Franchising in the Middle East, Dubai and Beyond
Franchising World,January 2007
With more than 120 nationalities residing in the city, and an extensive tourist component in the GCC’s commercial hub, Dubai, has been coined a “window to world.”
By Tracey Furey
The Arabian Gulf, sometimes referred to as the Persian Gulf, is at the very heart of the Middle East and North Africa region, a powerful economy consisting of a combined population of 1.4 billion people and a staggering combined Gross Domestic Product of $1.9 trillion.
The merger of the six states of Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain and Oman that form the Gulf Cooperative Council is a union of political and economic strategies, somewhat similar to the European Union.
While a small enclave on the world map, the GCC has attracted in-bound investment that is more than a match for many “first-world” economies. With a combined GDP of $600 billion and a population of 34 million, the GCC is ranked as the world’s 17th largest economy.
The oil-boom of the 1970s changed the desert landscape forever. With more and more GCC nationals being educated abroad and now travel savvy, the demand for like-for-like services and facilities on their home territory knew no bounds and still prevails. The GCC was quick to realize the benefits the franchise business model could bring to the region and franchise relationships are imbued into the social and economic structure here.
Franchise-driven revenues are estimated at $30 billion and the franchising sector is experiencing a 27 percent annual growth rate, according to Abdul Rahman Falaknaz, organizer of the Franchising Middle East Exhibition. Franchised and licensed businesses have permeated all sectors; education, transportation and tourism included, but perhaps it’s most significant impact has been in the retail sector.
With per-capita retail expenditures of $1,800, the GCC ranks lower than the United States ($9,000) and the United Kingdom ($7,000) yet compares favorably with China and India. So how do the numbers stack up? The UAE, while not the largest market (first position goes to Saudi Arabia with a population of more than 20 million and retail sales equivalent to 18.2 percent of GDP), has been the catalyst of the region’s development, and considered the regions commercial capital. It has invigorated the entire region’s economy.
Leading the Way
Dubai’s effort to secure its economic supremacy ahead of its depleted oil reserves shows no signs of subsiding. It led the way for foreign investment with the construction of free zone’s notably Dubai Media City and Internet City and was the first of the GCC states to allow 100 percent ownership of businesses by foreign investors. Free zones continue to expand and are now being offered throughout the UAE including in the country’s federal capital, Abu Dhabi and other GCC states.
Dubai was also the first to offer “freehold property” to foreign investors, a move which catapulted the UAE into an international property investment hub and activated a regional-wide wave of residential and commercial real estate developments. Currently, investment commitments to GCC real-estate projects have topped $400 billion. The fact that more than 25 percent of the world’s cranes are said to be situated here is a mark of the construction-frenzy hallmarking the region.
The second largest growth sector, after real estate, is retail which last year alone saw the entry of an additional 6.7 million square feet in retail space. A five-year forecast indicates that there will be an additional 143 million square feet of retail space available in the Middle East and 30 percent of this will be hosted by the UAE. Dubai’s organized retailing represents about 23 percent of the Gulf region’s US$65 billion retail industry.
Las Vegas Meets Disneyland
Dubai’s retail “jewel in the crown,” Mall of the Emirates, currently the world’s seventh largest mall, will be toppled by Dubai Mall. This giant will cover a total area of more than 12 million square feet and operate nine million square feet of shopping retail space across 1,000 stores. And, it does not stop there. From 2008, Dubai will be home to the world’s largest mall, Mall of Arabia. This mall is the gateway to a project of epic proportions, Dubailand. Positioned as Las Vegas meets Disneyland, there are expected to be more than 40 theme parks in this complex.
According to Retail International, Dubai’s retailers alone have to generate US$8 billion in sales by 2009 to sustain the massive increase in shopping center space and retail activities. The UAE and the other GCC states are enjoying population increases above 3.3 percent per year and forecasts suggest that Dubai’s 1.2 million population will reach five million by 2010. Recognizing that the resident population will not alone sustain the retail sector, Dubai is focused on the tourism dollar which currently accounts for 35 percent of retail sales in Dubai’s prime retail centers and this figure is expected to rise to 50 percent by 2010. Moreover, the government is committed to driving the seven million visitors a year in 2006, to 40 million by 2015.
Dubai has already earned an international reputation for being a primary retail therapy destination spurred on by the Dubai Shopping Festival, an event which has grown ten-fold from its launch in 1995. The DSF plays a leading role in Dubai’s retail tourism sector by attracting nearly 50 percent of the total visitors welcomed in 2005. This marketing initiative has enormous marketing budgets at its disposal and its reach has spanned the Middle East, Asia, Europe and Australasia (Australia and New Zealand).
So how is the organized retail offer constructed? In the GCC, more than 50 percent of retail sales are generated from international brands and in the leading malls the retail mix is as much as 80/20 (international brands versus home-grown). The consumer here demands superiority at every level and this is reflected in the brand mix.
Acutely aware that in a race to secure customer loyalty, the malls need to create a mix that is a combination of tried and tested brand leaders with innovative, exciting and fresh concepts; leasing teams are notoriously finicky when it comes to awarding retail space. One thing is for sure, only best-in-their-field will be entertained.
Fast-food has been the darling of the retail sector and it is said to account for 40 percent of the franchising market. Eating out here is inherent in the culture and with a growing number of tourists to accommodate, the fast-food, casual dining category appears to remain the leading contributor to retail revenue for years to come. Not surprising, U.S. concepts are the most revered particularly with the young and aspiring. Attracting the attention of this group is paramount to many businesses here, as it’s estimated that more than half of the region’s population is under the age of 25.
U.S. and U.K. brands dominate across all categories but there as been success among brands from around the globe, including France, Germany, Italy, Holland, Brazil, Canada and the Far-East among others. U.S. and U.K. brands remain high on the target list for many of UAE’s premier retail investors. They have a proven acceptability here and are thought of as being reliable, consistent and mature.
Cultural, Social Sensitivity
The success of a plethora of fashion, fashion lifestyle and high-tech accessory brands here is perhaps an indication of the very essence of the region, an aspect rarely promoted by the world’s media. The Middle Eastern consumer is image-driven, fashion-wise, playful and unrelenting in pursuit of the best. That said, the market is idiosyncratic and if franchise systems or principals are to consider a strategic entry, it is vital to be aware of and sensitive to the cultural, religious and social norms that underpin the regions preferences.
So what about the region’s retail investors? They are on the whole, well-structured and visionary. They are both appreciative of the value brand plays in achieving market-share and mindful of the economies of scale which are required to sustain bottom-line success in this fast-evolving marketplace. There are several regional-wide operators who have as many as 30 brands in their portfolio and the trend for conglomeration of smaller retail groups to operate under one holding or parent company is increasingly apparent.
While there are a number of ways to structure a business relationship here, given that retail and hospitality are not included in the free-zone opportunity, and that prevailing laws demand majority shares to nationals or citizens in joint venture agreements, franchising remains the preferred route for international retailers.
The legal system here is founded on Sharia law, a system of religious and social responsibility. The region’s leaders are all too aware that changes are needed if the GCC is to be truly an international player. There have been many initiatives to amend the constitution to reflect international legal standards and significant changes have been made particularly in relation to intellectual property rights and licensing laws. The GCC is dedicated to its continuing legal evolution and is generally considered to be franchise-friendly.
With more than 120 nationalities residing in the city, and an extensive tourist component in the GCC’s commercial hub, Dubai has been coined a “window to world.” It provides a soft landing for international franchise systems to test product and brand acceptability against a diverse cultural and social mix, and a potential gateway to the other GCC markets and the Middle East and North Africa region.
Tracey Furey is managing director of Franchise Development Services UAE. She can be reached at email@example.com.