• SERVICES
  • INDUSTRIES
  • PERSPECTIVES
  • ABOUT
  • ENGAGE

GCC

by EOS Intelligence EOS Intelligence No Comments

Sharing Economy in the GCC: A Success Story Waiting to Happen

629views

The current landscape in the Gulf countries is believed to show solid scope for sharing economy platforms’ growth. On the other hand, the region still lacks consumer engagement as well as updated and adequate regulations, which may cause these platforms to stumble and fall on their way to growth.

The concept of sharing economy has been spreading with great velocity worldwide with the advent of new technologies and connectedness. It emerged as a recognized concept around 2008-2010 with the arrival of successful players such as Uber and Airbnb offering P2P platforms that allowed financially strapped consumers to earn extra income. Global sharing economy was valued at US$15 billion in 2014 and is expected to reach US$335 billion by 2025.

GCC’s good foundations and latent potential

In 2016 alone, PwC estimated that consumers in the Gulf Cooperation Council (GCC) spent US$10.7 billion within five sectors of the sharing economy platforms – household services, accommodation, business services, transportation, and financial services.

The spending in sharing economy was of course lower than spending on similar services acquired through traditional avenues – for instance, in 2016, hotel revenues were expected to hit US$24.9 billion in the GCC, a considerably higher sum than accommodation revenues in the sharing economy that totaled to US$1.29 billion in that same year. This indicates latent potential, and with part of the traditional service revenue possibly taken over by sharing economy, the scope for growth is very promising, underpinned by favorable characteristics of the GCC countries.

Young and technologically-participative population

Sharing economy platforms do not hire employees directly but work with self-employed service providers instead. The essence of these platforms is to enable people – mainly young, dynamic, and technologically-participative – to use them as a way to exchange goods or services for money.

The appeal of the GCC for sharing economy platforms is exactly that – the diversity and demographic profile of the region’s population allows sharing economy platforms to reach a large pool of young, tech-savvy consumers and service providers. In 2018, 60% of the GCC population was under the age of 30 – considered key demographic to interact and use sharing economy services on both the demand and supply side.

Large immigrant pool willing to engage

Another market growth driver that is somewhat unique to the region is the large percentage of non-nationals living and working in the GCC. Between 2016 and 2017, 51% of the Gulf region total population were non-citizens, who, according to a 2016 PwC survey, were active users of the sharing economy services, largely due to relatively low incomes and limited (if any) access to other ways of improving their financial standing. The region’s large volume of immigrants has always been a steady trait that is very unlikely to change in the future. Due to this, high numbers of expatriates participating in the sharing economy platforms on a daily basis is likely to ensure a long-term steady growth of these platforms in the region.

(Slowly) growing women’s economic inclusion

Another appealing aspect of the GCC market is that all six countries have been changing (alas, slowly) their attitude towards women’s economic inclusion, fueled by shifting cultural norms that traditionally imposed limitations on women’s ability to work and earn.

This change is likely to allow them to participate more actively in the workforce, and a ride-hailing app company could be a good option to provide transportation to and from work to female workers, since in some GCC countries they are not allowed to drive by themselves, while in others they customarily do not often do it. With women representing around 40% of the GCC population, higher financial independence places them in the group of potential consumers of sharing economy goods and services for their transportation as well as household services needs.

Eagerly-consumed fast connectivity

Regardless of the gender participation mix at both supply and demand side, the sharing economy players are certainly set to benefit from fast adoption of technology by local consumers in the GCC. In 2017, 64% of the population owned a smartphone and, by 2018, 77% of the GCC population were mobile network subscribers. Such rates seem to give strong foundation for sharing economy platforms to grow.

Moreover, the GCC highly tech-savvy youth seeks new technologies and faster mobile connections. In response, the Gulf countries aim to become global leaders of 5G deployment (all markets planning to launch 5G by 2020), a major contributing driver to the sharing economies growth in the region. High-speed mobile connections plus a growing pool of eager-tech young adults willing to engage in P2P platforms are likely to become a major driver for their growth.

Sharing Economy in the GCC A Success Story Waiting to Happen

Nonetheless, despite these favorable foundations, there may be roadblocks representing a threat for the success of sharing economy platforms in the Gulf region.

Large immigrant pool refrained from joining the platforms

One of the key obstacles is the cultural-legal environment prevalent in the region. While the region has long been characterized by large share of immigrants in local populations, their way of working is controlled by Kafala, an outdated sponsorship system carried out by the GCC. This system allows immigrants to work in the region only for their sponsor, who is legally responsible for them during the time of his or her stay.

Kafala system does not allow for self-employment, nor does it allow for second employment beyond the job given by the sponsor. Since sharing economy companies interact mainly with freelance service providers, there is a large portion of expatriates working in the GCC who will find it difficult to be able to freely join the platforms as service providers.


Explore our other Perspectives on sharing economy


Lack of legislation and consumer protection

Lack of a dedicated government entity to oversee sharing economy services in the Gulf countries may cause consumers to be wary of using these platforms, ultimately hindering market growth.

According to a 2016 survey conducted by PwC, GCC users put considerable emphasis on trust and transparency when dealing with online providers, two factors that can influence their purchasing decisions.

In sharing economy, users need to be able to trust platforms’ screening process for providers before they deal with them. As a result, if the states do not establish bodies and laws governing sharing economy services, the platforms could witness weak demand from both consumers and services suppliers who are cautious about protecting themselves.

Limited awareness and lack of need

Lack of consumer awareness and simply lack of need for the sharing economy services is also an issue for the market growth since not all GCC nationals seem to be aware about the existence of the sharing economy platforms.

According to the same PwC survey, an average of 21-35% of respondents were not familiar with the sharing economy concept. This could be attributed to the fact that many households in GCC countries have traditionally enjoyed high income levels, a fact that resulted in no need for shared services and allowed them to afford services of expatriate workers hired directly and for long term (e.g. employing a household driver or cleaner, rather than using external providers as needed).

Consequently, local consumers may not see the need to use an online platform dampening the success of sharing economy platforms. This might change, as households’ incomes growth stagnates and sharing economy could help stretch that income.

EOS Perspective

The GCC countries could be a promising landscape for sharing economy platforms to dock successfully. The region offers growing population, continues to be characterized by a solid base of young, tech-savvy users, as well as females and non-citizens available to participate in the sharing economy market.

However, despite the current growth, these platforms could nosedive unless local authorities deal with regulatory deficiencies. A dedicated supervisory entity is required to allow local authorities to regulate sharing economy companies, which will also provide support to consumers through consumer protection and better screening processes of services providers. Local customers clearly manifest their need for such a protection, and the lack of it is likely to dampen the demand and thus market growth.

The update of labor policies such as the Kafala system is also required for sharing economy platforms to witness a continuous growth. This growth can only happen through allowing a good share of the readily-available pool of expatriates to work under a more flexible scheme these platforms require. This is something for GCC states to consider, as there region is increasingly facing the requirement for economic diversification and stimulation of its sluggish economies. Creating labor policies that allow people to work for sharing economy platforms legally (at least as a secondary employment, as it is increasingly allowed in Dubai) is likely to create employment opportunities across the region, spurring consumer spending and generating tax revenues.

While there also are other obstacles in the GCC sharing economy market, it is the lack of appropriate regulation and supervision of the industry, as well as the current form of the Kafala system that are the two key challenges to the market’s accelerated growth. Considering the nature of these challenges, it seems that the potential of this market is unlikely to be realized without active facilitation by the local governments. However, it is uncertain to what extent the governments will try to understand the potential economic benefits of fully embracing sharing economy, and change the deeply-rooted, long-standing, archaic labor laws.

by EOS Intelligence EOS Intelligence No Comments

GCC to Introduce VAT: What It Means for Businesses, Economy, and People

The Gulf Cooperation Council (GCC) countries are gearing towards rolling out a 5% Value Added Tax (VAT) starting January 1, 2018. Economies of GCC countries are highly dependent on the oil and gas sector revenues, which account for about 80% of the GCC governments’ budgets. The recent volatility in oil prices have battered GCC nations’ revenues, which motivated the governments to initiate a reform in the form of indirect taxation with a goal to diversify income sources. VAT is a measure that will impart more stability and robustness to the governments’ income considering the outlook for crude oil still remains volatile, while diversified revenue sources will cushion the GCC economies in times of financial crisis.

A standard rate of 5% will be applied on most products, except specified food items, domestic public transportation, and healthcare, education, and financial services. The proposed VAT rate is much lower in comparison with rates in most European countries, China, and Australia. Nonetheless, the GCC countries still stand to gain in income with the tax implementation – for instance, the UAE is forecast to generate US$3.27 billion revenue during the first year of VAT introduction.

Industries such as construction and automotive are likely to benefit from VAT implementation, while retailers might feel a pinch due to dwindling margins. The sentiment among the citizens is wary to say the least – for instance, according to a survey conducted by CFA Society Emirates, citizens of the UAE did not seem quite optimistic towards the economic impact of VAT across certain parameters such as price inflation, cost of doing business, and inflow of foreign direct investments (FDI).

GCC to Introduce VAT

EOS Perspective

Introduction of VAT could empower the GCC economies by bolstering revenue generation, aiding infrastructure development, and improving productivity levels. While some may believe that VAT implementation could tarnish GCC countries’, particularly the UAE’s, competitiveness and tax-free haven status, it is important to consider that GCC markets’ attractiveness goes way beyond only the tax benefits. GCC’s appeal also lies in developed infrastructure, competitive labor costs, lower trade barriers, and proximity to the developing Asian and African markets – implementation of a new tax reform will not change this favorable business environment.

There have been some discussions regarding the negative implications of VAT, considering residents and businesses have grown accustomed to high incomes and low deductibles for a long time. Post VAT implementation, businesses are expected to incur certain additional costs related to administrative expenses, upgrading IT systems, and training staff members, among others.

Also, highly competitive industry sectors, or those operating with thin margins are likely to witness cash flow burden, as they will be required to meet the VAT costs on purchases before they can be reclaimed from the government – in certain scenarios, when the businesses end up paying more as VAT to suppliers as compared to the VAT collected from customers, the difference can be reclaimed from public funds. The way businesses operate is likely to fundamentally transform once VAT is applied, however, with adequate preparation businesses should be able to introduce systems and processes to avoid unnecessary cost implications as well as smoothly align themselves with the new tax system.

The way businesses operate is likely to fundamentally transform once VAT is applied, however, with adequate preparation businesses should be able to introduce systems and processes to avoid unnecessary cost implications as well as smoothly align themselves with the new tax system.

VAT is not expected to have much impact on a common man, as vital household expenditure items will be exempted from it – this includes about 100 varieties of staple food items and essential services such as healthcare and education. However, for a section of the population with an appetite for luxury goods, services, and lifestyles, as well as for tourists (along with VAT, they will have to pay duty tax again on some goods in their country of origin) the brunt of new taxation is likely to be felt.

Nonetheless, a modest tax rate of 5% will ensure that certain social-economic distortions often associated with VAT are minimized. Also, the decision to exempt a few vital sectors (basic food items, and healthcare, financial, and education services) will ascertain that they are not affected by the tax reform.

VAT imposition is expected to become an essential part of GCC regions’ economic reforms and the taxation policy will immensely aid in diversification of revenue sources. Further, the pre-implementation period should be used by the GCC countries to develop a modern tax administration system that ensures compliance, so that once VAT is implemented, businesses and residents are able to smoothly adapt themselves to the new taxation policy.

by EOS Intelligence EOS Intelligence No Comments

GCC Warms Up to Renewable Energy

The development of fossil fuels in the GCC has led to a rapid economic growth of the region. A couple of the GCC countries boast some of the highest GDP per capita globally, with the good economic performance attributed primarily to the hydrocarbon sector growth. Saudi Arabia, the UAE, and Kuwait are the second, sixth, and ninth largest producers of oil in the world, respectively in 2015, reflecting their position as hydrocarbon exporters and producers. However, with rising domestic demand for energy and the need for a sustainable future energy supply, GCC has been making efforts to introduce renewable energy sources with a view to balance economic needs with environmental factors.

The Gulf Cooperation Council (GCC) comprises countries that are among the largest hydrocarbon producers in the world, with GCC collectively holding around one third of crude oil reserves and almost one fifth of global gas reserves. While oil and gas exports have underpinned an extraordinary economic growth of the GCC over the past several decades, the increasing domestic demand for energy has made it difficult for these countries to maintain their export levels. For instance, in 2014, Saudi Arabia, one of the largest oil producers globally, was the seventh largest consumer of oil in the world. In the same year, its domestic energy consumption stood at 28% of production against 17% in 2000, reflecting a rising domestic demand.

Domestic demand for energy is increasing in GCC 

Various reasons including industrialization, water desalination, and increase in population size, have led to this increase in domestic demand for energy in GCC. Industrial sector (comprising mostly oil refining, petrochemical, water, and fertilizer industries) accounts for nearly half of the total demand in the region.

The growth of the residential and commercial sector has also contributed to the rising energy demand, and currently almost half of the total electricity produced in the region is used by the residential sector. Moreover, electricity consumption by recent housing and commercial projects has grown at an average rate of 6% to 7% per year between 2003 and 2013, faster than anywhere else in the world in this time period.

Furthermore, rapid economic development in the region has led to rising water demand, leading countries to generate fresh water through seawater desalination. Desalination fulfills a large share of GCC’s water demand (e.g. around 27% of the total water demand in Oman and 87% in Qatar in 2015). Since desalination is an energy-intensive process, it has also put pressure on the consumption of fossil fuels.

These factors have forced GCC to focus on diversifying its energy mix to meet the domestic demand while still sustaining the countries’ economic growth. A diverse energy resources portfolio is needed to allow GCC to make the domestic energy production available for export. In addition, it would also reduce carbon-dioxide emissions to create a more environmentally sustainable future. Countries in the GCC region are thus focusing on developing the renewable energy sector, particularly solar energy.

The region is turning to alternative sources of energy

Several GCC countries have embarked on a path of setting more aggressing targets for sustainable energy production from sources other than traditional fossil fuels.

For instance, UAE plans to invest US$ 163 billion in the next 30 years in renewable energy sector. Moreover, it aims to increase the contribution of clean energy in total energy mix from 25% at present to 50% by 2050. It also plans to generate 44% of its power supply from renewable sources (e.g. solar), 12% from clean fossil, and 6% from nuclear energy.

Further, as Saudi Arabia’s renewable energy represents merely 1% of the total energy produced, the kingdom targets to increase the renewable energy share to 4%, an equivalent to around 3.45GW.

Other countries are also developing plans, and these include the renewable energy program in Kuwait that aims to generate 2GW energy from renewable sources, thus contributing 15% of the total energy produced by 2030. The country also commissioned its first solar power project of 10MW with an investment of US$ 99 million in 2016 and plans to generate around 20% electricity from alternative sources by 2020.

Qatar aims to generate 200MW solar energy by 2020, an equivalent of electricity for 66,000 homes per year. In addition, it also plans to install 1.8GW of solar power capacity by 2020.

GCC Warms Up to Renewable Energy

EOS Perspective

While GCC is putting in efforts to become an energy efficient region and reduce its revenue dependency on exports, the pace of alternative energy sources development has been rather low. Lack of clarity in roles and responsibilities of policy makers as well as uncertain policies and regulations around energy planning are contributing to the slow growth of renewable energy generation.

Lack of clarity in roles and responsibilities of policy makers as well as uncertain policies and regulations around energy planning are contributing to the slow growth of renewable energy generation.

In most countries, no authority has been assigned at the governmental level to handle the affairs of the renewable energy sector. There is no doubt that more dedicated efforts towards the implementation of energy development projects would surely help speed up the process of the sector’s development.

The governments of the Gulf countries should focus on establishing renewable energy corporate framework and assign a body to handle the development and implementation of policies and projects in this sector. Only few countries have assigned units within governmental structures to take the responsibility of overseeing the renewable energy production capacity growth.

The governments of the Gulf countries should focus on establishing renewable energy corporate framework and assign a body to handle the development and implementation of policies and projects in this sector.

For example, in 2010, UAE, set up a dedicated department called Directorate of Energy and Climate Change (DECC) within the Ministry of Foreign Affairs (MOFA), to lead the development of renewable energy in the country, supporting the national climate change strategy. DECC was also established to coordinate with stakeholders for the promotion of green energy in the UAE. It engaged with International Renewable Energy Agency (IRENA), an intergovernmental organization assisting its member countries to include green energy in their energy portfolio. IRENA acts as a center of excellence offering expertise and financial support to its members.

All GCC countries are members of IRENA which aids them in scaling up green energy in their respective countries. For instance, in 2014, it conducted Renewables Readiness Assessment (RRA) with the Government of Oman with a view to create a renewable energy roadmap comprising policies, regulations, and the infrastructure required for the country to meet its energy goals. The organization, thus, helps in the decision making as well as the implementation of strategies regarding renewable energy in GCC countries.

GCC should also focus on nurturing the development of R&D institutes which could offer expertise to policy makers in energy portfolio diversification. Such institutions could also offer workforce training to enable faster project deployment along the value chain.

GCC should also focus on nurturing the development of R&D institutes which could offer expertise to policy makers in energy portfolio diversification.

International collaboration with private and public companies in the GCC to set up renewable energy facilities could also support the development of the renewable energy sector in the region. Furthermore, incentives should be offered to these companies to encourage the establishment of green projects and facilities.

Endowed with hydrocarbon resources fueling economic development, GCC now has the potential to fuel its economic growth in a more sustainable manner, taking advantage of other resources at hand (e.g. by utilizing abundant sun available in the region throughout large part of the year). However, a greater and more structured regulatory support and more focused implementation is required to pave the way for the renewable energy sector development in the GCC.

by EOS Intelligence EOS Intelligence No Comments

The Rising Importance of Private Labels for GCC Retailers

367views

Despite the recent progress made by several Gulf Cooperation Council (GCC) retailers in developing their private labels, the industry is still lagging behind in comparison with western markets. Although regional retailers are well aware of the private labels’ potential, they have not fully leveraged their benefits. As the competition intensifies, regional retailers need to develop optimal private label strategies that can help them further enhance profitability and consumer loyalty.

With the evolving retail landscape, consumer attitude towards private label products has changed dramatically over the years in the GCC region. According to a 2014 Nielsen survey, nearly three-fourth (71%) of the respondents in Middle East and Africa agreed that their perception towards private label products have improved in recent times. Gone are the days when private label products were just seen as cheaper alternatives of national and multinational branded products.

Today, private labels include some innovative products that have no branded equivalent. Some of the premium private label products are superior to branded products in quality. Despite the growth of market share of private label products in recent years, the GCC retail industry is still lagging behind major matured retail markets in terms of private labels presence. Retailers now realize the need for making private labels an integral part of their growth strategies that can help them boost revenues and customer loyalty in the current retail environment characterized by intense competition and consolidation.

GCC - Retail Sales

The retail industry landscape in GCC region is constantly evolving, with the modern trade replacing traditional independent retail trade. As of 2013, the total occupied modern retail sales area was 5.3 million square meters. This is projected to reach 6.6 million square meters in 2018.

Retail industry has witnessed tremendous growth over the last decade and is one of the fastest growing sectors of the region. The growing expatriate population, increased purchasing power of consumers, modern lifestyles, and increasing influx of tourism revenues are fueling growth in the region’s retail sector. According to a 2015 report from Alpen Capital, retail sales in the GCC region are expected to grow at a CAGR of 7.3% between 2013 and 2018 to reach US$ 284.5 billion. Sales in supermarkets and hypermarkets across the region are expected grow at a CAGR of 9.2% during the same period.


GCC - Supermarket Sales

Given the retail industry’s strong growth outlook, a lot of potential opportunities exist for retailers to grow and differentiate themselves with private label strategies. However, till now retailers have largely failed to capitalize on this. Private label products have started to penetrate and enjoy success only across few product categories such as home care, packaged food, beverages, and hygiene products. Not only there is still an ample room for further growth in these categories, but the market remains untapped for other product categories such as personal care and hygiene products, and food categories including frozen food.

With the increased competition and industry consolidation, retailers need to re-think their strategies that can enable continuous growth and innovation. Therefore, many retailers are increasingly using private label as a strategic weapon to differentiate themselves and outperform competitors. According to SIAL Middle East, a leading event organizer in the region, 88% of the Middle East retailers they interviewed in 2014, were investing in private label expansion. Spinneys UAE recently announced to boost the exports of private labels in Middle East and North Africa (MENA) countries due to the increasing demand and recent success enjoyed by company’s private label offerings. Similarly Tesco, LuLu, and Carrefour have also announced their plans to further develop their private label offerings in the region within both food and non-food segments.

There are significant opportunities for GCC retailers in the private label space as these products are more profitable than branded products. By cutting the middleman (distributor) out, and by avoiding higher marketing costs associated with branded products, private labels enable retailers to increase gross margins. As today’s price conscious consumers are looking for best value for their buck, private labels offer consumers a wider range, better quality, and fairly priced products, thus creating a win-win option for retailers and customers in the current retail landscape. Moreover, private labels offer retailers with more bargaining power with their suppliers. It also helps retailers to have better control over their product offerings and category management. Although the opportunity for GCC retailers in private labels is clear, retailers in the GCC region have failed to reap their full potential. This is mainly because retailers within the region face an array of challenges.

Firstly, sourcing is a significant challenge for retailers as there are very few manufacturers in the region who have the capabilities to supply a range of high quality private label products. Most of these companies have existing manufacturing contracts with multinational retailers, which prohibit them from creating private label products for regional players. Other manufacturers and suppliers in the region face acute operational issues such as quality and supply chain management deficiencies that automatically make them unfit.

Secondly, the region has a diverse range of consumers of different nationalities, income levels, and other social demographics. Understanding their diverse needs is a challenge for retailers. So far, most of the retailers have focused solely on value, and failed to gauge the exact needs and expectations of these consumers due to lack of customer intelligence and the retailers’ limited ability to customize their private label offerings as per the regional market needs. GCC retailers have also failed to assess the current gaps in their assortment, and how they can utilize their private label offerings to fill these gaps.


Given the retail industry’s robust growth outlook, in order to grow and capture a bigger market share, retailers are using organic as well as M&A strategies. Therefore, M&A activity has also picked up within the industry. In the past few years many deals have taken place that involved region’s leading retailers such as Savola Group, Damas International, LuLu Group, and Al Meera Consumer Goods Co. As the retail landscape continues to consolidate, competition among retailers in the GCC will only get fiercer.

Private label is likely to become one of the key battlegrounds for retailers looking to succeed in these markets. As a first step, retailers should integrate private label with the company’s overall business strategy. Further, in order to succeed, retailers will have to develop a better understanding of the retail market landscape as well as shopping behavior of their target consumer segments. This will help them create targeted private label strategies tailored to shopper needs with optimal private label categories, branding, packaging, and pricing strategies. By collaborating with experienced manufacturers, GCC retailers need to ensure that right products are on the right shelves at the right time and price. It is critically important for retailers to strike the right balance between price and value. Cracking this code will allow retailers to strengthen growth and customer loyalty beyond 2015.

Top