Rise in retail M&A predicted as Gulf stores struggle

Reuters

• Consolidation expected amid uncertainty
• Ecommerce growth adds to pressure
• Retail sales in GCC to reach $387bn

An increase in mergers and acquisitions in the GCC’s retail sector has been predicted for this year, as operators try to cope with an increasingly uncertain economic environment.

Six retail M&A deals have taken place since the beginning of 2023, all involving intra-regional players. 

Thirteen retail M&A deals were concluded in 2022, of which five were cross-border transactions, according to the latest retail report from the financial adviser Alpen Capital in Dubai.

However, Alpen Capital’s executive chairman and CEO, Rohit Walia, says that while retail M&A activity in the GCC has been “subdued”, with an uncertain global economic environment and “operational challenges” affecting profitability, in the coming months “we expect retailers and brand operators to pursue consolidation”. 

In addition, Walia says, the need for businesses to remain competitive “amid a proliferation of ecommerce and online channels” is also likely to mean more retail M&A activity in the GCC.

• Merger activity tipped to rebound in Middle East

• The bricks-and-clicks battle to win over GCC shoppers

• Saudi retail in tech race to lock in consumer loyalty

Several major deals have taken place in Saudi Arabia. BinDawood Holding acquired Jumeirah Trading in a deal worth close to $50 million; the family-owned grocery chain Tamimi Markets paid an undisclosed amount for the supermarket operator Al-Raya For Foodstuffs Company; and Cenomi Retail agreed to sell a portfolio of brands to Abdullah Al-Othaim Fashion Company, a subsidiary of Abdullah Al-Othaim Investment Company, again for an undisclosed sum.

In the UAE in August, the Dubai discount retailer Brands for Less sold a $360 million stake in the company to the US giant TJX Companies, owner of the TJ Maxx chain. 

Retail industry sales in the six GCC countries of Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the UAE are projected by Alpen to grow at a compound annual growth rate (CAGR) of 4.6 percent to reach $387 billion in 2028, spurred by a rising population with a high number of expatriates and high-net-worth individuals.

That growth is partly fuelled by an increase in ecommerce transactions. The GCC ecommerce sector, excluding Bahrain, is estimated to have grown at a CAGR of more than 20 percent, to reach $21.2 billion in 2023, from $8.5 billion in 2018. The average annual spend on digital shopping in both Saudi Arabia and the UAE grew annually by around 23 percent during the same period. 

Alpen Capital says almost four million square metres of retail space is due to be added in the GCC between now and 2028, taking the total to more than 24 million square metres in what it describes as a “modest growth scenario”.

Hameed Noor Mohamed, managing director of  Alpen Capital Middle East, says retail M&A activity “is expected to intensify as the pressure on companies to drive earnings and gain market share continues to mount in the face of rising competition”.

While the IMF has revised its growth forecast for the GCC to 2.4 percent growth in 2024 and 4.9 percent in 2025, geopolitical concerns as a result of the Israel-Hamas conflict and a gloomy global economic environment caused by the Russia-Ukraine war could weigh heavily on the regional outlook, Alpen’s report predicts. 

Instability

Although average inflation in the GCC fell from 3.7 percent in 2022 to 2 percent last year, Máire Morris of Morris Global Consulting in Dubai says the retail sector had been suffering over the past 12 to 18 months.

“It has really been impacted by boycotts, but, in a general sense, because of the economic instability across the world, retail has taken a big hit,” she says.

Increasingly frugal shoppers and currency devaluations are blamed for the retail division of the UAE conglomerate Majid Al Futtaim reporting an 11 percent year-on-year drop in revenue in the first half of this year.

Sandeep Ganediwalla, a partner for the Middle East and Africa with Redseer Consulting in India, says: “All this means retailers will need to develop new capabilities even more rapidly to remain competitive.”

Given the positive cash flows available to large retail conglomerates in the region, Ganediwalla says, rather than having to develop these capabilities themselves, they can be gained “through inorganic routes” – mergers and acquisitions.