July 20, 2009

GCC Consumers Continue Spending During the Recession

28% of UAE and KSA’s consumers have cut spending while 26% have increased.

Despite the recession hitting the region, Gulf Cooperation Council (GCC) residents have maintained their pre-recession spending levels. A recent Booz & Company survey of consumers in Saudi Arabia and the United Arab Emirates found they are relatively untroubled about the region’s economic prospects. Just 28 percent of consumers in the UAE and Saudi Arabia have reduced spending levels in the past six months, and 26 percent have increased spending.


A Strong Sense of Confidence for Some

Consumer sentiment and spending levels have held up better in the GCC than other regions. Some GCC consumers report fewer shopping trips, buying more sale items, and putting luxuries or other material purchases requiring large cash outlays on hold. “Reductions in spending however are still not widespread—they are concentrated within a relatively small portion of the population, suggesting that some consumers believe their local economies can remain resilient despite gloomy global developments,” explained Gabriel Chahine, a partner at Booz & Company.

Roughly one-quarter of the UAE’s and Saudi Arabia’s consumers report spending less now than six months ago; in the UAE, 55 percent have maintained consistent spending levels since the crisis began. Another 37 percent have reduced spending, and nine percent are spending more. In Saudi Arabia, consumer spending is more resilient—36 percent of consumers have maintained spending levels and 20 percent have scaled back, but 43 percent report spending more. For both countries, increased spending levels don’t necessarily mean increased spending on luxury goods, but rather from increased needs and from inflation.

Interestingly, most consumers who have reduced spending are not forced into it, but are choosing to do so because of lingering uncertainty over the economy. Some 59 percent of UAE consumers and 46 percent of consumers in Saudi Arabia report concerns about the economy: significantly fewer than in other countries. “A possible explanation for this is the trust people have in the government as a continued source of employment. Lower levels of debt in Saudi Arabia could also give consumers a greater sense of confidence,” said Chahine.


A Specific Sort of Frugality

A few trends emerge from the survey. First, the spending reductions taking place follow specific patterns: a greater reliance on sale-priced items, fewer shopping trips, and fewer occasions of dining out. Entertainment now revolves around visits to friends’ homes, rather than going out. In Saudi Arabia, dining out with family is a strong cultural custom, which helps explain why consumers have made less pronounced cuts on that activity.

For material goods, the reductions vary by category of product. Consumers have delayed luxury purchases along with higher-end home goods. Spending on necessities such as groceries has remained fairly steady: Leisure travel remains relatively unaffected in both the UAE and Saudi Arabia.

Demographic patterns also influence purchasing behavior. Those with larger families have become more frugal and conservative in their purchases, while those born and raised in the region feel more insulated from global woes and are more secure about their economic future than expatriates; most likely because most affluent nationals in the GCC earn more money than they need to cover expenses and many have ownership stakes in companies, giving them a financial cushion. “The survey confirmed that nationals have made relatively fewer cuts as compared to the overall sample,” Chahine stated.

The UAE has a higher percentage of expatriate workers than Saudi Arabia, which could contribute to consumer-spending differences between the two nations. Expatriates, particularly from Asia, report greater reductions in spending than workers from elsewhere. Western workers have continued spending: those concerned over the economy have generally lowered their saving rates, not their spending. Going forward, significant repatriation of foreign employees could impact overall consumption in the region.

“Because this survey is a mid-recession gauge, it’s not meant to be predictive. If the financial crisis deepens, GCC consumers could be more profoundly affected, and may have to scale back their spending accordingly,” commented Chahine. Depending on how quickly the financial crisis eases, the region’s durable level of consumer confidence could bode well for future spending. Pent-up demand for material goods could trigger a rebound—and attractive opportunities for marketersonce economies around the world begin to recover.