New Oil in the Middle East?



In the Middle East, when you say you work for MBS, they roll out the red carpet. When they realise you work for a leading executive search company of the same name – and not the radical leader and change-agent in Saudi Arabia, crown prince Mohamed bin Salman (MBS) – your kudos drops slightly, but not much… Retail, Hospitality and Luxury are some of the region’s most important sectors!

Indeed, you’ve only got to drive around downtown Dubai to tangibly feel the critical importance of consumer industries to the Gulf Economy – opulent shopping malls, magnificent hotels, luxurious restaurants – and of course, you have some of the world’s best airlines to fly you there. According to CBRE, Dubai is now the world’s second most important shopping destination (behind London) – and their retail sector is expected to grow at a compound annual rate of 4.9% (not many markets can boast this at the moment – albeit down from the double-digit growth of its heyday), accounting for over 30% of Dubai’s GDP. Likewise, with 100,000 plus hotel rooms (set to grow by a further 50,000 by 2022), UAE tourism revenues are predicted to exceed $56bn by 2022, and Dubai itself aims to attract 20 million visitors per year by 2020 (more than LA, Miami and Rome combined) as part of its ‘Tourism 2020’ strategy.

Having not been to the Gulf for some time, I have just returned from meeting several CEO’s across the region – and this time my visit felt slightly different.

Very importantly, there is a “new” country in town – Saudi Arabia. This is major news in a region where historically UAE, and in particular Dubai, has been hugely dominant. As The Crown Prince continues to drive economic and social reforms, including significant investment in tourism, Saudi Arabia is predicted to grow its’ hospitality market by 13.5% per annum. In 2017 alone, fuelled at the moment by religious tourism, 30,000 new hotel rooms opened, with a further 40,020 guestrooms in 89 projects currently under construction (compared to just 35,050 rooms in the UAE). And it won’t stop there – Saudi Arabia is targeting 30 million visitors annually by 2030 with a massive relaxation in tourist visa rules planned. The Kingdom has also announced a series of leisure projects in recent months, including the creation of a Six Flags theme park in Riyadh by 2022 and a Red Sea resort built on 100 miles of sandy coastline backed by Richard Branson.

Jumeirah Viceroy Palm

The opening up of the country is a major opportunity for Western brands – and every type of leisure and hospitality company, in particular restaurants, cinemas and hotels are currently looking for ways to enter the market. It won’t, however, be easy as very few of these organisations have a deep understanding of the market and it very particular cultural and consumer nuances and, as such, some of the regional players centred out of Dubai, with experience in Saudi Arabia, are well placed to be exceptional partners. Concurrently, Doha which for many years was seen as a credible regional hub, and an emerging alternative to Dubai /UAE has all but fallen off the map as the regional boycott of the country continues.

Dubai is responding to both Saudi Arabia’s growth, and Doha’s demise with its usual characteristically bold nature. Simply, they want to be the most vibrant and exciting centre in the Middle East – an experiential luxury, retail and hospitality wonderland par excellence. In the words of Emaar’s Chairman, Mohamed Alabbar: “You should update your business as often as your phone is updated”.

As soon as Saudi Arabia finishes building the world’s tallest tower (currently under construction), he will start building their own new tower – Marsa Al Arab – which he guarantees will be taller, making the existing Burj Khalifa (at 163 floors – it is pretty dizzy from the top!) seem positively small. Inspired by how Singapore invested in their city through malls, and tourist attractions he has a truly ambitious vision for how downtown Dubai should look and feel. Given his previous contributions have included the Burj Khalifa, Dubai Mall (with one of the world’s largest aquariums, an ice-skating rink and a life-size dinosaur) as well as some of the world’s most luxurious hotels, it is a fair bet he and others in Dubai will continue to innovate and push the boundaries, pace and possibilities of consumerism. Indeed, construction is already underway for several new multi-billion-dollar attractions including IMG Worlds of Legends theme park and a Formula One theme park at Dubai’s Motor City.

The Dubai Mall aquarium

With all this investment and renewed energy, is now the right time for Western brands and talent to re-focus on the region? I would argue a cautionary yes – for four main reasons:

Firstly, commercial decision making in the region is by and large driven largely by property companies – and obviously their financiers and political backers. Their focus is predominantly building bigger, better and bolder capital projects as quickly as possible – and actually, with some notable exceptions, they have little interest in lower margin day-to-day operations. Going forward, it won’t be enough simply to have built the world’s most impressive hotels, malls or restaurants. As many retailers and hospitality companies have found to their detriment, growth is often the easy part of the journey – the next phase is much more difficult.

The region will need the world’s most impressive retailers, hoteliers and hospitality experts to operate and trade their physical assets – and not just through often superficial franchise or license type arrangements in place today. In short, core Western commercial disciplines, for instance in operations, product, digital, data, marketing and, above all, understanding of the ever-evolving customer, will be increasingly important – and be a valuable source of intellectual capital the region must effectively import.

Secondly, there will be opportunities as the market shifts away from a purely luxury focus. Today, around 50% of Dubai’s hotels are classed as ‘luxury’ (compared to around 11% for New York or 12% for London) – resulting in a market that resembles an inverted pyramid with an overinflated luxury offering (particularly in a time of tightening corporate travel budgets) and a comparatively lacking mid- and low-market sector. Mid-market Western brands, who excel at more mainstream retail and hospitality operations in this space, are well placed to seize the opportunity and shift the mix further away from pure luxury. For instance, the Landmark Group is currently investing heavily in Citymax Hotels, and will grow from its current portfolio of 4 hotels and 1384 keys to 8 hotels and 2333 keys this year. It is no surprise that they have appointed a Premier Inn / Whitbread veteran to lead this new initiative.

Though luxury will undoubtedly play a pivotal role in the continuing development of the region’s economy, the imminent demographic boom facing the region means there is significant opportunity to grow for businesses that target the local mass-market, not just top-dollar tourists and locals. Whilst there are a number of emerging accessible brands in the region – for instance Bull & Roo in hospitality and Air Arabia in the budget airline sector – the country still tends to thrive on Western Brands and partners are willing to pay a premium to work with the best brands.

Bull & Roo

Thirdly, new markets in the region – in particular Saudi Arabia (but also, for instance, Sharjah – one of the other Emirates) will present growth opportunities. Historically, navigating these markets as a Western Brand would have been hugely difficult – if not impossible. However, today, there are a number of best-in-class regional partners (from the scale of Alshaya, Al Futtaim, Landmark, Emirates Leisure Retail, all the way through to start-up hospitality operator eathos) who have a proven track record of sustainably growing Western brands on a multi-territory basis throughout the region and are continually looking for new potential brand partners. Whilst working in Saudia Arabia, or indeed other Gulf markets will never be easy, they will be able to guide partners effectively through the set-up phase.

Lastly, the rapid pace of expansion may be injecting too much supply into what remains a relatively small market (just 9.27 million inhabitants of UAE, obviously excluding tourism). Despite the clear risks, ultimately, this may prove attractive to new brands in the region as it could stimulate a rent reduction and increase margins for occupants. Indeed, taking into account this projected reduction in demand for real estate, several analysts point to possible significant decreases in rental rates for both retail and hospitality – presenting different opportunities for investment. As Olivier Harnisch, CEO of Emaar Hospitality observes: “While the quality of Dubai hotels is fantastic, and they are great at operating around 80 percent occupancy, supply and demand will not be perfectly correlated going forward, so there will be periods of volatility… this is something that we have to be ready for as an industry. There will be periods where, as a hotel manager, you will have two or three new hotels open up in your immediate vicinity. The demand growth will not be able to immediately absorb that supply…”

You only need to spend a few days in Dubai to understand their ambition. Whilst always uncertain, Dubai’s future at the moment looks bright – and the halo effect to neighbours will be huge. Where on the international priority list for Western Brands will the region be in the coming years – and will they capitalise on some of this new growth opportunity?

Elliott@thembsgroup.co.uk | @TheMBSGroup