'There is enough space for both segments currently and physical stores have time to pull up their socks '
E-commerce v traditional - a GCC perspective
Despite high levels of disposal income, internet and smartphone penetration and rapidly changing consumer preferences, the e-commerce industry in the GCC continues to remain in its infancy, says MR Raghud of Marmore Mena Intelligence.
Here, Mr Raghud talks to The National about the issues involved.
It is estimated that online sales in the Middle East is at a mere 2 per cent of overall retail sales; while it is much higher at 15 per cent in developed markets. The low penetration of e-commerce is an opportunity waiting to be grabbed. However, it also stokes fear that it could lead to the decline of the physical segment of retail in GCC.
This concern has turned into a reality in many developed markets such as the United States, where the accelerated shift of Americans shopping via the internet has pushed several retailers into bankruptcy. Approximately 8,640 stores with 147 million square feet of retailing space is expected to close down in US over this year. That would surpasses the level of closures after the financial crisis and dotcom bust, and signifies the enormity of the threat the conventional retail industry faces from the e-commerce segment. The current state of the US conventional retail segment prompts the need to address the following questions in the GCC context.
The GCC e-commerce industry is expected to grow at a compound annual growth rate (CAGR) of 30 per cent to rise from US$5 billion in 2015 to $20bn at the end of 2020. While, the conventional retail market size in GCC is expected to be at $206bn by 2020, registering a CAGR of 4 per cent during the same period. Although the pace at which the regional e-commerce industry is expected to grow is commendable, it would only account for 10 per cent of all regional retail sales. Given the size of the conventional retail industry in the region, it would take the e-commerce segment considerable time before it posed a major threat to traditional retailers. We believe there is enough space for both segments currently and physical stores have time to pull up their socks and think of ways to beat the online competition. The fear is not so near as generally perceived.
The conventional segment in the region is still in its growth stage. Some of the factors that testify that the industry is yet to reach saturation are the steady supply of retail real estate, lower concentration of the market, limited presence of international players, and consumer spending. There are currently ongoing retail projects worth $24bn in the GCC countries. The numerous mall developments in the pipeline are a testament to immense opportunities in the sector. Unlike the US market, which witnessed dramatic overbuilding of stores resulting in excessive retail space, the retail space density in most of the GCC countries is still sparse. The gross leasable area (GLA) for retail per capita in US is around 2.3 squre metres (4.6 sq m, if small shopping centres and independent retailers are added) as against 1.39sq m in Dubai and 1.48sq m in Abu Dhabi. These numbers indicate that there is still enough room for conventional retail space to grow.
The divergent cultural and climatic differences between the GCC region from the US and European markets illustrates the need to gauge the regional retail industry differently. Larger and well-bonded families, regular outings, high per capita spending and lack of other entertainment avenues make malls exciting places to be. Mall of Emirates is the seventh most productive shopping centre across the world, earning $1,423 per square foot per annum. Emaar Malls collectively had 125 million visitors during 2016, similar to annual footfall during 2015. Dubai Mall, being the most visited shopping destination, attracted more than 80 million visitors for third consecutive year since 2014, compared with 65 million visitors in 2012. This is higher than the total number of visitors to Niagara Falls and New York's Central Park put together. Going to the mall is an integral part of the region’s culture. Malls offer a unique proposition of entertainment plus shopping and continue to be the choice of destination for shoppers as it offers a wholesome experience.
While customers are gradually favouring online purchases, there are region-specific impediments to growth. The biggest hurdle for the growth of e-commerce industry in the region is the lack of consumer trust and awareness. GCC consumers are still wary of shopping online, fearing fraud, data security and privacy issues. Moreover, the e-commerce ecosystem such as digital banking distribution and logistical infrastructure is largely underdeveloped. The GCC banking industry is facing huge challenges in meeting customer expectations in digital experience, relatively few people have credit cards and online payment systems are in their infancy. The region still relies heavily on cash-on-delivery, which makes an online shopping operation even more difficult to manage. Cash-on-delivery can result in problems with returns or undelivered items, and often means higher costs, making it an unattractive option.
For now e-commerce industry does not pose a considerable threat to the GCC region’s physical retail. However, if conventional retailers are too complacent and fail to react to the changing trend, they are likely to lose their market share as witnessed in developed markets. A viable option for conventional retailers is to adopt to the hybrid retail model, which involves having both an online and offline store presence. Using a brick and click model, retailers can leverage upon their e-commerce sites by providing information about the latest products, sales, and deals in a physical store. This in return attracts customers to the physical store either to look at the product or to collect their purchased product.
This way the hybrid model is a win-win arrangement for both the conventional retailers and the customers.
M R Raghu is managing director of Marmore Mena Intelligence, a research house focused on conducting Mena-specific business, economic and capital market research.