The 6 Countries that constitute the GCC are unlike any other market in the world - on the one hand, it is home to some of the richest countries and individuals in the world, but also has millions of low paid workers at the subsistence level. The region is also home to over 200 Nationalities with people from all over the world drawn by the lure of tax free salaries and promises of an expat lifestyle. Thus, demographically speaking, this is a complex market with varying levels of affluence, a plethora of languages and cultures and adding to the complexity is the churning that is taking place due to the prevailing low oil prices, which has been the economic driver of this region. All these combine to make this region a very challenging place for new brands to enter and then to establish themselves.
Barriers to Entry
Perhaps the Number 1 Barrier to entry of a new FMCG Brand to this region is the practice of Listing or Slotting Fees which are charged by the Retailers. The concept of Listing Fees was first introduced into this region when Carrefour entered the market two decades ago. Those days, the intentions were quite noble - to prevent fly by night traders or wholesalers from dumping products of dubious brands on the shelves and then disappearing one fine day ! It also served to ensure only serious brands which had a long term vision and strategy entered the market. However, years later, this practice has become the single biggest entry barrier which is preventing new, innovative brands and products from entering this market as now every single supermarket and even small mom and pop stores have started charging "Listing Fees" !! To give an idea of the magnitude of the problem, it costs on average about $ 40-45000 to list one single sku or bar code across the Retail Trade in the UAE Market ! If a brand has over 10 sku's as is common in FMCG, you can imagine the enormous sunk costs required to get these 10 sku's on to the shelves !
The second big barrier to entry is the practice of "Rebates" which are levied by the Retailers from the Distributors. This practice started several years ago ostensibly as an incentive to the Retailers as a growth bonus, but in its present day form has evolved into a debilitating liability for the Distributor / Brand owner. The typical rebates charged by the major Retailers here average over 15 % , which in turn drives up the costs of the Distributor / brand owner by the same proportion!
The third barrier to entry is the Visibility or Display costs charged by the Retailers - with most retailers, it is not enough if the listing fees has been paid and display space is provided in their outlets. Retailers expect brands to hire Visibility on the shelves (primary visibility) and secondary visibility (Gondolas) ! The average cost of one Gondola in a major Hypermarket works out to about $ 1500 per month and this further adds to the operating cost.
The Fourth Barrier to entry in the GCC market is the practice of price control where it is next to impossible for the Brand owner / Distributor to raise the Retail Selling Price of their products once it has been listed. For every increase in price, there is a long and ardous bureaucratic process that has to be followed which is tortous enough to deter most brands from even trying it !
The GCC market structure invariably involves the Brand Owner who appoints a Distributor with local market expertise , who in turn handles the local distribution of the Brand with the Retailers in the region. The Distributor, in most cases, is caught between the devil and the deep sea. He works on an agreed fixed margin with the brand owner but in turn is squeezed by the Retailer for "Rebates" and brand investments , while maintaining a control over his operating costs and running a profitable business ! !!
Thus, entering and thriving in this challenging environment for FMCG Brands requires a lot of forethought, planning and awareness of the challenges that lie ahead !!