UAE F&B Sector - What are the pain points?

The total outlets in UAE for food services were 16,000+ in 2015 which is expect to expand by 17.4% annually to reach 19,000+ by 2020 (KPMG report). The market size for food and beverage (F&B) in UAE was measured at USD 14.27Bn and is expected to grow at a CAGR of more than 9% to reach USD 22.32Bn by 2020. While an affluent population with more mouths to feed is a positive indicator for the economy and for the F&B industry, it brings with it a host of challenges. In a country where indigenous food production is near to impossible, a growing F&B sector will have to face several pain points to survive.

VAT may prove to be a bump in F&B industry growth

UAE have already imposed tax on selective goods and beverages such as tobacco, soft drinks, and other harmful products to be collected from Q4 of current year. In addition, the Value added tax (VAT) on most goods and services will be introduced in 2018. While introduction of VAT is likely to impact the purchasing power of consumers in the short run, it will also affect the F&B companies as they will have to incorporate VAT systems in their accounting, update IT infrastructure, train staff to be VAT-compliant, renegotiate supply contracts etc. In the long run if the government periodically increase the tax rate consumers will become more selective or may even resist buying certain food products. This can be an impediment to the growth of the F&B industry. For example, dairy products, juice and carbonates are the categories that will be hit the most with the introduction of VAT as these commodities are more price sensitive. The VAT effect is likely to offset the growth of dairy products by USD 280Mn over the period 2018-2023, representing approximately 19.5% of the market size of 1.45Bn expected in 2018 (Euro monitor). Similarly revenue from beverages including juices, carbonates and bottled water is likely to come down by USD 300Mn from the baseline forecast after adjusting for VAT.

Also Check our Report on "Food and Beverage industry in Saudi Arabia"

High cost of retail rentals

In the past 5 years, as the demand for retail space grew, the rentals in the UAE have soared at a much faster rate. In Dubai, the food capital of GCC, average rents have climbed by more than 9.5% CAGR from USD 703 per sq. m in 2010 to USD 1336 per sq. m as of Q1 2017 (Jone Lang Lasalle). While existing operators continue to expand their business, new international players are also entering the market. This heightened demand is driving rental costs and making it difficult for players in the F&B sector leading to drying up of their profit margins. For prime locations, retailers are asked to pay a significantly higher premium as compared to the current market rates. Operators are also being charged in proportion to the number of customers visiting the stores thus limiting the scope for superior returns. While several F&B outlets, particularly restaurant chains, are engaging in lease models that allow revenue sharing to decrease costs, small and mid-size foodservice retailers who do not have multiple lines to boost their sales will have a more severe impact.

Growing health awareness may slow down frequency of eating out

Gut-busting meals served in fast-food restaurants are placing the health of UAE residents at risk. People consume a large quantities of carbohydrates and fats in every meal. A combination of unhealthy eating and lack of exercise has given the UAE the dubious distinction of being the country with the second-highest incidence of diabetes in the world. With the fast-paced life convenience foods and snacks such as chips, muffins or other unhealthy choices have become inherent part of daily diet. However, with increasing awareness among people about the negative impact on health, the frequency of dining out specially fast food items is likely to slow down booming fast food category to an extent as consumers will switch to eating fresh food and healthier meals self-cooked. Also adjusting to the changing preferences of consumer will impact the margins of the outlets in short term as players will have to incur cost to integrate wider range of healthier food items with the existing food offered at the outlets.

Conclusion

F&B industry will continue to be an important driver of the overall development of the economy, as UAE attempts to reduce its dependence on petroleum industry and evolve into a more diversified nation. The growth of F&B industry will have to face many pain points, therefore effectively managing the challenges will be the key to maintain sector’s current growth trajectory. While the country is blessed with a growing population which will offer abundant opportunities for the F&B sector, issues such as food price inflation, employee costs, quality and innovation will play major roles going forward.