How the Middle East is forging ahead

Date : 21 August 2013

The Middle Eastern market is quietly forging ahead and presenting interesting opportunities for consumer goods companies that are watching closely...

While a number of emerging markets have been capturing the headlines for the last few years, countries in the Middle East have been quietly becoming more important and interesting for retailers and suppliers alike. With a population that is young and growing, the region is likely to attract further attention in future. In this article, Jon Wright, senior analyst at IGD, looks at three factors that make the Middle East an attractive market for consumer goods…

1. Short-term challenges give way to long-term economic growth and diversification

In the IMF's update on its outlook for the global economy, it cut its forecast for the Middle East by 0.1%, to 3.1% for 2013, but maintained the rate of 3.7% for 2014, making it home to some of the strongest economic growth globally.

While natural resources make up a large portion of the countries' economies, governments in the region have been steadily investing to mitigate their reliance on oil and gas, in particular, and to embed policies for longer term growth. For example, Oman has spent heavily on the building of a new port in Duqm and the creation of a special economic zone in order to create an export hub close to the route taken by ships moving from Asia to Europe while on the way to the Suez Canal.

Elsewhere in the region, attempts to diversify their economies have been taken by Saudi Arabia, manufacturing and solar power; the UAE's Dubai, into tourism and international finance; and Qatar, into petrochemicals, fertilisers and steel.

Despite the positive long-term macro-economic environment, Middle Eastern countries will not escape without some short-term challenges. Inflation is set to rise in all but four Middle Eastern markets in 2013, versus 2012 - Iran is forecast to see inflation 'fall' to 27.2%. Mounting inflation is driven by different reasons across the region for example, in Egypt its depreciating currency and in Saudi Arabia its economic growth - but overall it could put  shopper spending in the region under pressure.

Also, large scale inequality exists in a number of markets. For example, in Saudi Arabia a large section of the local population lies within the medium to low income group, with income growth powered by government spending. This provides an opportunity for retailers and suppliers to target this section of the country's population, but it will be one that requires a different strategy for development in the medium term.

2. Hypermarkets still dominate, but supermarkets and convenience stores will become more popular

Modern grocery retailing - i.e. hypermarkets, supermarkets and convenience stores – will account for a greater share of shoppers' spending in the future, but in contrast to much of the world, where the channel is in decline, hypermarkets will continue to overshadow the market in most countries.  International operators entered the region using the format as a way to provide  wide range and a strong mix of grocery and non-grocery products under one roof,  a step that local retailers have emulated. Carrefour's presence in the region - through Majid Al Futtaim - is dominated by its hypermarkets, while elsewhere  Panda in Saudi Arabia or LuLu across the region also have a strong presence in  the channel.

However, with much spending switching from traditional channels into modern ones, as retailers expand their store presence, so smaller stores, like supermarkets and convenience stores, are increasingly making an impression.  Convenience stores are the emerging channel of the moment. Although there are no large-scale chains in a number of markets - such as Saudi Arabia and Jordan –  the stores are becoming more important in others, like UAE, which has seen a  number of new entrants in recent years.

SPAR, for example, opened its first store in 2011, in conjunction with the locally-based Consumer Cooperative Society, and is looking for further opportunities to expand. The pace of growth for convenience store chains is likely to pick up in the UAE, and Abu Dhabi specifically, following the Emirates' Food Control Authority introducing a law in 2011 that forced independent retailers to modernise stores or face closure in January 2013. The enforcement of the law led to the closure of a large number of independent retailers, who were unable to afford the improvements.

3. Health is becoming an increasingly important issue

A recent publication from the UN's Food and Agriculture Organisation highlighted the prevalence of adult obesity in the region. The report, using 2008 data, showed that globally the incidence of obesity in adults stood at 11.7%. However, in a number of markets in the Middle East, the figure was much higher: Bahrain, 32.6%; Kuwait, 42.8%; Saudi Arabia, 35.2% and UAE, 33.7%.

Mirroring steps being taken in Western Europe and North America, retailers and suppliers can help to educate shoppers about how they can improve their diets or assist them in cutting out the worst excesses. One supplier that has taken a lead in the region is FrieslandCampina. The company launched the 'Eat Right, Be Active' promotion in conjunction with Sharjah's Ministry of Health. FrieslandCampina and the Ministry of Health went in to local schools to raise awareness of the importance of healthy diets and physical activity. In the medium term, therefore, growing health awareness will create an opportunity for retailers and suppliers.

Outlook appears positive for the region

While the region's markets rely on a healthy global economy to keep gas and oil prices high, the outlook for the medium term certainly looks positive. If governments are able to use this time to diversify their countries into other sources of growth, then the region's positivity could last even longer. While there are likely to be bumps in the road - such as inflation inequality - there  are more reasons to be optimistic than pessimistic.

As this economic growth flows into shoppers' pockets, so spending should rise, providing a boost for suppliers and retailers. Trends like health concerns boosting shoppers' desire for value added products are likely to create further opportunities.

Find out more...

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This article was originally published on www.igd.com