Al Arabiya: Franchises flock to Dubai, as demand struggles to keep up

Lululemon, Old Navy, Abercrombie & Fitch, All Saints and Five Guys are just a few of the new faces on Dubai’s ever-expanding retail scene.

 With franchise brands projected to double within the next seven years and mall space ballooning, retailers worry whether consumer demand can keep pace.

 Retailers are already suffering from such challenges as high rents at prime locations, a decrease in Russian tourists, a weakness in the exchange rate and an increase in competition.

Retail mall space in Dubai is expected to increase 19 percent over the next two years to reach around 3.5 million square metres, according to a report by real estate consultancy firm Jones Lang LaSalle MENA. Currently demand is still outstripping supply with occupancy close to 100 percent.

 The average rent in the larger malls increased by three percent last year, but retailers say lease renewals in prime locations increased by as much as 50 percent. Top shopping centres, like Dubai Mall, which has an average footfall of 250,000 people per day, demand rents of up to $270 (1,000 AED) per square foot.

Meanwhile, Russian tourists, who traditionally have been among the top five spenders, have decreased due to the collapse of the rouble. Spending by Russian tourists plummeted by 57 percent in the first three quarters of 2015, compared to the same period in 2014, according to a study by regional payment solutions provider Network International.

To top it off, because the dirham is pegged to the strong US dollar, European tourists also have much less spending power.

‘Tough market’

“It’s a very tough market,” said Ahmad Al Khayyat, managing director of Al Khayyat Investments, which operates several franchises in Dubai, including BurgerFuel and Superdry. “The retail market was very weak last year and this year we expect it to be even weaker.”

Rent increases have proved unsustainable for some businesses. Apple Seeds, a New York-based children’s edutainment centre, was forced to close in early March after property developer Emaar increased its rent by 50 percent.

Reem Farah, who is partner at both Apple Seeds Dubai and Flywheel Middle East, said rent increased by 25 percent at Flywheel’s two spinning studio locations as well, but they chose to stay put.

“At the end of the day it’s obviously better for us to stay in our current location than to close the business for four, five months and look for a new one and fit out somewhere new,” she said.

As rents eat up revenues and the retail market expands, sales growth is slowing. Euromonitor International has projected that the value of the United Arab Emirates’ retail market will be $53.7 billion in 2016, a 7 percent rise on last year, compared to an 8 percent rise from 2014 to 2015.

“We’re expecting the [retail] market to soften further, reaching the bottom in 2017,” said Craig Plumb, head of research at JLL MENA.

Analysts say the dip in the market will only recover when new tourist attractions open later this year and next year, such as Legoland, the Dubai Water Canal, and the world’s largest Ferris wheel Dubai Eye.

Brands seem to be betting on long term success. Dubai comes in second worldwide as the city with the most international brands after London, according to the 2015 “How Global is the Business of Retail?” report by US-based real estate consultancy firm CBRE. With a presence of 55.7 percent of global retailers, Dubai beat out Shanghai, New York and Singapore.

There are currently around 800 franchise brands in the UAE, and that number is set to double in the next seven years. Franchisors are attracted by its business-friendly, tax-free environment and, with the seventh highest GDP per capita in the world, its affluent consumer base. Dubai is particularly alluring as a booming tourist destination with 13 million visitors last year and targeting 20 million by 2020.

It is also an ideal launch point to the rest of the region. Shake Shack opened its first international location in Dubai in 2011 and now has 24 outlets in the Middle East. Lululemon has already opened three stores in Dubai since September and plans to expand to several other Gulf countries.

Shifting market

“If you asked the average company that has already made some solid foundations what are their target markets, Dubai is there 90 percent of the time,” said Professor Roy Seaman, founder and managing director of UK-based consultancy firm Franchise Development Services .

Following the economic downturn of 2009, Dubai has steadily put mega-projects back on the table and the city is buzzing with construction again. Several major mall extensions and new retail developments have opened in the past year, and retailers have no choice but to keep up as the market shifts.

“It’s not like New York or London, where the areas are established…you have new areas coming up all the time,” Al Khayyat said. “You can’t take the risk of not being in new developments, because you’ll be out of the market.”

Consumers may stand to benefit the most, as market saturation has pushed retailers to offer discounts and other attractive deals. Normally sales are limited to January and June, when the Dubai Shopping Festival takes place, but lately stores have been offering discounts on a more regular basis.

New shopping malls will likely continue to attract retailers, while older locations will suffer. The Mall of Arabia, billed as one of the world’s largest malls with more than 1,000 stores, does not have a completion date set, but it already has a “retail space request form” on its website.

The brands that will survive are the ones that can afford the high-footfall locations, manage their expenses smartly, and offer high-quality products at good value, says David Macadam, CEO of the Middle East Council of Shopping Centres.

“For years this market was considered an emerging market and in an emerging market all [retailers] had to do really is open your doors and the sales would flow,” Macadam said. “Now that it’s becoming a more mature market, [retailers] have to do a little better than just opening the doors.”

By Nada El-Sawy

Link to Article: http://english.alarabiya.net/en/business/economy/2016/04/29/Franchises-flock-to-Dubai-as-demand-struggles-to-keep-up.html