British brands find hope in the Gulf

Marks & Spencer, Tesco and WH Smith are among the famous UK retailers that will soon launch major expansion efforts across the lucrative Mena region, driven in part by deeply unfavourable economic conditions at home.

A House of Fraser store in the U.K. Photo courtesy House of Fraser

They did it before and had their fingers burnt. Who can forget the ignominious retreat from France by Marks & Spencer, which 11 years ago had to lower the Union Jack on its European stores.
But now British retailers are pushing overseas again and the Middle East is one of their priority markets.
Faced with low growth or even no growth at home, they are looking overseas to counter the chill on the British high street. Familiar brands like M&S have been taken to heart by the local Gulf communities: the company sold 160,000 bras in the region last year, a 74 per cent increase on 2010.
"With the current financial landscape in the West, retailers are looking for alternative sources of sales," says David Macadam, the head of retail for the Middle East and North Africa (Mena) at the property consultancy Jones Lang LaSalle.
"The region has great spending capacity and the demographics are in retailers' favour. Shopping is part of the culture. There is a relatively small population in the UAE, but it has some of the highest earning malls in the world," Mr Macadam says.
M&S, which works with its franchise partners Al-Futtaim and Al Hokair, opened five stores in the region last year, taking its total to 30.
"We're committed to building our presence in the Middle East as one of our priority international markets," says Mark Koprowski, M&S's regional director for Mena.
Sales in the region jumped by 19 per cent last year compared with 2010, and the company's rivals have been quick to notice.
This year, the supermarket chains Asda and Tesco have announced they will expand in the region.
The bookseller WH Smith is also making a big push, as is the Scottish fashion retailer M&Co, which plans to open 12 stores in the UAE during the next five years and 30 around the Gulf in Kuwait, Oman, Bahrain and Saudi Arabia.
House of Fraser, another major brand, is moving in. The department store chain will open its first store in Abu Dhabi next year, while Mothercare, which sells baby clothes and supplies, has expanded happily into the region.
The upmarket food group Waitrose is also expanding in the Middle East. Even Poundstretcher, the recession-busting shop where a range of plastic general goods, toys and stationery is sold for a £1 per item, has opened in the Madina Mall in Dubai, bringing its motto "every penny counts" to local shoppers.
John Stevenson, the general retail analyst at Peel Hunt, a brokerage specialising in medium-sized companies in the United Kingdom, explains that this time around, the brands have found a way to expand with significantly less risk.
"In the early [2000s], British retailers were not too adept at expanding internationally, and there were a number of high-profile disasters," he says. "This time, they are using joint ventures and franchising to access high-growth markets such as India, China and the Gulf states."
In a franchise agreement, the retailers will typically take a royalty on any sale made. The franchise partner will also fund any capital investment. This allows British retailers to quickly roll-out international outlets, without any capital constraints and without the risk of entering markets that they do not understand.
Franchise partners tend to have good access to space in prime new developments, which a UK retailer, working alone, might struggle to secure.
The downside to franchising is that the potential returns are limited, unless the parent company later decides to buy out the agreements and move to a joint venture.
Tesco is working with Fawaz Abdulaziz Al Hokair Group and opened its first F&F clothing store in Jeddah this year. The store will be based on its core F&F clothing collection for men, women and children.
"F&F franchises will enable us to accelerate our growth in international markets in a resource and capital-efficient way," says Fflur Davies, a Tesco spokeswoman. That's not to say Tesco food stores will follow soon, Ms Davies adds.
Food retailing requires very different supply chains and distribution networks.
WH Smith, which plans to open 25 international stores this year, uses franchises, joint-venture agreements or direct leases, depending on what it determines to be appropriate for the location. Its international stores are predominantly in airports, but it has also identified opportunities outside, for example at railway stations, malls and hospitals.
But it is not just weak home markets that are sending British retailers overseas. A successful international operation has benefits for the whole group. Besides royalty payments, the increased volume of sales will benefit the company's overall supply chain and gross margin.
In the case of Mothercare, which has more than 300 stores in the Middle East alone, its international sales are now worth £675 million (Dh3.72 billion), bigger than all of its domestic UK business.
Successful openings by British retailers in the UAE can help to establish a supply chain that can be used as a stepping stone to other GCC countries and to markets beyond, such as Egypt, which have significantly more red tape.
From a property perspective, markets such as Dubai are now saturated with major malls, whereas up to 1.6 million square metres of space could become available in Cairo by 2014, once its political situation has been resolved.
British retailers and brands may be stepping up their Mena presence, but they do not have the markets entirely to themselves. Many other western and North American retailers would like to give their British peers a run for their money in the Gulf.
And that is not the only source of competition. The next wave of retailers to come in search of riches will be, according to Jones Lang LaSalle, from the East. The Indian luxury retailer Kimaya and Reid & Taylor, an international brand under Indian ownership, plan to expand in the region.
The competition in the retail environment in the Gulf countries remains as hot as the summer weather. It is to be hoped that British retailers do not get burned again.
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