Bargains no longer in style

Cheap deals are thin on the ground in Duabi's malls. Consumer demand has rebounded in the wake of the downturn, but rising costs and supply shortages are exerting pressure on prices and squeezing profits.

Bright signs still hang in the shop windows of Dubai's Mall of the Emirates flagging discounts of up to 60 per cent. But shoppers are likely to find the bargains available previously are no longer to be had.

"Before, when on promotion, you could get a pair of denims for Dh30 (US$8.15)," says Sanjay Rajapaksha, 29, a Dubai resident. "Now, it's at least Dh50." It is a trend that is likely to continue. A combination of rising labour costs in major manufacturing hubs, such as China, higher freight expenses and increasing commodity prices is putting pressure on retailers' bottom lines. At Al Ghurair Retail, a company in Dubai that manages brands such as Springfields clothing, the cost of stock for the 2011 spring-summer collection, which retailers typically buy at this time of year, has increased between 10 and 40 per cent because of a rise in the price of cotton.

Keith Flanagan, the general manager of the company, says it is likely he will have to raise retail prices by early next year. "I can't absorb these price increases," he says. "I don't want to, but I have no choice. And I'm sure most of the other retailers are in the same boat." During the past year, most merchants in the Emirates have rolled out heavy discounts in order to compete for business in a difficult economic climate.

After the onset of the global slowdown early last year, many merchants were stuck with a glut of stock, ordered when shopping sprees were the norm for consumers. To clear the shelves, many retailers slashed prices. But with profit margins already thin, many now say there is little room to accommodate an increase in costs such as the steep cotton price rally. Cotton has jumped 40 per cent in the past year, says Abah Ofon, a soft commodities analyst at Standard Chartered in Dubai.

It is now trading at about 84.5 US cents per pound, up from 60 cents per pound in August last year. In the fourth quarter of 2008, cotton was trading at just 40 cents per pound. The increase stems from a shortage of supply, as major producers such as the US and China planted less cotton and used the land for other crops, Mr Ofon says. At the same time, there is a rebound in consumer demand in those same markets. Worldwide cotton supplies have not been this stretched since the 1994-1995 season, he says. "Demand is on the rise and there isn't enough supply."

It is a dynamic that is driving up shipping costs as well, says Philip Damas, the company director of Drewry Supply Chain Advisors, based in the UK. The price of shipping a 40-foot container to Dubai from the UK has jumped nearly 40 per cent to $1,800 from $1,300 a year ago, he says. Shipping the same sized container from the US to Dubai has also increased in price to $1,400 from $1,300 a year ago. "The rates last year were extremely low and all the shipping companies were losing money," Mr Damas says. "So they withdrew huge amounts of capacity and now there are signs of a shortage of capacity."

At least the freight costs between China and Dubai remain flat, as companies increase the number of available containers on that route. Still, Deepak Babani, the chief executive officer of Eros Group, which sells and distributes electronic brands such as Samsung, says his company has started to feel the pinch in the past two months because of rising manufacturing costs in China. "For bigger appliances, such as refrigerators, washing machines, anything that is bulky, [the increase] is impacting us by $15 to $20 a piece," he says. "That would be about 5 to 6 per cent [of the total cost]."

Prices at Eros have climbed between 4 and 5 per cent in the past year, depending on the manufacturer, because of increasing manufacturing costs in China. Factories in China, a production hub for many retailers, have been hit by an increasing number of strikes as workers demand higher pay. This has pushed up costs. Workers at a Guangdong factory, which supplies locks to the car maker Honda, won a 28 per cent salary increase, while industrial action forced the Chinese government to increase the minimum wage from July 1.

Although labour costs in China represent a small proportion of the overall manufacturing expense, analysts say these small victories are an indication of more to come. Abdulla Ajmal, the deputy general manager of Ajmal Perfumes, says cost increases have trickled down to some of his company's suppliers in China. The price of plastic and metal components that Ajmal uses in its fragrance packaging has gone up between 20 and 30 per cent in the past year, he says.

"Number one, the components have become more expensive, because the labour has become more expensive," Mr Ajmal says. "Number two, it is causing delays. On average, we have seen almost two to three months' delay in a lot of our supplies." While Mr Ajmal does not intend to raise his prices just yet, Eros has started slowly passing its increased freight and manufacturing expenses on to electronics dealers.

"Marginally, we have started doing it. We have started telling the dealers we will not do it in one go, but a 2 to 3 per cent increase every month," Mr Babani says. "We need to increase, because otherwise, it is hurting the bottom line." Some of his appliance suppliers will probably raise their prices this month, he predicts. "If there are any orders from August onwards, they are asking for increased prices. So, the impact will come in gradually."

With consumer demand beginning to return in Europe and the US, and oil and commodity prices on the rise, prices are likely to follow suit in the UAE, says Tudor Allin-Khan, the chief economist at HC Brokerage. "Everything has now moved into a growth dynamic. So now when you look at a producer of goods and services, he is going to try and pass on that higher cost to end consumers - because demand is returning, because the cost of production is much higher," he says.

"A year ago, consumers weren't very happy to spend. They weren't going to take higher prices, and so the producers cut costs. "Now, producers find it harder and harder to cut costs, because they have done the cost-cutting exercise. So now they will pass these higher prices on." [e-mail]