A global outlook on the retail sector

Against a global trend of reduced VAT in the retail and restaurant sectors, Saudi Arabia’s increased VAT must be seen against the budgetary deficit of SR34.1bn in the first quarter of 2020. Lower oil revenue allowed this increase. Additionally, a tax has been introduced on e-commerce transactions originating from outside Saudi Arabia at 15%. 

Because of the combined impact from the lockdown, a contraction in personal disposable income and VAT increase will lead to a 2.1% contraction in the nominal value of retail sales this year (excluding automotive and wholesale trade). Higher prices will increase the share of consumer spending on food and beverage from 21.8% to 22.9% in 2020 and will dampen non-food retail sales. Once tourism restarts, there might be more consumers buying big-ticket items from neighboring countries. Along with the overall economic downturn, this will also slow foreign investment in retail and deter new entrants.

Retail jobs are downsizing  –The UK lost over 24,000 retail jobs with an increase in high street insolvency. Experts expect this trend to continue and also be reflected in other countries. Over the past couple of years, a shift towards online retail has led to storefronts closing and retail jobs moving to warehouse and distribution models.

 Retail real estate is in a challenging space globallyWith movie theatres still closed in many countries and social distancing rules guiding business at restaurants, and food stores, the future for malls looks quite uncertain. Real estate owners have been keen to roll back rent reliefs offered to tenants during the lockdown, but few retailers have been able to draw shoppers back into stores. While many property owners are still negotiating rent reliefs with tenants, others worry about empty retail spaces as the number of retail bankruptcies mounts.

Online marketplaces on the rise – The coronavirus outbreak gave a considerable boost to online retail. It opened up opportunities for online marketplaces, such as Amazon and eBay, which allow small and medium-sized sellers to set up online storefronts without setting up digital platforms. Facebook launched Shop, its online marketplace, in May, and Walmart teamed up with Shopify, a move that will connect more merchants to buyers through an online presence. We expect such marketplaces to continue online business even after lockdowns ease. Online retail will remain popular, and many small merchants will decide to shut down physical operations to curtail costs.

Source: The Economist