What GCC Restaurant Operators Can Expect In 2017

Thanks to sagging oil prices, last year was challenging for the GCC region. Fortunately for operators in the region — who’ve had to deal with increased saturation brought on by competition, as well as poor sales due to, again, oil — 2017 is already showing a few glimmers of hope. Here’s what the region’s macroeconomic conditions could mean for the GCC restaurant industry.

MANY SECTORS ARE FEELING THE PINCH 

Increasing uncertainty has led high net-worth individuals (those with more than $2 million in investable assets) to protect their wealth through more cautious and conservative investments. A survey conducted by the Emirates Investment Bank at the end of 2016 reveals a continued trend toward more liquid assets such as cash and deposits.

Overall, there’s a declining appetite for increasing investments across all assets in the near future compared to 2016. A notably lower proportion of those high net-worth individuals intend to increase their investment in direct investment and private equity.

DEMAND WON’T BE AS STRONG AS IT HAS BEEN HISTORICALLY

Demand is not as strong as it once was, to be sure. Large retailers will continue to exhibit growth, thought smaller retailers will struggle. There are a number of potential risks that are worthy of attention: increased volatility and reduction in prices of oil; the future of the OPEC deal remains uncertain; Saudization could increase costs for labor in the KSA. We expect the diversification of the economy to continue and the non-oil economy to push the overall economy forward. However, since the region is still so reliant on oil revenues, gaining positive momentum will not be an easy task.

GCC OPERATORS WILL HAVE TO ADJUST TO THE ‘NEW NORMAL’

In April, the IMF announced it had cut its forecast for Arabian Gulf oil producers’ economic growth this year. as their output cut deal is expected to wipe out any gains from higher oil prices in terms of government revenue. The average growth for 2017-2021 has also been revised downwards in all countries except for Bahrain and Qatar.

Overall growth in 2017 will not be as strong as it was in years past — that’s all part of “The New Normal” for the region, which has suffered due to declining oil prices. The economy will benefit, however, from stable oil prices, diversification, and tourism. Restaurant operators will see food prices either declining or stable, partially related to a strong U.S. Dollar, which may mean lower costs for restaurants but also cheaper Food at Home.

Oil prices dipped to their lowest point in 2016 and have been leveling off since. However, the future of the OPEC production cuts remains uncertain and stability in oil prices is, of course, not guaranteed.

Another uncertainty, at least for GCC restaurant operators, is the forthcoming GCC-wide value-aded tax (VAT). The 5% VAT on most products will be imposed January 1, 2018, though it’s unclear if food will be subject to the tax. Even if food in restaurants is exempt, consumers may cut spending across the board, as they will face a 5% tax on most other purchases.

Both Saudi Arabia and the UAE have ratified the agreement. According to the IMF, GCC nations may be able to boost GDP by about 1.% with the implementation of tax.

RETAIL WILL CONTINUE ITS SURGE

Retail is expected to grow 25% in square meters in the next three years. Restaurants will need to balance demand with rent costs.

With 138 hotel projects underway in Dubai alone (all of which will include some type of F&B program), foodservice operators will face increased competition and potential market saturation. In the longer-term, the appeal and quality of concept will determine success.

TOURISM GROWTH WILL BENEFIT THE GCC RESTAURANT INDUSTRY

Some $79 billion in planned airport projects in the Middle East are estimated to bring 400 million passengers — per year, over the next 10 years — to the region. More people, of course, means greater demand for food and an opportunity for operators to differentiate themselves with unique and homegrown concepts.

GROWTH IS EXPECTED TO PICK UP IN 2018

Analysts remain optimistic about the region’s efforts to diversify. Spending cuts and an increase in oil prices are helping GCC states lower some of the world’s highest budget deficits, and the International Monetary Fund has hailed the region’s progress in attempting to transform economies that have relied on hydrocarbons for more than five decades. Most of the countries in the six-member Gulf Cooperation Council have made “substantial” fiscal adjustment, according to Jihad Azour, head of the Middle East and Central Asia Department at the IMF.

More good news comes in the form of salary increases which, for restaurant operators, means more disposable income. Regionally, it’s been projected that salary earnings will increase an average of 4.% in 2017, demonstrating a more optimistic outlook across the board as GDP growth is also expected to climb in the year ahead. The IMF expects the cumulative budget shortfall of the six countries through 2021 to stand at about $240 billion, compared with a forecast of about $350 billion in its 2016 outlook.

Find more specifics regarding the challenges and opportunities facing GCC operators here:

What the Current Economic Climate Will Mean for UAE Restaurant Operators

How Macroeconomic Conditions Will Influence KSA Restaurant Operators

* * * 

ABOUT AARON ALLEN & ASSOCIATES:

Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketing, branding, commercial due diligence for emerging restaurant chains and prestigious private equity firms. Aaron has personally lead boots-on-the-ground assignments in 68 countries. Collectively, his clients around the globe generate over $100 billion annually and span six continents and more than 100 countries. 

Get access to restaurant industry analysis, trends, and unique insights. Zero spam, and we won't clog your inbox. Promise.

Worth spreading? Share on Facebook

Leave a Reply