Retailers expect families to restrict spending to essential items only until the current economic gloom lifts.
The year of living frugally
Analysts are expecting steep reductions in family spending this year, as the global economic downturn causes confidence to fall and incomes either to stay steady or drop. Last year, 39.4 per cent of family spending was for housing and utilities. But while there has been evidence of a decline in housing costs in some parts of the country, experts do not see that leaving families with extra spending money.
It is the non-essential spending, on items such as electronic goods and expensive clothing, that retailers predict will suffer the most. "The spending pattern has not changed," said Kamal Vachani, director of the Al Maya Group, which has 22 supermarkets in the UAE. He predicted that families would be more reluctant to spend for leisure and other non-essentials, and said spending on groceries would be one of the last categories to decline.
"Even if we do a little bit less than last year as far as food is concerned, with other items the supermarkets will see probably 10 per cent to 15 per cent down," he said. Among the products Mr Vachani thinks will sell less well this year are electronic goods and expensive soaps and toiletries, with consumers choosing value brands instead. Retailers fear they could be hit not just by a reduction in the spending of individual households, but also by a drop in tourism.
Shakil Chaudhry, general manager retail for Jashanmal, said: "In line with what's happening around the world and how Dubai in particular is reliant on tourism for business, we expect if there's a drop in tourism it will affect our overall retail sales. "We are seeing job losses, effects on the property market and investments, and that does have an effect on people's confidence and spending. Overall there is a cautious mood. People are out spending but they are not buying as much."
At Lamcy Plaza in Dubai, the chief operating officer Tim Jones said business had been "tough" and was expected to remain difficult this year. The number of shoppers has remained constant or even increased slightly but spending patterns have changed. Family expenditure on mid-market items, such as value clothing, has not been affected by the financial turmoil so far. However, there has been a noticeable drop in spending on luxury goods such as high-end clothing and footwear, which Mr Jones described as "discretionary purchases".
"You can always say to yourself 'you can put off buying them, you can carry on with what you've got', but for the essentials, you cannot do without them," he said. "Those people in the discretionary product or service areas are finding they have to develop something different to get by. "They cannot just open their doors because consumers are being very picky about who they shop with." Mr Jones said only those stores with "a point of difference", such as a unique style, price or good customer service, have maintained sales at their former levels.
"If they do not stand out from the rest, from their competitors, then they're finding it tough. It would be unwise to assume there's a quick fix. "A lot of people in this part of the world have never seen a situation like this. It's definitely a change from when everybody was trying to take space." Most retailers would be pleased if sales fell by less than 10 per cent this year, he said, adding however that "top-end" malls were likely to be more heavily affected.
An even more drastic cut in business is feared by the travel industry, where agents think they could lose 40 per cent of their business this year. "I think it will come down," said Irshad Mohammad, the general manager at Four Seasons Travel in Dubai. "The people will not want to go anywhere. They will want to concentrate on their jobs, so the package [holidays] will be sold out less." Mr Mohammad said business during January was "OK" but that it has fallen this month. Last year, he said, the market remained buoyant until the middle of December.
Households are also likely to spend less on transport, with dealers predicting flat new-car sales after steep annual increases in recent years. For example, Jim Sakaguchi, Toyota's marketing manager for Oceania, the Middle East and South-west Asia, recently said the company expected a slight fall in sales in the first six months of this year, followed by a marginal increase in the second half of the year.
Last year, the company achieved a 24 per cent increase in sales, slightly more than the average for the country. According to Dr Salwa Hammami, head of research for Arqaam Capital, there are factors other than simply a pressure on salaries that could cause household spending to decline. The heavy borrowing that has financed an increase in home ownership, and investments in the stock market, mean that a reduction in house prices and stock values will lead to a decline in consumer confidence and therefore a cut in spending. Both business and consumer spending, she predicted, would remain "weak".
"The duration of the contraction will depend on how quickly financial firms, businesses and consumers rebuild their diminished wealth and regain their confidence," she said. A resolution to the current crisis will come when banks "resume their role as intermediaries". Until then, she said, spending by governments was likely to remain more positive than that of businesses or consumers. firstname.lastname@example.org email@example.com