to down trade,” Fflur Roberts, head of luxury goods, at market research firm Euromonitor International, tells Executive.

That means that luxury is being tested for its compatibility with new economic realities in the Gulf region. However, this does not mean that luxury sales are faltering in either the UAE or other emerging markets. According to Euromonitor International’s luxury goods research, the UAE currently ranks 21st out of 32 countries covered.

The four highest-ranking countries, United States, Japan, Italy and France take up almost half of value sales, expected to exceed $302 billion this year globally, a year-on-year real-value gain of 4 percent.

Overall, the UAE is an example of the growing importance that emerging economies represent for the luxury goods industry. According to Roberts, manufacturers of luxury this year saw much-needed growth from emerging economies at a time of sluggish Western demand. At the forefront of the spending spree, consumers in the BRIC countries (Brazil, Russia, India and China), lavished on luxury in sizeable numbers. While essential goods and middle-class fundamentals top the household buying agenda in these four large economies, luxury sales in the BRIC space increased 4 percent from 2011 and 22 percent when compared with 2007.

When compared with the growth rates in the BRIC countries, however, the UAE’s crème de la crème by far topped the ranks of those who expanded their spending in the past five years. UAE luxury sales have increased by almost 43 percent since 2007, which in real terms equates to an increase of $581 million, according to Euromonitor. The per capita expenditure of luxury buyers in the UAE is a story in itself. The small country, with the help of visitor spending, is ranked eighth globally by that measure.

The market still has not exhausted its potential but Dubai’s period of economic worries did not leave it unscathed. The fall in real estate prices led to a 19 percent fall in the UAE’s high net-worth individual population in 2009, Roberts points out. “The luxury market in the UAE has a lot of ground to make up to ensure that it does not slip down the luxury market size rankings any further in the medium-to-long term,” he alerts.

The worry factor should not be too excessive though; luxury sales year-to-date for importers and traders were more akin to sailing the Arabian Gulf on a pleasure yacht than to being tossed around in a dinghy in the Gulf of Mexico during hurricane season.

An ideal region for luxury

Luxury retailers in the UAE are on course for a good year, according to Consultants A.T. Kearney. The firm’s recent GRDI report and business issue paper “Global Retail Expansion: Keeps Moving on in the UAE” pointed to the size and importance of the UAE markets for Swiss watches and for premium automobiles, citing examples such as Dubai’s imports of between 800,000 and one million premium watches per year and the UAE’s position as the fourth-biggest market worldwide for motorcar maker Rolls Royce.

When compared with retail malls in large European or North American cities, the first visual impression on the inside of malls in Abu Dhabi and Dubai is that they are teeming with outlets branded by high-end names in jewelry, watches, perfumes, accessories, fashion and the like.

Majid Al Futtaim (MAF), a big regional player in both development and operations of shopping centers, reports that confidence among its retailers has been boosted by rising consumer spending.

As of mid-summer MAF’s three shopping malls in Dubai — Deira City Center, Mirdif City Center and the Mall of the Emirates — have witnessed a 10 percent increase in traffic and 15 percent increase in sales year-to-date.

“Last year alone, Mall of the Emirates welcomed more than 36 million visitors and we anticipate a greater number this year”, MAF’s Senior Director Leasing Fareed Abdelrahman, tells Executive.

Luxury retailers standing at eye-level with the UAE market say that the demand is well segmented and growth rates differ in specific segments of their product offerings but are increasing throughout.

In the Emirati market for gold jewelry, the 22-karat product lines are sought by buyers, largely from Asia, who think of gold in terms of weight and investment, according to Anan Fakhreddin, chief executive of jewelry chain Damas, which operates 142 stores in the UAE and about the same number in other Middle Eastern markets.

“The 22k segment is very sensitive to price and demand is affected by any sudden price movements, whether up or down,” he says. The purchases of jewelry with 18-karat gold or platinum settings and precious stones, on the other hand are “mostly fashion driven and less of an investment decision,” he explains, adding that annual growth rates in this market segment are 10 to 12 percent.

An important factor for the luxury market is demographics. For Damas, the youth of the GCC population is a huge advantage, Fakhreddin says, because “all the buying occasions are still ahead of the people. In other regions, celebration points and buying occasions are more or less in the past.”

Correlating it to other world regions, he sees the luxury market in the GCC as increasing in importance because of the support provided to luxury by the troika of “strong economies, strong government spending and high oil prices. For all international players, it is a very important and very stable market, growing steadily.”

The ‘A’ Class

Prevalence of wealth cannot be wrong in a market where one wants to sell luxury. And although the inside perception of living in Dubai debunks the false stereotype of ‘rich Arabs’ quite easily, wealth is spreading in measurable ways in the UAE. The highest-grossing income group, earning above $150,000 per year, is expected to rise from 23.1 percent in 2010 to 25.4 percent in 2020, according to Euromonitor’s Roberts.

Concurrently, what Roberts calls “the social class ‘A’ consumers” will also get older, advancing from the 35-39 age group into the 40-44 bracket. Such an expanding, middle-age class of affluent consumers with changing luxury needs must be many a high-end retailer’s dream.

And it is not just the wealthy but even more the aspiring social and economic risers who value luxury and are willing to invest in status. This means retailers simply have to make sure to further nurture the ‘label me’ environment pervading in the GCC, Roberts explains.

“Brands are regarded as a symbol of social status and success. More than a third of residents in the UAE are likely to purchase a luxury product at least once a year, a proportion that is much higher than in many other markets across the world,” he says.

It also does not hurt one bit that authorities in Dubai have keen awareness of the importance of commerce and have created an entire infrastructure of retail institutions and events, beginning with the Dubai Duty Free phenomenon. To encourage spending, government-backed Dubai Events & Promotions Establishment (DEPE) regularly organizes an expanding events portfolio including the annual Dubai Shopping Festival, Dubai Summer Surprises and most recently Eid in Dubai.

These key events in the retail trade calendar have been successful in promoting Dubai as an international shopping destination attracting millions of visitors from around the world, representing a major boost to the economic, retail and tourism industry, MAF’s Abdelrahman points out.

Besides new tourism coming from Russia and China, regional shoppers are also big targets for UAE luxury offerings. “We have seen an increase of visitors from within the GCC — notably from Saudi Arabia and Qatar, who are attracted to Dubai’s proximity and broad shopping and entertainment opportunities. These new audiences support our thriving luxury retail offer, and we expect these trends to increase,” Abdelrahman says.

Good to go farther

Dubai leads not only the UAE but also the rest of the GCC countries in terms of retail space. “With more developments in the pipeline, the overall retail market is forecast to grow to $26 billion at constant 2011 prices by 2016,” reckons Euromonitor’s Roberts, adding that luxury sellers have adapted to changing customer preferences that emerged since the 2008 global economic crisis. “Luxury retailers in the UAE are therefore stocking more affordable luxury items and classic, timeless luxury pieces to cater to the new customer mentality”, he says.

Indeed, new, if smaller retail space, is spreading in upmarket neighborhoods and these up-and-coming living quarters are sure to include retail of the exclusive kind — not even to mention the one-million square foot (92,903 square meters) expansion announced in February of this year by Dubai Mall, already the world’s largest shopping temple.

According to MAF, its Mall of the Emirates (MoE) has a waiting list of retailers, including luxury brands looking to establish their presence in the region. Take a walk around MoE and the evidence is obvious, the mall enjoys 100 percent occupancy at rental rates on par with current industry standards.

Martin Fabel, Partner and Head of Consumer Industry and Retail Practice at A. T. Kearney Middle East, says the GCC region is evolving at hyper-speed, given that its markets are growing three to four times faster than their more developed peers.

“The GCC’s strong representation in the global index reflects the ongoing opportunities for retailers looking to expand their brands in fast-growing markets. While retail activity here reflects many of the global trends, it also highlights the often regionally concentrated demographic segmentation of the consumer market, the composition of which varies from region to region, demanding a targeted portfolio approach for successful go-to-market strategies,” Dr. Fabel explains.

In a nutshell, while there may be a point in life when luxury ends for the individual, given that the right strategies are adopted by its retailers and major distribution groups in the luxury space, there is no reason whatsoever to suspect that the UAE would ever run out of new luxury offerings.

November 7, 2012 0 comments

Business

The smoking issue

by Sam Tarling November 7, 2012

written by Sam Tarling

Hundreds of employers and staff from Lebanon's hospitality industry took to the streets on November 7, 2012, to protest the country’s recently imposed smoking ban [Photo: Sam Tarling/Executive]

The protestors blocked Beirut's Sodeco Square, demanding an amendment to the law which they say is killing business [Photo: Sam Tarling/Executive]

The ban has come at a bad time for the hospitality industry, already struggling with a dip in tourism due largely to political instability [Photo: Sam Tarling/Executive]

Traditional shisha bars have been worst hit by the ban. The protesters called for the law to be amended to include an exemption for such outfits [Photo: Sam Tarling/Executive]

Bar and restaurant owners warned that if their calls were unanswered they would boycott the ban, which has been largely adhered to since coming into force in September [Photo: Sam Tarling/Executive]

[Photo: Sam Tarling/Executive]

Protesters carry a coffin emblazoned with the Arabic word for tourism [Photo: Sam Tarling/Executive]

[Photo: Sam Tarling/Executive]

Many hospitality-sector workers showed up to the protest in their uniforms, including staff from the Bayrock Cafe in Rouche [Photo: Sam Tarling/Executive]

[Photo: Sam Tarling/Executive]

Protesters take to the streets of Beirut over the country’s new smoking ban.

November 7, 2012 0 comments

Economics & Policy

Gulf growth

by Thomas Schellen November 7, 2012

written by Thomas Schellen

Despite some corporate performance soft spots and pockets of socioeconomic discontent, the Gulf economies are a good bet for investors this year, and into the future. High oil prices conjoined with high levels of oil and gas extraction was the formula that kept national wealth in the Gulf region bubbling in the first nine months of 2012, says new research by financial services multinational, Barclays.

While the probability of an economic union of the Gulf Cooperation Council (GCC) countries in the near to midterm is next to nil in her assessment, Barclays’ economist and research director Alia Moubayed is positive on the outlook for the region in 2013, albeit with some caveats for individual countries. “We are largely bearers of good news, because our outlook for the region remains very positive,” Moubayed said. “Our recommendation for investors is basically to remain engaged in the region.”

Its emerging-markets research team expects growth of gross domestic products in the six-member GCC to range from 3.8 to 8.0 percent in 2012 for individual countries and clock in at 5.6 percent for the economic bloc. Although this represents a drop from the 7.2 percent growth in GCC GDP that Barclays cited for 2011, this expectation for 2012 is higher than the bloc’s 5.1 percent growth that was recently forecast by Emirates NBD, according to a report in Gulf News. This endorsement for the region is driven firstly by Barclays’ view, asserting strong global liquidity and general support from central banks for flows of this liquidity into emerging-market assets.

“We are recommending to our investors that they move down the risk spectrum and chase higher yields,” Moubayed said. In this context, the Middle East and North Africa region offers “a good combination of assets where you have strong fundamentals but also high yields, making these assets attractive from a risk-reward perspective.”

A nuanced view on growth

The factors that will determine the economic outlooks and attractiveness of the various investment opportunities around the region are well-established constants that have been the region’s blessings and banes for many years. They are, besides oil prices, government spending, balancing of oil and non-oil economic growth and political risk.

In 2013, GCC-wide GDP growth will slow to 3.9 percent, forecasts Barclays’ latest research publication under Moubayed’s purview, “The GCC Handbook 2012”. However, the rates and speed of economic development will be quite diverse, creating performance and investment pictures that vary from country to country. In terms of real GDP, Barclays sees Qatar as the growth leader in 2013 with 4.5 percent, followed by Saudi Arabia (4.2), Oman (3.9), Bahrain (3.5), the UAE (3.2) and Kuwait (3.0).

Barclays’ views and forecasts on the GCC and individual member countries differ from the latest World Economic Outlook figures, published last month by the International Monetary Fund (IMF). The IMF document, which groups the GCC with the region’s other oil-producing nations, does not provide a GDP forecast for the bloc. For individual countries, the IMF projections for 2013 for real GDP growth in Qatar are higher than those of Barclays but the IMF projections for Kuwait and the UAE are lower than the Barclays forecasts by 1.1 and 0.6 percentage points, which is not insignificant. More interesting than the numerical forecasts, which have the tendency to fade from memory as readily as tea-leaf divinations on love and fortune, are Barclays’ views on how the different GCC countries will handle their strategies and what challenges they will face in managing the constants.

The oil snake and the non-oil tree

The paradisiacal wealth provided to GCC states by their hydrocarbon exports has long had the downside possibility of choking non-oil economic growth. The handbook sees the interplay of oil and non-oil economic expansions at the current juncture as determined by a sharp impending drop in hydrocarbons-based growth to less than half a percent year on year in 2013.
Oil prices are not the problem. According to Barclays’ assessment, 2013 will see an average oil price of $125 per barrel (Brent), up from $113 forecasted for 2012. With Iran largely out of the provider picture, oil market dynamics will be producer friendly.

The recent past provided the GCC with year-on-year hydrocarbon growth rates of 7.4 percent (2011) and an estimated 4.5 percent this year, yet production capacity limitations and relative oil price stability, even at high levels, mean that no growth is on the books for next year.

The resulting challenge will be “to encourage and sustain higher rates of growth in the non-oil sectors in the coming period”, the handbook said, specifically citing the great importance of non-oil growth for reducing unemployment.
The supply and demand balance for Liquefied Natural Gas (LNG) will next year be “extremely supportive of prices”, said Moubayed. Yet LNG giant Qatar needs, in Barclays’ view, to prepare itself for challenging gas price-plays not in the short term but beyond 2014, as gasification projects in Eastern Med and Australia and other game changers to the price dynamics are throwing their shadows ahead. “In the medium term, supply-demand dynamics in LNG could become more challenging for Qatar,” Moubayed said.

Big spenders and big cash burners

While public sector spending will continue at significant levels in Saudi Arabia and Qatar, and be elevated in Oman and Kuwait, Barclays expects less in the United Arab Emirates, where Moubayed sees significance in Abu Dhabi’s desire to rationalize spending.

This desire appears to be rooted in the early days of the economic crisis a few years back when Abu Dhabi was spending more in terms of share in GDP on stimulus measures than all it’s peers in the Gulf. This stimulus support was directed mainly to the corporate space but as of late, revision of large projects and rationalization of spending in Abu Dhabi may be linked to uncomfortable numbers from the state-affiliated corporate space.

State-affiliated issuers of corporate bonds in the wealthiest emirate of the UAE are not looking too enticing when one examines their ability to churn out revenues. Over the four years 2008-11, and for five major corporate bond issuers in Abu Dhabi, “we estimate negative cash generation of $62 billion,” the handbook noted.

Domestic issues that pose challenges in Kuwait and Bahrain have a more political bent. The more it immerses itself in political bickering, the less likely will Kuwait be able to make progress in implementing its development plan and it could also “put some of the gains at risk that the Kuwaitis made recently in terms of improving the cleanup of balance sheets and through improved fiscal discipline they have made to keep better savings for future generations,” Moubayed said.

For Bahrain, she sees a “mixed picture” where recent return to growth is juxtaposed with nervousness over inability to reach political reconciliation. Plus, Barclays’ expectation for a balanced budget in Bahrain was put in question by her visit to Manama last month. “It seems that the budget could be much higher and the deficit not be balanced at all,” she said, with a 3 to 4 percent deficit a possibility.

The tipping point: political risk

As Moubayed confirmed, geopolitics is the most important element in assessing the Middle East’s differentiated investment potentials with meaningful accuracy. According to her, the impact of geopolitics on the investment climate is twofold. On one hand, the obvious geopolitical risks of the reality have to be weighed in valuation of any investment proposition related to the region. On the other hand, the perception of high risk is anchored deeply in the minds of investors, making this a driver of decisions with a possible propensity to override the very strong economic fundamentals in the GCC that speak for investments in the region.

The complexity of geopolitical risk in the region means that the actual dangers de jour are anything but easy to spot and at the same time, tough to do analytical justice to. “Our view is that the chances for an imminent confrontation have receded considerably, at least in terms of a unilateral attack by Israel on Iran,” Moubayed said. The handbook addresses the possibility of a conflict over Iran’s nuclear program but that is not the full picture. “We have moved beyond this binary approach to geopolitical analysis to a much more complicated web of interrelated risks spanning from Syria to Iran to Iraq,” she elaborated.

For investors, this requires another round of highly nuanced thinking. “As geopolitical risk is likely to come back to haunt us very soon, people will start differentiating among risks between issuers and corporates and banks. This is why we think that, for example, corporate issuers with greater exposure to oil and gas and infrastructure will be more risky. Corporate issuers with greater refinancing needs could also be perceived as riskier, should there be capital flight from the region, or the shying away of capital inflows.”

Peeking at some of the company-level views in the handbook, a notable recommendation in the analysts’ view is Dubai Holding Commercial Operations Group (DHCOG), one of the economic crown jewels of Dubai ruler Sheikh Mohammed bin Rashid al Maktoum. DHCOG is a favorite of the Barclays equity team from a risk/return perspective because of successes in the restructuring of its Dubai Holding parent and its engagement with hospitality, property and trade, sectors that are seen as drivers of Dubai’s growth. Moubayed said, “The whole Dubai corporate space remains our top pick because the triple-B rated corporates are high-yielding at current levels.”

Mall developer Majd Al Futtaim is Barclays’ top pick among BBB-rated corporate issuers in Dubai.

A read through the handbook with a mind to inquire about the more long-term prospects for the GCC, the volume’s depiction of differentiated investment profiles and political approaches makes the idea that the GCC could become a better economic and monetary union in the short term look exceedingly fanciful. When asked about it, the Barclays economist put her optimism on infrastructure as a facilitator, much more than on politics. The GCC-wide infrastructure projects on rail, power grid and road network improvements, she opined, could be “a good entry toward convincing politicians and local constituencies of a stronger economic union between the countries.”

November 7, 2012 0 comments

Economics & Policy

World Economic Forum’s Martina Gmur

by Thomas Schellen November 7, 2012

written by Thomas Schellen

The World Economic Forum (WEF) is the preeminent organization trying its hand at the impossible game of matching business with the greater global good. The WEF global agenda councils (GAC) are an ensemble of stakeholder groups that play an increasing role in identifying and defining issues to go on the agenda of the WEF’s annual main event in Davos, as well as regional events. As the annual GAC summit is hosted in the United Arab Emirates it is also the WEF’s only top-tier event associated with the Gulf region. Executive chatted with GAC chairperson Martina Gmür.

What issues will dominate the GAC summit this year?

We have a strong focus on the economy and on what is going to happen in Europe, but there will also be discussions on China and the other emerging markets. One of the big themes will be resource scarcity and related to that, water, food and energy. Lastly, a major issue that has been raised and is important to discuss is the digital and communications revolution.

What will be your hottest topics this year relating to the Middle East and the regional economy?

A clearly important one is youth unemployment and we will have a televised debate on this topic. The other one that we feel is very important is the whole geopolitical risk and security agenda. On this we will also have a TV debate. Those two are really important aspects.

On the larger front, [we will discuss] the role of the Middle East as it relates to Europe, and also the outcome of the elections in the United States and the implications for the region.

What does this wide spectrum of topics and current concerns demand of you as a person steering this event?

You do have to have a certain design or architecture to fit everything in. The summit is quite different from other events that we have and it is a lot more flexible and open. Not all the sessions are pre-determined. There are just the broad topics and then whatever the group decides becomes the focus. This can be influenced by recent events but also conversations with other people in the network.

How do you determine the membership in the different councils?

It is quite a lengthy process that we engage in each spring. We talk to our government constituents and [those people with whom we have]relationships — our chief executives and strategic partners — and we do our own research on who the new voices in the world are, on [a] regional and on [a] stakeholder basis. We collect all these nominations and then we do a pre-selection based on certain criteria of diversity and fit with the topic.

Is the final selection done by WEF or by a peer group?

The Forum has the ultimate decision but we will check back with the councils and the chairs. Each GAC has a chair per year and there is usually a vice-chair and 15 to 20 people in each group per year. Those people can rotate but usually 80 percent stay on for at least two or three years.

How much time would a council member have to commit to participate in a GAC over the course of two years?

It will be a minimum of one or two weeks over two years but most people actually engage more and many councils not only discuss ideas but also start implementing on their levels and that takes a lot more time.

There is no remuneration involved in council membership?

No, none at all.

The councils are one of several new structural elements in the Forum. Where do the councils fit in with the task of shaping the future of WEF?

The essential purpose for creating them was to help us shape the agenda in a more structured way. They are very much embedded in all our activities, they participate in our initiatives, they participate in programming for our regional events; the summit is the key brainstorming event for those and for agenda-setting for the program that happens in Davos. They integrate in all [the Forum’s] communities.

Do you have measuring tools and feedback mechanisms to show how effective the different councils are in fulfilling those roles?

Yes. We ask them to produce annual reports at the end of their terms to show what they have achieved; how much they have been contributing to our activities but also to activities around the world. We have feedback rounds within the groups themselves and also with our constituents. Our strategic partners for example constantly rate how much value the councils add or don’t add.

You have quite a number of councils. How many are there in total, how many are new, and do you have a personal favorite?

This year we have 88. Of these, 16 or so are new. I could not choose a favorite. They all have their own special things that make them really interesting. There are topics that no one has done much on such as new growth models on economic thinking or the Arctic, which is really a new effort for the Forum, but there are also the long-standing ones [such as] the ones on education or health.

The whole culture of conferences, endless debates, and global recommendations or rankings has proliferated greatly in the last 20 years. Do you think that it is still meaningful today to hold global events of this type?

From our perspective, one shouldn’t underestimate the power of dialogue and bringing people together. We are putting huge emphasis on virtual engagement as well. We are balancing the physical conference, going to a more virtual… culture, or reality. I certainly think virtual [interaction] will play a big role in what we are doing and how we interact and communicate and our products will also become more and more virtual. But as I said, the dialogue itself is critical and we have seen over and over again, how useful it is to bring people together who have never spoken [before] and break some barriers.

A recent WEF report focused on the gender gap. The report seemed to indicate that there are some improvements in gender balance but it is also known to be a persistent problem in corporations and countries. One also sees many more men than women on the GAC participant lists. What is the situation within the global councils as far as gender balance?

It is one of our priorities to improve the gender balance within the councils. We have today 25 percent women across the councils, which obviously can still be improved. We started from 15 [percent] four years ago and have improved it every year. Our aim is of course to get to 50 percent in the future but we have to be realistic. There is a certain reality that Fortune 500 and political leadership around the world is not 50-50.

Do you expect that a more balanced composition of the councils could create a loop where women participants have a greater chance to take larger roles in their organizations?

Yes, one of the big points that encourages people to be in the councils is not only the contributions they can make but also the recognition of their thought-leadership.

And that could perhaps help women advance in their organizations?

Perhaps.

Is there a specific value-added that you expect from the new councils in 2012?

We emphasise greatly the economy and finance related councils in the hope that we generate new thinking on economic growth models this time around because many argue that the economy after the crisis will be different than before. We also have a number of new environmentally related councils, whether it is governance of sustainability or measuring sustainability. Then we have more innovative councils like the one on complex systems which we hope can help us to put a perspective on how our world is changing and what that means for different issues in our complex world.

November 7, 2012 0 comments

Economics & Policy

A promising partnership

by Karl Nader, Ramy Sfeir & Karim Abdallah November 7, 2012

written by Karl Nader, Ramy Sfeir & Karim Abdallah

There is no shortage of super-regional and regional malls in countries of the Gulf Cooperation Council (GCC). Super-regional malls, such as Dubai Mall and Mall of the Emirates in the United Arab Emirates, as well as Villagio in Qatar, are major destinations and are filled with well-known and sought-after high-end retailers. In some of these malls — which often attract thousands of visitors per day — you can shop, visit artificial ski slopes and travel on a replica gondola.
In addition to their popular leisure offerings, these malls each comprise more than 200 shops, restaurants, and entertainment venues. Similarly, regional malls, such as Muscat Grand Mall in Oman and The Avenues Mall in Kuwait, provide residents with 100 to 200 shops, dining venues, and entertainment facilities that are multi-purpose in nature.

The GCC retail boom of the past 10 to 15 years spawned these shopping centers along with developments in almost all parts of the regional property market. However, the GCC market continues to evolve and this growth is paving the way for new opportunities. In particular, cities are flourishing and communities are expanding. This means that while super-regional and regional malls serve their purpose of providing a major anchor within cities across the region, they are far from becoming convenient one-stop shopping centers for everyone, especially given their lack of proximity to housing developments and cumbersome access. Ultimately, this gap in retail coverage offers canny developers and retailers an important opportunity.

Matching brands with bread

Essentially, malls attract tourists and families, but are not practical for fulfilling the daily needs of GCC residents. This is because they are situated in busy city centers, locations that are far from housing developments, making these malls inconvenient for everyday needs such as childcare centers, gyms, grocery stores, and other miscellaneous shops. At the same time, there are more and more large, isolated residential developments that lack nearby shopping centers and convenient retail space.

The mundane needs of local communities are an opportunity for retailers and real estate developers. The attraction for retailers is expansion via new channels. For real estate developers, such ventures can reignite development plans stalled by the property bust, and provide sustainable recurrent income essential for balancing their business models.

One current trend that aims to meet market needs is a fully integrated approach among large retail conglomerates and mall developers. In this model, a developer acquires, or organically develops, capabilities in retailing (such as major brands) — or a retailer develops the capabilities needed for property development. This ensures consistency of retail and property objectives as well as maximum returns.

This fully integrated approach, however, is operationally complex and financially risky. Nonetheless, successful regional examples include Azadea’s Le Mall branches in Lebanon, which have responded to community needs by offering malls that focus on convenience and present affordable retail and dining options in smaller-sized malls. The fully integrated approach has also been employed by retailers and developers looking to create large-scale mall developments. Alshaya’s The Avenues located in Kuwait and Majid Al Futtaim’s City Center properties across the region are both prime examples of this trend.

These examples of fully integrated models also demonstrate the substantial evolution among retailers and developers. Azadea and Alshaya have established themselves as franchising specialists, yet are now developing malls that showcase their wide portfolios of brands. At the same time, Majid Al Futtaim has made a name for itself as a mall developer, but is now growing its own retail portfolio of fashion brands and grocery stores (namely Carrefour).
These malls are all driven by their corporate owners’ need to improve negotiation positions and secure their share of the attractive retail market in the region. While sometimes successful, this model requires that retailers fully build capabilities in mall development and management, and that mall developers acquire retail capabilities in order to ensure that best practices are not overlooked. Otherwise, these malls may face challenges, such as design flaws, access issues or a narrower retail offering.

A better alternative

Yet there is another, more promising approach that could enable smaller retailers and developers to compete and capture a share of the retail gap without having to develop a complete set of new capabilities. In essence, non-integrated real estate developers and retailers should form alliances to develop convenience and neighborhood shopping centers geared toward GCC residents.

This model allows successful retailers, such as Al Meera and retail cooperatives in the UAE, to capture market share without the high capital costs of building new outlets. Instead, retailers will be able to rent store units in these vibrant, growing communities. Many of these retailers have found the right formula to attract customers at home, a feat that they believe can be repeated in adjacent markets.

These retailers will still need to adapt their value proposition to the specificities of this new channel, but by partnering with real estate developers, they will overcome the biggest hurdle — large upfront costs.

For real estate developers, such partnerships can position them for the eventual recovery of the property market. Real estate players are trying not to repeat the mistakes of the past when they focused on capital gains from property sales. Instead, developers need the recurring revenues that long-term rental leases provide, income that will give their investors a constant stream of returns.

Certainly, a convenient shopping center located within a residential development would increase its value and make it more attractive to current and future residents.

Both partners have much to contribute. First, real estate developers, such as UAE-based Emaar and Saudi Arabia-based Dar Al Arkan, own the residential developments that can host the community shopping centers. Second, these developers have expertise in designing and executing commercial centers, in raising capital, and in potentially managing the properties. As for the large retailers, they can become anchor tenants, attracting customers and smaller retail tenants.

Important differences between the partnership and the fully integrated approach are the concentration of risk in the integrated approach, and the partnership model’s dual availability of critical retail and mall development and management capabilities.

A strategic alliance

The best way forward in the partnership approach is an exclusive agreement in which developers and retailers agree to build a number of neighborhood shopping centers together. Given the small investment required, lack of community shopping centers in the region and ongoing trend of large, isolated residential developments, neighborhood shopping centers are in a position to thrive.

The keys for success in this model are full agreement on the center’s positioning in the market, its offerings and its target customers. This model is good for food retailers and large residential developers, who come together in a strategic alliance that allows each partner to focus on their core capabilities. The retailer obtains a secure client base — people are housed next to the shops. The developer builds an environment that is ready for retailers to move into. Sorouh, a leading UAE developer, uses this approach with its Boutik brand. Boutik is a series of retail centers inside Sorouh’s residential communities that offer a Waitrose grocery store and an attractive mix of other retailers.

The partnership model requires careful agreement between the retail and real estate sides on the center’s positioning, its target segments, and the division of responsibilities and rewards. The rewards will be worth the effort. With GCC governments embarking on large-scale housing projects, which include a program to develop complexes of affordable housing with a total of 500,000 units across Saudi Arabia alone, there is no better time for real estate developers and retailers to join forces and provide low and high-end convenience shopping centers.

November 7, 2012 0 comments

The Buzz

Morning briefing: 7 Nov 2012

by Executive Staff November 7, 2012

written by Executive Staff

US Elections

US president Barack Obama said difficult compromises were needed to move the United States forward in a speech after he won a second term in the White House by beating Republican challenger Mitt Romney earlier today.

More from Arabian Business

Barack Obama tweeted “four more years” shortly after winning the state of Ohio.

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Companies

Dana Gas, the first UAE company to fail to meet a bond redemption, said on Wednesday it reached an "in principle" restructuring agreement with creditors to repay the US$1bn Islamic bond, or sukuk.

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Dubai’s Emirates Airline has signed Britain’s low-cost carrier easyJet to its frequent flyer programme Skywards. The agreement will enable Emirates’ frequent flyers to redeem their Skywards miles on easyJet flights across Europe and North Africa from November 6, said the airline.

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Abu Dhabi's two biggest property developers Aldar and Sorouh have both reported big Q3 profits increases ahead of the two companies potential merger slated for later this year.

Credit Agricole Suisse plans Middle Eastern expansion

by Thomas Schellen November 7, 2012

written by Thomas Schellen

Crédit Agricole Suisse (CA Suisse) is the centerpiece of the private banking division of Crédit Agricole, France’s third-largest bank, whose interests in the Middle East include long-standing relationships with banks in Saudi Arabia and Lebanon. Executive sat down with Youssef Dib, head of private banking at CA Suisse, Pierre Masclet, newly appointed head of markets and investment solutions, and Peter Chamlian, the recently appointed chief executive of the bank’s subsidiary in Lebanon.

You are one of five entities under the umbrella of the Crédit Agricole Private Banking arm. As such, you are present in select locations, with Beirut one of three locations in the Middle East, together with Abu Dhabi and Dubai. Why is Lebanon attractive to you, rather than Doha or Riyadh?

[Dib] Lebanon is obviously not what it was 30 years ago but it is still a key market and a key presence for us, for the local market and also for the diaspora. We are very present vis-à-vis the [Lebanese] diaspora, whether in Europe, in the Middle East, or in Africa and Latin America. We know how the diaspora works and the heartbeat really comes from Beirut. We (re)opened the office [in 2006] and are committed to it despite the ups and downs.

You told me that you are adding new competencies. What is the new real estate financing capacity that you are preparing?

[Masclet] Our goal is to protect and grow the assets of our clients. We want to develop product lines that are diversified and deep. We have discretionary portfolios, management activities, advisory mandates, some structured products, private equity funds, forex of course, and so on. What we want to develop more and more to add new points to this, is our real estate offering. It will first be based on knowledge that is coming from France.

Given that regional real estate investment hotspots exist in Dubai and Beirut, will you offer your financial services for real estate in Arab markets?

[Masclet] It will be a new offering and we have to develop it step-by-step and build up a learning curve. We will begin with the main markets of the group which are France and Switzerland. We have projects to develop in other European countries and later we will see the appetite of the clients.

Within your range of product offerings, is there any favorite asset class that you can share as being the best right now?

[Chamlian] In a nutshell, diversification is key today, whether it is asset classes or currencies.

[Dib] On the offering side, we really insist on open architecture and what we are reinforcing is the top-down approach, which is the asset allocation approach. We are pushing more the new offerings [such as] the real estate side, tax and legal engineering, and private equity where we are adding capacity for global custody for our clients.

Do you see a gold bubble or any other asset bubble that is shaping up in your field of vision?

[Masclet] A lot of people are speaking about bubbles today. The price of gold was pushed higher and higher during the last few years. We don’t have a feeling that there is specifically a bubble.

[Dib] Gold continues to be supported by lack of visibility and strong demand from countries like India and finally by the fact that interest rates are so low, so the opportunity cost of investing in gold is very low.

[Chamlian] It is exaggerated by the non-traditional monetary policy by the United States mainly, with QE 3, the unlimited [quantitative easing].

How much in assets does CA Suisse have under management today?

[Dib] About 45 billion Swiss francs ($48.4 billion) in Switzerland. For the overall business line of international private banking, it is close to 100 billion euros ($130.2 billion) for Crédit Agricole Private Banking, to which you can add about 30 billion euros ($39 billion) at Crédit Lyonnais Private Banking. That does not include the private banking through Crédit Agricole in France, which is in the hundreds of billions [of euros].

In which tier of the private banking world are you located, in terms of total assets under management?

[Dib] If we include Crédit Agricole in France, we are definitely in the top 10, but I would guess even in the top five, although this is not official because the group doesn’t consolidate the figures.

November 7, 2012 0 comments

The Buzz

Morning briefing: 6 Nov 2012

by Executive Staff November 6, 2012

written by Executive Staff

Economics

Gold traded little changed on Tuesday as investors awaited potential policy spinoffs from the US presidential election, while China's upcoming leadership transition and Greece's strike over a new austerity package also kept sentiment cautious.

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Qatar and the United Arab Emirates have requested the sale of up to $7.6 billion in Lockheed Martin Corp missile-defense systems to counter perceived threats and lower their dependence on U.S forces, the Pentagon has announced.

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Growth of business activity in Saudi Arabia's non-oil private sector fell slightly in October from a four-month high, a survey of over 400 private companies showed on Monday.

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Abu Dhabi's state-owned investment fund Mubadala is seeking bondholders' consent to alter certain contract terms on outstanding bonds worth about US$3.4bn.

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November 6, 2012 0 comments

Business

Return to the chief’s chair

by Thomas Schellen November 5, 2012

written by Thomas Schellen

In 2002, Fouad Makhzoumi retired as chief executive of Future Pipe Industries at age 50 and handed the reins of day-to-day business to his son Rami. In April 2011, a brain aneurysm struck and Rami passed away in the middle of life. At age 33, he was father of two young children and the main decision maker in the business.

Makhzoumi says as painful as it was to lose his son, he had to quickly reassume the role of chief executive. “Then to step in and reposition, you must remember that Rami for 10 years was the only known figurehead and if I did not step in very fast, the whole thing would start shaking,” he said. “But luckily, I like to read and follow up, and Rami was copying me in on all his correspondence. He would consult with me for only one hour every day on the key issues. I was acting as a chairman, a non-executive chairman. So I was in the loop, plus this was a business that I built myself, so I could easily step in. Of course we also have a very good management that was there before Rami and is there after Rami, which means the adjustment process was not very painful.”

At the time of writing, preparations were being finalized to announce a Rami Makhzoumi chair for corporate governance at the American University of Beirut’s Olayan School of Business. Also, a global prize of jurisprudence bearing Rami’s name for outstanding scholars of law is being prepared on a level comparable to the Nobel Prize, according to his father.

Fouad Makhzoumi on…

…the Makhzoumis:

“We, the Makhzoumis, were in Mecca before Islam. Historically, my father, uncle, grandfather and great grandfather were part of the Ottoman Empire. We believe in the establishment of government. My generation was the first that decided to step out of government and establish our own business.”

…rights and their misperception in the region:

“We don’t understand freedom and don’t understand our rights. We think that if we can remove [former Egyptian President Hosni] Mubarak, we can remove anybody. The process of change is a series of education. We are not educated in this region to understand what it means to have rights. All the time we revolt against the regimes that take our rights away but guess what — we have no idea what our rights are. Look at Lebanon. We are now waiting for a bunch of yo-yos to [give] us the election law that we are pursuing in order to reproduce the same group.”

…his venture in Akkar and Lebanese industrial politics:

“At one point we had 850 employees in Akkar; it was the only investment that ever existed in Akkar. But neither were the Syrians happy for me to generate jobs nor was the Beirut government interested. Instead of trying to help, they blocked me from selling to Syria… There is no intention in this country to try and support industry. For the political regime in Lebanon it is much easier if you are a trader because your profit is a function of the political decision.”

…encounters with the Muslim Brotherhood in Egypt:

“I have a factory with 2,000 people in Egypt. Some time before the ‘Arab Spring’ started the Muslim Brotherhood came to me and said ‘you are not a true Muslim [because] you are supposed to be helping us against the Christians.’ I said, ‘I have a global company, so I have Muslims and Christians, you name it. I actually have 29 nationalities working for me and so I am sorry, I don’t play this game.’ Then, all of a sudden, we had a fire in the factory.”

…Iran:

“Elections in Iran are coming up in 2013. I believe we will come to a deal between Iran and the United States by the end of 2013. The question is what advantage we can give Iran to not put them in the same position as North Korea. They are not willing to back off, because it has become an issue of national pride at this stage. Iran is a much bigger country than Iraq, three times the size, and it will be the focal point together with Afghanistan, to have all these cross[-continental] pipelines.

It is important that we try to encourage the region to come to a deal with Iran. I know the Gulf people may not be comfortable with Iran but at the end of the day, Iran will have to deal with reality, just as we, the Arabs, will have to deal with reality. I believe that if we can do that, it will be done by this time in 2013.”

November 5, 2012 0 comments

Society

Where luxury meets utility

by Nadim Mehanna November 5, 2012

written by Nadim Mehanna

Every time the curtain rises on a motor show these days, it seems a new luxury sports utility vehicle (SUV) is crowding the limelight. A year ago it was the Ferrari FF, four seats, four-wheel drive, a 650 horsepower “family car” targeting the snow-bound vacationer. This spring we got our first glimpse of Bentley’s XP9 concept, the “Queen’s Car” for the super-rich soccer mom, packing both a 12-cylinder engine and a built-in silver-and-Lalique crystal picnic set.

A month later, Lamborghini unveiled the Urus at the Beijing motor show, signaling its own entrance into the luxury SUV ring. Three makers, 7,500 miles apart, but as the saying goes: Once is an anomaly, twice is coincidence. But three times makes a trend.

The entrance of these ultra-luxury brands solidifies a trend started more than two decades ago. It was 25 years ago, after all, that Lamborghini sortied what many consider the first luxury SUV, the LM002 — a chiseled, muscular SUV that would have been right at home in the movie ‘Jurassic Park.’ The car, originally modeled on a military-purpose vehicle codenamed “Cheetah”, sold out almost overnight. Then, of course, there was the Cadillac Escalade — a revamped version of the GMC hauler — bombarded with derision until its sales numbers shut up the critics for good.

The real pace-setters for the modern wave of luxury SUVs came in the late 1990s, in the form of the BMW X5 and Mercedes-Benz M-Class. These “crossovers” were the first to take the concept in a truly new direction, moving away from the militaristic ruggedness of the old design toward something closer to a synthesis with the sports car model. But what started as a trickle has since grown into a flood. Luxury SUVs are taking an increasing share of the limelight, attracting a new class of car buyer — the top-dollar family man, the ultra-rich soccer mom. And that means new business — a lot of new business.

Business is ‘bigger’

In part, the movement toward luxury SUVs has simply been a matter of market inertia. Many people outside automotive circles will tell you that the heyday of the SUV waned a decade ago; that, like the dinosaurs, the big-car movement of the 1990s tripped into a tar pit of high gas prices and drowned, succeeded by a generation of fleeter, more economical sedans. Nothing could be further from the truth. In the commercial markets, many makers are counting on big-car sales to flush out their profit margins this summer. Ford Escapes, Honda CR-Vs and the new Mazda CX-5s are selling like hot cakes, so much so that many dealerships are struggling to keep them in stock.

You can see similar patterns in the sports car markets as well, with sales of BMW’s “sports activity vehicle” segment — the X3, X5 and X6 — up more than 20 percent, and Audi’s Q5 Crossover SUV up an incredible 60.5 percent.

Porsche, one of the first makers to branch into the luxury family vehicle, saw more than half its June sales claimed by two of its break-out models, the best-selling Cayenne SUV and the Panamera four-door sedan.

For commercial and luxury markets alike, SUV sales have never been better.

Trimming down the Hummer

Some things have changed. The new genesis of utility vehicles has less and less in common with the behemoths of the 1990s, such as the Hummers and Mega Cruisers, designed for armored convoys and co-opted by suburban driveways. Sales of those hulking gas-guzzlers did, in fact, tank with the oil price spike of 2002, and today make up less than 10 percent of the big-car market.

The SUV idea has itself evolved to fit the times. The credo of “bigger is better” has been tempered by the reality of gas prices and the more carbon-conscious consumer, so that each new luxury SUV seems to compete for the mantle of greatest fuel-efficiency. Relying on clean fuels and ultra-light carbon-fiber components, the SUVs of today outdistance the Hummers of yesteryear by an order of magnitude.

Currently, the vast majority of SUVs sold are small and mid-range vehicles, defined by their high carriages and focus on front or all-wheel drive. These are family autos for the all-purpose urbanite — a synthesis of power, prestige and, of course, utility. The Bentley XP9 packs a W2 engine, 600 horsepower and enough cargo space for a family of five. The Urus’ chief designer, Filipo Perini, told Forbes Magazine that he wanted the car’s trunk low enough for the family dog to jump in the back. Size has given way to an emphasis on handling, speed and, of course, all the latest gizmos and gadgets to trick out your dashboard.

The marketing angle here is no mystery. While high-end sports cars have traditionally targeted young and middle-aged men, women make up more than half of all SUV drivers. Access to this sizable and previously untapped market segment has been largely responsible for the surge in sales that many of the early pioneers have enjoyed in recent years.

Super cars and Soccer practice

This creates a possible dilemma for the brand, of course. Not every critic out there is happy to see Lamborghini marketing family vehicles. In general, their arguments run as follows: It takes years — decades — to build a brand, to imbue it with certain qualities that go beyond carbon-fiber and chrome. For super cars, those aren’t necessarily qualities that mesh well with soccer balls and picnic baskets.

The machines that Maserati and Ferrari build are supposed to be pure experiences, works of art that sit outside the realm of the day-to-day. You wouldn’t treat them like a family minivan, the argument goes, any more than you would prop up a table with one of Michelangelo’s marble busts. The very idea of “utility” in conjunction with these brands seems heretical.

Ten years ago, just as the Cayenne was being unveiled, I posed this question to the president of Porsche. I told him I couldn’t believe that now, on some wind-blown highway outside of Dubai, I might come across a Porsche towing an Audi through the desert. He laughed, and assured me that the brand was safe. The SUV, he said, represented a new branch in the company’s activities, but not a new direction. This was hardly a step toward becoming a mass producer, and it wouldn’t shake the company’s focus on its core market — the fast, sleek sports cars that will always define the high-end auto consumer.

That much, at least, has stood the test of time.

And despite the many hybrids and crossovers to make their way into the market, when it comes to rough terrain, many believe the originals — Nissan Patrol, Range Rover, and of course, Jeep’s many iterations — still do it best.

Because seriously, if you’re going off-roading in Iceland, are you really going to risk the fenders on a $200,000 car?

November 5, 2012 0 comments