The 2011 boom should not hide the fact that existing retail concepts are maturing and retailers will need to innovate to sustain high growth rates, Bain & Company executives said. Last year's strong growth was attributed partly to the strong fundamentals of the GCC consumer markets and partly from a set of one-off factors, such as the Saudi government's move to pay out about SR53 billion of exceptional bonuses to its employees in 2011 and raise the minimum wages in the public sector by 37 percent, as the data from Bank Saudi Fransi showed. Bain & Company executives expect the GCC consumer market to grow at a strong but slower rate. Yet, they noted that existing retail concepts are maturing and face new challenges. Although there are still some opportunities in new districts or in smaller cities, the potential for new store openings is inexorably decreasing. Currently, it does not stop competing retailers from continuing to open a high number of new stores. The risk is that additional supply outpaces the market growth in the coming years, with new stores cannibalizing existing ones, and retailers facing significant challenges to maintain their sales per square meter and their profit. Jean-Marie Péan, Chairman of Bain & Company Middle East and Cyrille Fabre, a Bain & Company partner, who leads the Retail & Consumer Products practice for the Middle East, said that as the existing retail concepts mature, retailers will need to innovate to achieve a sustainable profitable growth. The comparison between the state of development of the GCC retail industry and that of more established markets like the US suggests there are several areas for innovation. First, winning retailers will innovate in their existing formats. To do so effectively, retailers will need to invest in understanding their shoppers and in adopting a more segmented approach. As a first step in this direction, many retailers in the GCC such as Jarir, Landmark and MAF Carrefour have recently launched loyalty programs to better understand their shoppers. The next step will be to tailor their offerings and promotions to the needs of the customer mix living in the catchment area of each store. This segmented approach is still in infancy in the region. For instance, while electronics retailer in the US customizes their assortment by type of location, most electronics retailers in the GCC have uniform execution across stores. As this level of consumer intelligence is developed, retailers will be also able to adapt and launch new added value products and services that have been successful globally such as private labels or financial services in grocery stores. But retailers also need to consider seeding new sources of growth, outside of their existing core business. There is a significant scope for innovation in format, brands and geographies. Historically, modern retailers have outpaced the overall consumer markets by opening new stores to gain share of overall consumer spending. For example, 10 years ago, there were few hypermarkets, mega malls or large specialized electronics stores. Today, penetration of these formats has reached high levels. For instance, the number of hypermarkets and supermarkets per million inhabitants in the large Saudi cities now reaches levels similar to that of the UAE and other emerging markets. The lower share of modern grocery retail in Saudi Arabia compared to the UAE (50 percent vs. 80 percent) is not the result of lower store density but actually from differences in consumer behaviors and basket size. In format, the region is still focused on few models including supermarket, hypermarket, big box specialized retail, and large malls. What about modern convenience stores, cash and carry, hard discounters, outlet malls and e-commerce? All of these globally successful concepts are still vastly under-developed in the region. Besides, despite the high number of brands available in the region, there are still significant gaps in some market segments. For instance, in fashion, low-end and high-end international brands are extremely well represented but there are few medium-end brands available. Another area for opportunity: the region's stores offer few local brands. Moreover, GCC retailers have a unique opportunity to pioneer the development of a modern retail industry in the less advanced Middle Eastern countries like Egypt or Iraq. Initial geographical expansion of GCC retailers like MAF-Carrefour or Landmark seem to have been successful and other retailers should consider these high-potential markets. GCC retailers also have a tremendous potential for innovation in their core and adjacent businesses. Capturing this potential will require a focused strategy as well as the development of a stronger organization able to manage a more complex business model.
