Macroeconomic, social and political megatrends are shaping the future of the restaurant industry in the GCC. 2016 was a slow year in terms of economic growth. Fortunately, growth in 2017 will outpace that of last year, thanks to fiscal reforms and an improvement in both investor sentiment and business confidence.
Still, there’s a lot of uncertainty looming. How will unemployment impact the quick-service food industry? Will oil prices rise enough to make an impact? And what will increased taxes mean for restaurants?
Through multiple projects for clients across the region we have observed a number of factors driving supply and demand — and affecting profitability — within the QSR segment.
The fall in oil prices wiped out USD 360 billion in GCC revenue in 2015 alone. In Saudi Arabia, fiscal deficits were expected to surpass an estimated USD 118 billion in 2016 (about 16% of GDP) and USD 97 billion in 2017. In order to reduce fiscal deficits and address low domestic fuel prices, policymakers in GCC countries have adopted a mix of spending cuts and revenue-boosting measures. Over the past two years, all GCC countries have raised energy prices, while some countries have also begun planning measures to rein in the public sector wage bill. The slide in oil prices has forced Oman to issue hiring freezes and both Oman and Saudi Arabia to streamline overtime and benefits.
Most countries have also reduced capital spending and increased fees and excises to further diversify revenues. Policymakers in the region have also been forced to reassess their income sources and spending habits in recent years. Saudi Arabia announced both the partial privatization of Aramco (the highest valued company in the world) and a major policy shift to diversify government revenues away from oil. All GCC countries have already formulated strategic development plans (like Saudi Arabia’s Vision 2030) that aim to reduce the proportion of GDP derived from the energy sector.
Plans for future regulations include the introduction of a Value Added Tax (VAT) of up to 5% by 2018. The VAT is the first of its kind in a region where citizens are accustomed to a low-tax environment. Other taxes will likely be ramped up, too — including reforms aimed at helping GCC governments achieve medium to long-term economic goals and reduce their reliance on hydrocarbon revenues.
It remains unclear how much food purchased in restaurants would be taxed. Still, businesses will need to redesign their accounting systems far in advance to comply with the new taxes. It is essential to begin creating awareness throughout the organization, assess the potential impacts of the new taxes on the business, and ensure systems and processes are in place to apply the taxes correctly.
Uncertainty, both international and domestic, will weigh on the GCC economies, potentially affecting the performance of the restaurant industry. One of the main sources of uncertainty is, of course, oil prices, which are expected to move higher in 2017. But several factors, could dampen any recovery, including sluggish demand, competition from US shale producers (the industry added 55 oil rigs (+12%) between the last week of November 2016 and the first week of January 2017), and uncertainty regarding the future of OPEC.
Thanks to a 38% acceleration in GDP growth, consumers should feel confident enough to open their wallets a bit more. F&D spending is expected to reach approximately USD 800 per person in 2017. Unemployment, however, is also expected to increase slightly — from 5.1% in 2016 to 5.3% in 2017.
The population in the GCC has doubled in the past 20 years; this explosive growth has boosted economies and strained resources. A portion of the population growth stems from an influx of expatriates, allowing the Middle East to cement itself firmly as one of the fastest-growing markets in the world, particularly in the UAE.
The United Arab Emirates is now the second-most populated country in the GCC, and its population grew tenfold between 1980 and 2016, to nearly 10 million. It is projected to continue to grow at a rate of 3% per year for the next five years, among the fastest rates in the GCC.
The region is one of the most highly urbanized in the world, with new cities, buildings, and mega-projects continually under construction. In fact, at least USD 2.5 trillion worth of projects are planned (or already underway) in the MENA region.
Dining out is a very popular activity throughout the GCC, where options for entertainment are often limited. Even at malls, fully one-third of visitors are driven primarily by food, not shopping.
Urbanization is spurring the growth of QSR chains, which have a small footprint conducive to operating in cities, where rents tend to be high. Saudi Arabia leads the market, representing 43.8% of the GCC QSR market (USD 4.8 billion). Saudis’ strong appetite for meat, along with brutally high temperatures, which keep consumers indoors, makes Saudi Arabia an attractive QSR market.
U.S. fast food chains like McDonald’s, KFC, Burger King, Hardee’s, and Domino’s Pizza largely dominate the region’s QSC scene. But younger, well-educated expatriate workers are increasingly expressing interest in healthier, higher-quality items. That demand has led to an influx of “better burger” chains like Elevation Burger, Fatburger and Burger Fuel. In 2015, the burger segment grew by 11% in current value terms in Saudi Arabia alone, though the burger market has grown oversaturated in the region, and globally.
Other large QSR players in the region include Baskin-Robbins, local players Herfy, Al Baik, Cone Zone, and Shawaya House and premium bakery chain Paul (represented in Saudi Arabia by Azadea Group), which currently has at least 12 locations in KSA and 24 in the UAE.
Though the strategic development plans of GCC countries were built with the goal of reducing the GDP reliance on energy, they also focus on innovation. Plans like Saudi Arabia’s Vision 2030 anticipates that strategic sectors — logistics, energy, health care, and manufacturing — will help generate private-sector job growth.
But technological shifts are transforming the QSR industry, too. A slew of online and mobile food ordering apps have made their way to the region, including Talabat, Delivery Hero, and Deliveroo. This trend makes perfect sense, given the region’s heavy reliance on mobile.
The Middle East’s IT spend is projected to exceed USD 234 billion in 2017, following a slowdown in 2016. The MENA region is set to post the world’s strongest mobile data traffic growth at 77% CAGR to 2017.
There’s no question that 2016 was a particularly challenging year for the GCC, characterized by currency volatility, weak oil and commodity prices, and a subsequent softening of government spend. And while the GCC’s QSR market has expanded rapidly, comparisons with developed markets suggest there is indeed room for further growth.
Within the QSR industry, chain operators are growing at a faster pace than independent operators. Among fast food chains, burger concepts dominate, followed by chicken concepts. While burger sales growth is expected to outpace the average over the next four years, the chicken segment will expand more slowly.
Of the top 10 brands in chained consumer foodservice (ranked by revenue derived from within the UAE) all but two are Western foodservice brands and all but one are QSR-format operations. As the segment heats up, and restaurant customers grow more sophisticated, it’s likely that they will become more discriminating as well and demand better quality and service. We believe operators that take the time to understand the region’s nuances and customs will outperform brands that create more cookie cutter experiences.
Population shifts will continue to drive demand for restaurants. Saudi Arabia will continue to lead the region with total foodservice sales of USD 8.9 billion, followed by the UAE (USD 5.3 billion) Kuwait (USD 1.9 billion), Qatar (USD 1.3 billion), Oman (USD 1.1 billion) and Bahrain (USD 0.4 billion). According to UN estimates, 90% of the GCC population will be urbanized by 2050 (good news for the QSR segment). Major changes in work, lifestyle, and diet have pushed the frequency of people eating outside their homes. The rise of diabetes and obesity will most likely force operators to adapt by increasing their use of fresh produce and healthier options. We see Western-style coffee culture continuing to trend upwards. And a new wave of technological trends (online ordering, food trucks, kiosks) will further fuel the demand for QSR options in the region.
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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. Collectively, our clients around the globe generate over $100 billion annually and span six continents and more than 100 countries. Our firm has worked extensively throughout the GCC with leading foodservice companies and prestigious private equity firms on a host of issues important to all hospitality businesses, specific to the culturally aware nuances of operating in the Middle East. For more on how we can help you achieve your most inspired ambitions, let’s start a conversation.