Beware ‘false economy’ of discounting in Dubai

Unsplash/Arno Senoner

• Non-oil businesses in Dubai have cut prices for 8 consecutive months
• Prices for fuel, materials and wages have all risen
• Experts suggest cutting prices can harm profits or lead to a loss

Offering discounts in a bid to maintain high sales in a competitive Dubai market, at a time when operating costs continue to rise, will have a negative impact in the long term, the head of one of the emirate’s largest business groups has warned.

The latest Dubai Purchase Managers Index (PMI) for March found that staffing and material costs had increased at their sharpest rate for around five years, but businesses in the non-oil sector have continued to cut prices for the eighth month running. 

“Firms again cited efforts to offer price discounts to customers and maintain robust sales volumes,” the report said.

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Jen Blandos, founder of Female Fusion, a UAE-based community of female entrepreneurs, said she is surprised by the finding in the survey and appealed to Dubai businesses to resist the urge to discount.

“We encourage businesses not to be afraid to increase or maintain their prices,” Blandos said.

“Resisting discounting opens up opportunities for clients willing to pay the desired fee.” She added that small operators who continue to discount will “negatively impact their business and even lead to closure if they fail to make a profit”.

A straw poll this week of around 100 Female Fusion members found that most had taken the advice. In the past year 27 percent of respondents said they had kept prices the same, while 37 percent had put theirs up. Around a third said they only offered discounts occasionally.

“Dropping prices across the board can create a false economy and harm businesses due to reduced profits or even losses,” Blandos said.

Rising costs

The PMI survey observed there was a noticeable increase in the price of materials such as fuel, cement and iron, as well as an uptick in staff wages. 

Ashish Panjabi, chief operating officer at electronics retail giant Jacky’s in Dubai, said rent and staffing costs were on the rise but the market remains as competitive as ever.

“Most malls seem to be moving back to full occupancy, which means more retailers per category and more competition, which naturally means more has to be done to make a sale happen,” he said. 

Real estate consultancy firm CBRE said in its latest GCC report that retail rents in Dubai had risen 51.5 percent year on year in 2022.

“Some landlords have started to push rentals upwards and there is the risk that these increases become unsustainable for retailers,” Panjabi added.

Ramadan is typically a busy period for retailers, as they offer discounts and sales to benefit from the increased spending. It is predicted UAE shoppers will spend $66 billion over the holy month, an increase of $5 billion compared to last year, a study by India-based Redseer Strategy Consultants said.

Despite warnings from some business leaders to resist cutting prices, a study commissioned by market research firm Toluna found that the majority of shoppers in the UAE are being thrifty and planning to hold out for special Eid sales and discounts once the holy month has ended.

In a bid to entice shoppers to take advantage of discounts ahead of the holiday, the Dubai Festivals and Retail Establishment on Friday launches the first ever Ramadan edition of the Great Online Sale, with participating companies offering discounts of up to 95 percent across a wide range of the city’s e-commerce platforms.

In the monthly PMI reports, any result over 50 indicates economic expansion. While Dubai’s March score was still in positive territory at 55.5, up from a 12-month low of 54.1 in February, the outlook means businesses that are still discounting prices to boost sales volumes will not be able to keep pursuing such policies for too long.

“A further slowdown in new business growth shows that demand growth is continuing to weaken from its post-Covid peak, with notable slippage seen in the wholesale and retail and travel and tourism sectors,” said David Owen, senior economist at S&P Global Market Intelligence.

“This suggests that rapid activity growth may not be sustained, which was reflecting in a slight drop in future output expectations.”