Gulf consumer spending stays high

The region’s markets remain attractive targets for consumer goods companies, despite the potential for lower oil prices to dent confidence. Published in MEED, 3 December 2014

Conspicuous consumption is a way of life in some parts of the Middle East, particularly in the Gulf, where shopping often seems like the most popular leisure pursuit. Retailers have become adept at separating consumers from their money and there are few parts of the world where consumer spending has risen as quickly in recent years.

Between 2002 and 2013, the average annual growth in consumer spending in the Middle East and North Africa (Mena) region was 6.7 per cent, according to UK-based Capital Economics. Only Chinese consumers increased their spending at a faster rate over that period.

Compared with other emerging market regions, consumer spending in the Mena region is still relatively small. Capital Economics puts it at $1.1 trillion in 2013, which makes it the same size as India and slightly larger than Russia, but smaller than China, Latin America, and Eastern and Central Europe.

Attractive market

Others suggest the Mena consumer market is slightly bigger. UK research firm Euromonitor puts it at about $1.3bn and the Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC) – the statistics arm of the Organisation of Islamic Cooperation, an intergovernmental body – suggests it is $1.4bn.

Whatever its overall size, certain aspects of the Middle East market make it very attractive for retailers. GDP per capita is relatively high in the Middle East, averaging $9,800. The region also has young, fast-growing populations, which, if overall economic growth can be maintained, should translate into a vibrant consumer market in the years ahead. Places such as Dubai also attract a lot of free-spending tourists.

“Spending by international visitors constitutes an increasingly important source of revenue and is a good indication of growth,” says Raghu Malhotra, Mena president at US financial services firm MasterCard. “Dubai is expected to receive almost 12 million international visitors in 2014, an increase of 7.5 per cent since 2013.”

However, that momentum is now starting to slow a little, with consumer spending expected to ease back to an annual growth rate of 5 per cent in the Mena region from 2015 to 2020. The Middle East is not alone in this, although the slowdown is more pronounced than in some other regions.

“Consumer spending growth slowed further across all emerging markets in the second quarter,” wrote Liza Ermolenko, emerging markets economist at Capital Economics, in a research note published in early November. “In all emerging market regions, consumption growth is now below its long-run average.”

Within the Middle East, a small number of markets stand out in terms of their size, in particular the large population centres of Egypt, Iran and Saudi Arabia, and the UAE. Figures from SESRIC show Iran has the largest consumer market, with household final consumption spending of just over $300bn in 2012. Behind it come Egypt, Saudi Arabia and the UAE, where the market is worth between $191bn and $202bn apiece.

Then come the populous but poorer countries of Algeria, Iraq, Morocco and Sudan, which have market sizes of between $49bn and $67bn. The consumer markets in other countries gradually taper down until the Palestinian Territories, where it is about $10.5bn a year.

Food, drink and tobacco are often the largest elements of consumer spending. According to Euromonitor, this is most pronounced in Algeria, where the category accounted for 45 per cent of all spending, with Jordan and Egypt at 44 per cent and 41 per cent respectively.

The next most significant categories of spending tend to be housing followed by transport. It is notable that in some of the GCC countries, including the UAE, Bahrain and Qatar, housing costs outweigh spending on food and drink.

Wealth levels

Clearly, the differing levels of wealth between countries mean their consumer markets can vary substantially. US consultancy AT Kearney says consumers behave predictably as a country’s wealth increases. It groups nations into four categories based on their typical consumer spending patterns: basic; emerging; escalating; and establishing, although only the first three of these are relevant for the Middle East.

Within the region, basic consumer countries include Algeria, Egypt, Jordan, Morocco and Tunisia. The focus of spending in these markets is on food and personal care items. People often work far from home, so they also spend more on travel, postal services and lodgings, but there is limited discretionary spending. Emerging consumer countries include the GCC markets. In these places, food and other basics still account for a large portion of overall spending, but there is room in people’s budgets for more clothes and footwear, personal care products, communications services and education. Entertainment and leisure spending is also rising steadily.

The next category, escalating consumers, includes Iran alongside the likes of Turkey and some Eastern European countries. Consumers in these places focus less on the basics and have more balanced spending patterns across personal care, entertainment and leisure.

Although Iran may be ranked higher than other regional countries in this system, the ongoing sanctions regime makes it a tough market for international firms to target. Far easier are the GCC countries, which represent the most vibrant consumer markets in the region due to their high levels of disposable income.

Consumer spending per capita is highest in the UAE, Kuwait and Qatar, where it reaches into five-figure sums. The other GCC countries of Bahrain, Oman and Saudi Arabia are also relatively high up the rankings, along with Lebanon and oil-rich Libya.

Consumer confidence

Another important factor is consumer confidence, and here the outlook is far more mixed across the region. Surveys by Australian polling company Nielsen highlight the very different experiences of consumers in Egypt compared with Saudi Arabia and the UAE.

In the most recent poll, covering the third quarter of this year, some 85 per cent of Egyptians felt their country was in recession and 64 per cent said they had recently changed their spending habits to save money. Egyptian consumer confidence was at an all-time low in the second quarter of this year, at just 81 points, and, although it rose slightly to 85 points for the third quarter, this is not a promising result for an index where the baseline is 100 and anything below that indicates the degree of consumers’ pessimism. Compare that with the UAE where the latest consumer confidence index edged up three points to 112, giving the country the fifth-highest score among the 60 countries surveyed.

“Consumers in the UAE continue to be bullish about future economic prospects,” says Arslan Ashraf, managing director for Nielsen in the Arabian Peninsula. “Despite the fact that rising rents are driving inflation north and consumers are mitigating risk via savings, they are still upbeat about future job prospects.”

Saudi Arabia is also in positive territory. The latest consumer confidence survey there went up three points to 105. However, some say they can detect signs of Saudi consumers becoming more wary, which may yet have an impact on retail spending in the future.

William Jackson, emerging markets economist at Capital Economics, says consumer credit growth in the kingdom has slowed sharply over the past 18 months, particularly for purchases of houses and cars. “Consumer lending is now growing at its weakest pace since early 2011,” he said in a research note in August. “One explanation is households are now facing stretched balance sheets following several years of rapid credit growth, and so are reluctant to take on debt for large purchases.”

Oil prices

There may be further downward pressure on both consumer sentiment and spending in the Gulf in the coming months if oil prices stay at their current levels or drop any further, although for now most observers are still predicting relatively healthy growth.

“Right now the drop in oil prices is not significantly affecting consumer confidence, due to the fact that GCC governments have yet to curtail any of their plans,” says Ashraf. “If oil prices keep moving southward for an extended period then we expect rationalisation in public spending, which could affect consumer confidence.”

Forecasts from Euromonitor support this view. The firm predicts that several GCC economies, including Oman, Qatar and Saudi Arabia, will see growth rates above 40 per cent in terms of consumer spending to 2020. Most other countries around the region will see growth rates of at least 20 per cent over that five-year period and, overall, the wider Middle East and Africa region is expected to grow faster than any other part of the world.

“The GCC is one of the main hubs for retail spending,” says Fatemah Sherif, senior research analyst at Euromonitor. “The growing number of malls and tourists, population growth, and ongoing demand for luxury and value brands is expected to increase consumer expenditure within the [region].”