Kuwait economy, retail, feeling heat of expat exodus

The high levels of urbanization, disposable income and household spending especially among citizens, means there are opportunities, particularly in the higher-end segment for retailers in Kuwait to continue thriving. But despite its wealth and high-end retail potential, there is no denying that Kuwait is a small market for international retailers due to limited population size.

Foreign brands are also worried that Kuwait’s dependence on oil and oil-related activities as a driver for economic growth does make it vulnerable. As evidence of this oil-related consumer sentiment, brands point to dramatic slowdown in retail sales following the sharp fall in oil prices in mid-2014, and the consequent austerity measures and subsidies cuts imposed by the government. In the years leading up to 2023, there could also be the unrolling of Value Added Tax (VAT) in the country that could further dampen retail sales.s.

Another potential challenge to retail revival is the mass exodus of expatriates as a result of both, Kuwaitization of jobs in public sector due to government pressure, and the growing living costs as a result of subsidy cuts and increase in fees for most public services. The large number of empty apartments that used to house expatriate families and the increased frequency with which sales are announced by retailers, are evidence of the impact that foreigners leaving the country are having on its retail environment.

A recent report from Oxford Business Group noted that: Given their significant disposable income and the fact that they account for roughly 70 percent of the population in Kuwait, expatriates make a considerable contribution to the local retail market in terms of sales and employment.

The retail and wholesale sector accounts for more than 500,000 jobs, second only to the public sector. Of this total, some 480,000 positions were held by foreigners. The policy of Kuwaitization, aimed at reducing the number of expatriates in the workforce, particularly in the public sector, could therefore have a negative impact on retail sales.

Expatriates employed by the state are increasingly being winnowed down. More than 2500 foreign employees were removed from the public payroll in the first five months of 2019, in addition to the 3100 made redundant last year, according to government officials quoted in local media.

While there has been an increase in overall expatriate numbers, this growth has been linked to the rollout of new infrastructure and development projects, with the recruitment of foreign blue-collar workers bolstering employment numbers.

Such workers, who have low levels of pay and remit much of their salaries to their home countries, have less impact on retail sales than expatriate white-collar workers, whose numbers are being reduced by government policies and replaced by Kuwaiti nationals.

Reiterating this view, a National bank of Kuwait analysis showed that real estate sales in the first quarter of 2019 fell back from a four-year  high in 4Q18.  The decline came mostly from a drop in investment sector sales, which includes sales of apartments and apartment buildings, Sales in 1Q19 stood at KD248 million, a sharp 47 percent decline from the  exceptional KD470 million recorded in 4Q18 and down 31 percent year-on-year.

The bank attributed the declines possibly due to softer demand . “Although property prices and activity levels have  recovered from their lows of 2016-17, rents in the apartment  sector, which is important for the consumer price index basket,  may be being weighed down by relatively weak demand from  the expatriate segment due to recent falls in the number of  expat dependents (which may especially affect larger units)”, said the bank.

Malls in Kuwait are seen as the new social watering holes, especially for the young crowd who find these modern shopping centers an ideal venue to mingle and interact with the opposite gender, and, in the process, do some shopping and dining.

When shopping and dining are an afterthought, rather than the main reason for people gathering in a mall, it reflects on sales and on the viability of retailers who open outlets there. Besides paying a high rent each month, retail operators often pay a premium for occupancy in the newest mall. High footfall but lack luster sales means that many of them are unable to recoup their initial investments and monthly operating costs. Shop closings, shortly after grand openings, are nothing new in Kuwait.

Despite the pressure that the retail sector has been undergoing in recent years, this has not stopped the opening of new malls or the explosion of international brands launching outlets in the country.  The optimism in retail is further reiterated in a recent report by financial advisory firm Alpen Capital, which found that retail is expected to recover and grow through 2023. According to analysts at the firm, the size of the GCC retail sector is projected to grow at a Compound Annual Growth Rate (CAGR) of 4 percent from $253 billion in 2018 to $308 billion in 2023.

Behind the buoyancy on future potential of the sector are several retail growth drivers, including a rising population that in 2018 topped 4.3 million people, and a projected increase in oil revenues from the nearly KD15 billion earned last year. Higher oil prices are expected to not only improve macroeconomic stability, but also trickle down to provide high levels of disposable income and ensure an affluent lifestyle for majority of citizens and a minority of expatriates.

In addition, targeted government initiatives such as reviving retail infrastructure projects, allowing 100 percent foreign ownership in retail sector and easing visa regulations and increasing tourist arrivals, are expected to boost the retail sector further.

Moreover, the retail sector is forecast to witness paradigm shifts in the coming years from the establishment of online e-commerce sites that have the potential to further disrupt, or augment brick and mortar stores, depending on who you talk to. Given the tech-savvy crowd of young millennials in Kuwait, online purchases, especially of international branded products, is likely to shift online.

Several merger and acquisition (M&A) transactions with a focus on e-commerce and online retailing, both within Gulf Cooperation Council (GCC) states, in the region, and on the international level have taken place in the last couple of years. Such transactions are expected to further increase in the coming years and strengthen online retailing,a s companies look for new opportunities outside their borders to expand their market base and size.

According to another report by leading global market research firm Euromonitor International, the retail sales in Kuwait, Oman, Saudi Arabia and the UAE  are projected to increase by more than $24 billion over the next five years, with the UAE expected to lead this trend with an estimated growth rate of 16 percent. All four countries are set to capitalize on the rise of consumerism thanks to favorable demographics, a rise in population and a strong growth trajectory in tourism and per capita income.

The report also reveals that the value of non-store retailing is forecast to increase across all four Gulf markets between 2018 and 2023, with Saudi Arabia expected to account for the biggest growth of 93.5 percent, followed by Oman (68 percent) and Kuwait (48 percent). “The long-term outlook of the sector remains strong and is expected to welcome a steady growth through to 2023.

While these glowing figures will no doubt encourage retailers looking to enter the market, these numbers are no consolation for those looking to exit retailing because of its current non-viability. Lets us hope they can hold out till better days come.

-Staff Report