Weakened by depressed oil prices, unfavorable currency trends and a still-ailing world economy, restaurants in the Middle East faced a challenge-packed 2016. About two-thirds of restaurant operators in the United Arab Emirates reported stagnant or declining same-store sales midway through the year, and in Saudi Arabia lower oil prices depressed employment, which in turn affected demand for dining out.
Some observers have suggested that the supply of new restaurants has been growing too fast. But a closer look at the factors driving demand shows that the fundamentals and upside potential remain solid, especially in the UAE and Saudi Arabia. Here’s why:
MORE TOURISTS AND BUSINESS TRAVELERS MEANS MORE RESTAURANT SPEND
International leisure and business travel is heating up in several Middle East destinations, particularly Dubai and Abu Dhabi, thanks in no small part to government promotions.
Dubai’s Tourism Vision for 2020 is shooting for 20 million visitors per year by 2020, double the 2012 figure. The government-backed initiative encompasses regulatory policy, infrastructure development and marketing to position the location as a leading global destination.
Abu Dhabi, meanwhile, welcomed 4.4 million visitors in 2016, an 8% uptick from the year before, according to the Abu Dhabi Tourism and Culture Authority (TCA). The opening of Louvre this year, along with a USD 1 billion Warner Brothers theme park and SeaWorld over the next five years are expected to fuel more tourism. The city is also targeting major meetings and conventions; last year marked the largest number of conference wins to date, with 14 events booked through 2020, including the Special Olympics World Games (10,000 participants) and the International Diabetes Federation 2017 Congress (15,000 delegates).
Even Saudi Arabia, historically not known for welcoming tourists, is looking at ways to grab a piece of the pie. As part of its National Transformation Plan, the government has hinted that it might begin issuing tourist visas, reversing a longstanding opposition to the practice. The goal: Grow the number of visitors from about 65 million to about 82 million over the next four years.
INTERNATIONAL CHAIN OPERATORS CONTINUE TO POUR MONEY INTO THE REGION
A slew of global food brands have made their way into the regions. Dominant player McDonald’s, which operates more than 1,200 units in 16 MENA countries, is eyeing 1,700 by 2020. “Saudi Arabia remains our biggest market in the Gulf and we see high potential in our growth there,” Yousif Abdulghani, vice president and international relationship partner of McDonald’s Middle East Development Company, told Arabian Business. “The UAE is another market which has been very strong and solid from inception,” he added.
Arby’s Restaurant Group plans to open 25 units in Kuwait and Saudi Arabia. They’ll be owned and operated by Kharafi Global, which also franchises Johnny Rockets in the region. Nestle Toll House Cafes by Chip recently opened its 10th location in Saudi Arabia; another is expected to open in March.
Smashburger recently announced it would open 26 restaurants in Qatar and the UAE through an agreement with Pearl Investments. “Despite there being an ample number of fast casual restaurants in this region, the industry has yet to reach its potential in THE UAE and Qatar and we feel there is a huge opportunity for brands such as Smashburger,” says Pearl chairman Abdel Hameed.
Tablez, the foodservice division of hypermarket chain Lulu, expects to have 70 casual restaurants under the Famous Dave’s, Genghis Grill and other flags open in the UAE by 2020, about double the number of units now open.
The GCC’s booming economies and growing populations have created a gold rush atmosphere for investors and operators. Some, in a hurry to get projects off the ground and capitalize on the environment, fail to account for the economic and cultural dynamics in the region. They think something that works well in the U.S. will translate in this environment. In the short term, these operators may be successful, but as markets heat up and restaurant customers grow more sophisticated, the novelty will wear off and their expectations will be elevated. And as local developers learn the business, expect them to start competing head to head with international chain-based restaurants, possibly beating them at their own game.
SHIFTING DEMOGRAPHICS AND SOCIAL MEDIA ARE DRIVING DEMAND
Middle East population shifts should put more butts in restaurant seats, particularly in Saudi Arabia. KSA’s population, for example, is expected to reach 40 million by 2050, with 70% of that under 30 years old. Younger Saudis, who are more connected with the outside world and social media-savvy, are natural targets for the kingdom’s growing supply of malls, restaurants and hotels. And social norms limiting women are gradually relaxing, with more women seeking education and employment. Relatively high disposable incomes and a lack of entertainment options in many Middle East destinations are fueling demand for restaurants as well, especially burger concepts.
Based on these developments, food and beverage industry revenues in Saudi Arabia are expected to double by 2021, from USD 105 million to USD 208 million. SEDCO Holding Group CEO Anees Moumina recently forecast that food consumption would grow 15% over the next two years. One of SEDCO’s holding companies operates Applebee’s, Macaroni Grill and Ocean Baskets in the kingdom; the company is especially bullish on development in areas outside the major cities, where many markets are underserved.
In the UAE, meanwhile, the upside potential for restaurants lies at opposite ends of the economic spectrum: luxury and value. Fine dining restaurants can expect to benefit from a well-heeled population and tourism, while QSR outlets cater to the growing ranks of lower-income expats building and serving the country’s rampant development. The high price of groceries in the UAE also fuels demand for affordable restaurant options.
Tourism across the region is expected to continue its growth trajectory. Dubai International Airport, now the world’s busiest airport for international passengers, welcomed 83.6 million passengers in 2016; that figure is expected to grow 6.5% in 2017. About 24.5 million passengers used Abu Dhabi International Airport last year, up 5.1 cent for the year. And traffic to Saudi Arabia’s airports is projected to grow 4.1% annually for the next two decades, buoyed by the National Transformation Plan.
THE LODGING MARKET IS SOFT NOW, BUT POSITIONED FOR THE FUTURE
Dubai’s popularity among developers continues, with current plans destined to add more than 25,000 rooms over the next four years. Abu Dhabi’s supply grew three percent last year to 30,000 rooms; another 10,000 are scheduled to open over the next five years, according to TCA Abu Dhabi.
One gap in the market remains: moderately priced lodging. A growing middle class is priced out of many markets. In Saudi Arabia, six of the 10 brands with the most supply in the pipeline are developing midmarket projects. Rezidor Hotel Group Saudi Arabia (Radisson) has 17 hotels with nearly 4,000 rooms in development.
For the short term, with softening occupancy and rates, there seems to be an oversupply. But developers have an eye on the long term, and they see potential based on the infrastructure pipeline and government investment in attracting travelers.
As oil prices rebound, the region’s economy continues to diversify beyond oil, the population continues to grow and buildout of the tourism infrastructure continues, expect the Middle East food and beverage market to get back on track in 2017.
* * *
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.