BrazilHow GCC food & beverage companies are coping with Covid-19
Food and beverage (F&B) companies across the UAE, Saudi Arabia, Kuwait and Oman face the daunting prospect of long-term social distancing, falling demand and cash constraints. A new report by KPMG examines trends and concerns in these key Middle East markets.
KPMG’s food & beverage report is a yearly affair – an attempt to make up for “the absence of reliable and relevant information for stakeholders” according to Anurag Bajpai, Head of Consumer Retail at KPMG Lower Gulf. Traditionally focused on the UAE, the latest report expanded its focus to Saudi Arabia, Kuwait and Oman as well, to reflect each market’s “unique set of opportunities and challenges.”
The 50-page report, titled ‘Recipe for Resilience’, captures the views of operators and consumers across the region and outlines the developments of key financial and operational benchmarks for various segments within the sector.
A roundup of the outlook in the four markets:
UAE
A key measure of performance in F&B is like-for-like (LFL) sales – which exclude unique factors such as mergers & acquisitiions, for instance, that might cause disproportionate spikes or dips in the numbers. In the UAE, LFL sales were already contracting in recent years, with more than half seeing a decline in figures last year.
At the same time, the performance in 2019 was still an improvement from the year before, and many had positioned 2020 as the year of promise. Nearly 60% expected LFL growth this year. This was before Covid-19, which has been devastating for the sector.
Aside from a few digital-friendly business models, F&B has struggled with low demand and zero footfall under lockdown. Many were relying on Expo 2020 to bring investments into the country, and its cancellation has been devastating.
As a result, KPMG reports that 90% of UAE’s F&B operators expect a 20% or higher decline in sales this year – a figure that jumps to 40% for a third of them. Social distancing and a demand squeeze are front and centre on the list of concerns, giving rise to a host of other challenges regarding cashflow and staff costs. All this while health and safety concerns make crowded kitchens a risky affair.
Saudi Arabia
Conditions in Saudi Arabia were relatively positive in 2019. Years of government support for the leisure, entertainment & culture sector was culminating in strong performance towards the end of the decade. Well over half of all operators were reporting steady LFL figures, and a third of these were growing.
And the optimism was only strengthening – nearly 80% expected LFL sales to be growing this year. The Covid-19 effect has been harsh here, with nearly 90% now expecting devastating sales contraction of up to 60% in the next 12 months. According to KPMG, this is the “lowest operator sentiment” across all markets in focus.
A flat 100% are concerned about social distancing, and concern around the demand shock is just as exhaustive. To make matters worse, VAT in the Kingdom has also tripled this year – from 5% to 15% – causing many F&B businesses to despair. Not surprisingly, nearly 60% are worried about cashflow and costs in the current period.
Kuwait
In Kuwait, market size has been a key issue over recent years. Serving less than 5 million residents in the country, F&B operators have struggled to post landmark numbers. Government policies in recent years have also squeezed incomes and limited spending. As a result in 2019, LFL numbers were steady for more than a third of operators, while nearly half saw declining sales.
At the same time, 75% expected sales growth for 2020. “At the turn of the decade, with the impact of recent policy changes affecting consumers behind them, operators were hopeful for the coming year,” noted Bajpai. Interestingly, Kuwait is a market where this optimism has not faded even in the wake of the crisis.
Around half of operators still expect growth in 2020, driven by consumer attitudes. Casual and social dining has persisted during the pandemic, and many expect to resume normal dining patterns by the end of this year – if not the start of the next. No doubt, social distancing, health, and the current cash squeeze are still pressing concerns, although demand is one thing that very few Kuwaiti operators are worried about.
Oman
The F&B market in Oman can be positioned as the least mature of surveyed markets, with a small market size and a limited and stagnant eating out culture. LFL sales in the country were declining for nearly 40% of operators in 2019, and rising for an identical amount. On the back of consumption growth and strong tourism numbers, 75% of F&B players in the region were expecting growth this year.
Now, around 50% expect sales to decline by up to 60% in 2020. The good news is that many consumers expect to resume dining out by early next year at the latest, although it will take some time before pre-crisis levels are reached. “Until the economy can recover, operators’ concerns are likely to remain focused on reduced demand, social distancing, and managing cashflow and costs,” noted Bajpai.
Positive signs
Not all is gloom and doom. While Covid-19 is a pressing and immediate challenge, changes to consumer behaviour – at least regarding dining habits – are expected to level out in the medium term. In the backdrop, many economies in the Middle East are geared towards long-term food & beverage growth, with targeted government policies to encourage foreign investment, tourism and a broader rise in economic prosperity.
“Recovery may prove tricky. However, operator performance through recent downturns indicate that those who can hone their strategy, test their methods, and remain afloat throughout the potentially lean periods will enter the recovery poised for expansion,” concluded Bajpai.
