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While US and European high streets continue to face pressure from online marketplaces, and traditional retailers scramble to develop omnichannel offerings for consumers, in one region of the world the mall model remains the favourite: the Middle East.
Jacco Weterings, Allport Cargo Services director for the Middle East, told a retail-focused supply chain seminar in London last week that shopping malls in the region “are an entertainment destination in their own right – online is beginning to grow, but visiting a mall remains one of the region’s favourite pastimes”.
Indeed, according to a newspaper report at the weekend, the five-year-old Dubai Shopping Mall has now become the most visited place on the planet; with shopper numbers hitting 80 million in the past 12 months – that’s 17 million more than the population of the UK and more than the number of sightseers at Niagra Falls, the Eiffel Tower and Florida’s Disney World combined. The figure is expected to top 100 million visitors by 2020.
The rapid growth of retail volumes in the Middle East, particularly in those countries that are part of the Gulf Cooperation Council (GCC) – the UAE, Oman, Saudi Arabia, Bahrain, Qatar and Kuwait – represents a major opportunity for UK retailers whose goods are highly prized in the region.
Last year, retail sales in the GCC countries totalled $230bn and the sector has a compound annual growth rate of 7.7%.
In addition, the scale of expansion is impressive – according to Mr Weterings, there is currently 151 million sq ft of gross leasable retail space in the GCC – destined to grow to 248m sq ft by 2020 – and some of the huge developments underway include the 2.5m sq ft YAS Mall in Abu Dhabi, the 2.1m sq ft Mall of Qatar and the 2.7m sq ft Al Diriyah Festival City in the Saudi capital of Riyadh.
At the heart of the GCC retailers’ modus operandi is the franchise model, with family-owned companies such as MH Alshaya Group and Al Futtaim talking the lead.
“These are cash-rich companies that develop a lot of their properties in-house,” said Mr Weterings. “They build their own malls and fill them with their own franchise stores. Over the last five years, Al Shaya has opened a store a day, and in 2014 plans to open another 400 stores across the Middle East and Russia, targeting to triple the size of its business over the next three years, going from revenues of $5bn to $15bn.”
The group currently sells over 70 brands in its 2,600 stores, and charting the growth of such companies has allowed Mr Weterings to track what he terms the logistics lifecycle of the UK retail product in the Middle East.
Franchises purchase stock from UK retailers ex-works and sell them at considerably marked-up prices to locals in the GCC. At the point when the first store is opened, the supply chain sees goods sourced in Asia shipped by ocean freight to the UK, and then air freighted to the Middle East.
When the operation has grown to 15 stores, it presents the opportunity to develop a transit hub in Dubai, and the franchisee can start seeking opportunities for goods to bypass the brand’s host country. In addition there are possible origin-consolidation opportunities for season implementation, with replenishment via air freight from the host country.
At the 50-store stage, across several countries, there are more direct sourcing opportunities from Asia, possible stockholding and replenishment from a Dubai warehouse, while air replenishment from the host country can now bypass Dubai.
And when a franchisee hits 500 stores, it has a reached critical mass and can maximise direct-to-market sea freight from Asia, and supply chain design can begin to have a material effect on the bottom line.
“At this stage they can minimise the use of air freight,” said Mr Weterings. “When franchisees become really powerful they buy ex-works at the point of origin, and if you look at the portfolio of some of these companies, they have brands which compete fiercely in the UK under the same roof in the Middle East.”
However, he added: “The question is, what is the best strategy for UK retailers keen to get their brands into GCC malls?”
He suggested that Alshaya might represent around 0.5% of H&M’s business, which would mean that it would not make sense for the retailer to split goods at origin. On the other hand, some 50% of Mothercare volumes are for the Middle East, where it clearly makes sense to ship directly from origin.
In fact, he said, there was increasing evidence of UK retailers managing their own hubs in Dubai to take advantage of opportunities in the region.
“As long as there are sufficient volumes, these retailers are seeing an 80% cost reduction by going direct to Dubai, rather than via the UK and gaining a 30-day transit time improvement,” he said.
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