COVID-19 reality: Dubai gold retailers will make do with fewer stores

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5 years ago

April 22, 2020

Reducing the size of the store network will be a priority for the big retailers, while for smaller players it becomes a question of survival.

But one thing is clear – having a jewellery store in every neighbourhood or community is just not going to work any longer. The Meena Bazaar and Deira Gold Souq areas, where some gold retailers have multiple shops within walking distance of each other, could see some unprecedented change.

Gold prices are again heading up to the $1,700 an ounce mark. It is now at $1,691. The Dubai Gold Rate for 22K is Dh192.5 a gram.

This will have major consequences, given that the gold retail trade is a major employer. And it is one retail category where the human element is vital to conclude a transaction.

But these are perilous times – “I feel most retailers, not just those in jewellery, will surely revisit their existing business model and cost structure to adapt with the new norm post-COVID-19,” said Karim Merchant, Group CEO and Managing Director at Pure Gold Jewellers.

“Retailers will have to study their current store locations catchment radius and revisit the requirement of the current number of store each brand operates from.”

Be everywhere

In the last four years, gold retailers had been pushing for a vastly expanded presence in Dubai’s emerging neighbourhoods. While Gold Souq and Meena Bazaar functioned as the core of the gold trade, stores were springing up in locations across the city. Many were in close proximity to supermarkets, which ensured a steady flow of business, while many experimented with standalone stores on the high-streets.

But today, it could be those locations that could be in for the chop. “Gold Souq locations are vital because that’s where the tourists come to pick up their gold,” said a retailer. “Tourists will come back once flights resume and things go back to some normalcy.

“But the question is whether there is a need to maintain stores in neighbourhoods/communities catering only to resident shoppers. Job losses or salary cuts of residents will mean less traffic for those stores in the coming months.

Cut down to size

Anil Dhanak, Managing Director of Kanz Jewels, has always felt comfortable with operating a bare minimum number of stores rather than a blanket presence. But he feels it will take some time for gold retailers to adjust to the new market realities.

“Rental forms the highest cost component of business expense followed by HR,” he said. “In addition, most retailers would have paid “key money” for prime space and that also has to be taken into account and added to the overall rental cost.

The rental cost within the jewellery industry in UAE is amongst the highest in the world. Landlords would have to consider this.

“In the immediate future, I forecast a pause in growth. All tenants have a rental agreement with the landlord and it is very difficult to break a contract. Retailers, therefore, may not immediately reduce their stores with these contracts in place.

“The other factor is the fitouts. There is a huge investment in getting a showroom ready and that cost has to be taken into account. Each outlet has got inventory.

“Whether we have five outlets or 20s, each outlet is equipped with its own inventory. So when you close five outlets, we need to decide how we will accommodate the inventory of those five. Hence, a reduction of showrooms will not happen immediately.”

Tough discussions ahead

Gold retailers have been sounding out their landlords about upcoming rental renewals – and they want landlords to adjust rents looking at the market reality.

Even before COVID-19, the need for “key money” for shops in Gold Souq or Meena Bazaar had dropped significantly. Some in the trade say outlets could even be taken with zero key money – compare that with the millions a retailer had to shell out for those locations as recently as 2015.

Options

According to Pure Gold’s Merchant, there are options other than store closures to save up on cash. One way could be to have more effective inventory management – “just in time” inventory management could be what retailers might have to adapt to,” he said.

The just in time model was first put in place by Japanese carmakers in the 1980s and since replicated in other industries. What it means is that a retailer will carry only a bare minimum stock level at all times. This effectively frees up cash.

But will UAE’s jewellery retailers have the time and flexibility to make such gradual changes? Or will they opt for the easiest one of shutting stores that do not generate enough sales?

In these times when preserving cash is the only way, retailers could take the easy decision.

“Landlords will have to readjust their contracts by at least 50% if they want to ensure the survival of retailers in the jewellery industry” -Anil Dhanak of Kanz Jewels

Courtesy: GULFNEWS