KPMG 2016 UAE Food & Beverage Report

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No. 1

126

146 149

42 23 8 125

27%

142

19

39 112 178

<10 m in 10 7% -20 m 28% in

20-30 min 41%

27%

46%

KPMG 2016 UAE Food & Beverage Report

Offering insight into a leading global F&B market

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MENU HOUSE

Specialties

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We explore how innovation is affecting the UAE's F&B market, paying particular attention to the growth and popularity of digital (including food apps), healthy eating and food festivals.

SPECIALS

Hot bites Appetizers

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Introduction to the 2016 UAE F&B report by Anurag Bajpai, Partner and Head of Retail for KPMG in the Lower Gulf.

Entrées

8

We examine the current state of the UAE's F&B market and investigate how often we eat out, what we eat, and how much we are prepared to pay.

Fusion

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We look at customer preferences, including how and why we choose the cuisines and formats we frequent and how consumers react to market forces.

Delicacies We look at the importance of engaging effectively with consumers. We question how quality service, deals and promotions attract and retain consumers. We also investigate how social media and data and analytics are affecting the sector.

26 We examine some of the challenges F&B operators may have underestimated, including the imminent introduction of 7"5 UIFEJGěDVMUJFTPGQSFEJDUJOHDPOTVNFS behavior, and how to sustain top line growth.

Desserts

30 We explain who we questioned - both consumers and industry executives - and highlight the services KPMG provides to F&B clients.

Spices Our report contains infographics based on consumer and F&B operator responses.

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Consumer response

Operator response

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Appetizers Introduction to the 2016 UAE F&B report by Anurag Bajpai, Partner and Head of Retail for KPMG in the Lower Gulf.

I

n 2015, KPMG released its inaugural UAE Food & Beverage Survey. Our 2016 report builds on last year's survey, canvassing the views of more than twice as many respondents. We have also looked at the market from an operator's perspective, focusing on the current state of the market, including opportunities and challenges. To do this, we spoke to leading industry executives representing many of the major brands in the UAE’s food and beverage (F&B) sector. A key factor in the spectacular growth of the UAE’s F&B market has been a seemingly limitless investment appetite. Indeed, the underlying demographics that make the UAE such a tempting target for both international chains and small start-ups – a highly diverse, growing and relatively young population, rapidly expanding tourism and high levels of BGĜVFODFIBWFOPUDIBOHFE5IFDFOUSBMNFTTBHF of this year's report is that the market as a whole has remained resilient - despite changing macroeconomic conditions - and that operators are generally more optimistic about the longer term outlook. This level of general optimism is perhaps most clearly illustrated in the ongoing competition for good locations. Existing operators continue to invest in new locations. Some of these investments are opportunistic and some are defensive – whether to raise entry barriers for prospective new market entrants or to counter slowing same store sales. While Dubai is seen as a larger opportunity, investment into Abu Dhabi and the northern emirates continues. This is having a knock on effect on rents – and therefore costs.

KPMG 2016 UAE Food & Beverage Report

From an individual operator’s perspective, growing competition and changing demographics - in addition to pressure on topline growth and margins - have NBEFUIFNBSLFUNPSFEJGěDVMU8IJMFUIFNBSLFUBT a whole is growing, carving out and then controlling a part of that market is becoming challenging. As a result, churn in the market will continue. In addition to market resilience, there are four other broad themes that underpin this report: – Consumer preferences are reasonably consistent. – Operators are increasingly aware of the importance of engaging with their customers. – Innovation - whether in terms of menu enhancements or new ways of understanding consumer preferences - is a differentiator. – In a market which is bullish in the longer term but less optimistic in the shorter term, there BSFTJHOJěDBOUDIBMMFOHFTUIBUPQFSBUPSTNVTU effectively address. My thanks to the consumers who completed the online survey and the industry leaders who shared their views on the UAE's F&B market. I do hope that ZPVěOEUIJTSFQPSUJOTJHIUGVMBOEXPVMECFEFMJHIUFE to hear your feedback.

Anurag Bajpai Partner | Head of Retail KPMG in the Lower Gulf

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Entrées We examine the current state of the UAE's F&B market and investigate how often we eat out, what we eat, and how much we are prepared to pay.

The UAE is one of the world’s leading F&B markets, with market size measured by Euromonitor at AED52.4 billion in 2015. The market has shown impressive resilience in a challenging environment over the last 12 months. While there is evidence that the UAE's F&B market has been impacted by changing macroeconomic conditions, the TFDUPSDPOUJOVFTUPCFOFěUGSPNUIF6"&ijTQPTJUJPOJOH as a major global tourism and retail destination with a diverse mix of cultures and ethnicities. There are, however, a number of challenges which operators have to contend with. Increasing competition puts pressure on both topline and overheads, most evidently in the form of rising rents.

What is your growth outlook for the next 12 months?

Decline

The UAE’s food & beverage market

Stagnation

2015

Growth 16,234

1.2x

2020

27% 19,053

2015

46% 52,399

1.6x

2020

27% 81,960

Source: Euromonitor

Number of outlets

Revenue (AED million)

Although the overall market outlook may be positive, these are challenging times for F&B businesses. Most operators we spoke to, which includes some of the largest F&B brands in the UAE, have been affected by changes over the last 12 months. Nevertheless, there are good grounds for a more optimistic longer-term outlook. Recent Euromonitor data suggests that growth in revenue between now and 2020 is likely to outstrip growth of outlets by around 30%. Some of this is predicated on continuing strong tourism growth in the UAE in the run up to Expo 2020.

KPMG 2016 UAE Food & Beverage Report

64%

Despite the market growing overall, of operators surveyed indicated that same store sales over the last 12 months have either been stagnant or have declined.

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Challenges galore While there is considerable optimism regarding the longer-term prospects for the sector, the short-term outlook has been dampened by current macroeconomic conditions. Only one in four of the operators we spoke to expect to see improved market conditions in the short term. As the market grows, the UAE in general, and Dubai in particular, continues to attract new players, resulting in increased competition. For individual operators, this means a growing struggle for footfall and revenue. There are also TQFDJěDJTTVFTBGGFDUJOHUIFTFDUPSJODMVEJOHJODSFBTJOH rental costs, the race for space, topline growth, rising food costs and increasing attrition of trained staff. In aggregate, these challenges may force some operators – across cuisines and formats - out of the market.

Rents are rising.

I am losing some of my best staff.

Food costs are rising but my customers are price-sensitive.

Finding a good location is getting increasingly EJGěDVMU

Sustaining topline is not easy.

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Frequency

Reasons to be cheerful Consumer demand for F&B offerings remains robust – people in the UAE, residents and tourists, like to eat out. Our consumer survey indicated the vast majority of people are eating out at least as much as last year with around one third of our respondents indicating that they are eating out even more frequently.

Lunch and dinner

67% 44%

Five in six respondents are eating out at least as much as last year.

of survey respondents eat dinner out every weekend. of respondents eat lunch out or get a take away – about the same as those who bring a packed lunch from home.

Brunch

66%

of respondents have brunch at least once a month.

3 out 4

survey respondents order a take away or have food delivered at least once a week.

KPMG 2016 UAE Food & Beverage Report

More for more In addition to strong consumer demand for eating out, our consumer survey also highlighted that a majority of respondents have increased their spend per meal – only one in ten are spending less than last year.

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How has your average spend changed compared to last year? Spending more No change

Our respondents are much less likely to cook and eat dinner at home than any other meal. When eating out, average spend is similar to last year with people prepared to spend more when eating in a restaurant than on takeaways. Brunches, something of a UAE tradition, tend to see higher spends and are extremely popular.

Spending less

9%

28%

63%

How much are you prepared to pay? Cost per head
AED101-300

AED51-100

>AED300

Brunches

12%

32%

42%

Eating out Dinner

26%

38%

33%

Takeaways

38%

43%

18%

14%

3%

1%

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Where are you looking to invest in the medium term?

64% Expand the outlet network for existing franchises and brands

Positive longer-term outlook Despite short-term challenges, operators are bullish about the sector's medium to long-term prospects and are preparing for improved market conditions. All the PQFSBUPSTXFTVSWFZFEDPOěSNFEUIBUUIFZDPOUJOVFUP invest – either by increasing the UAE footprint of their existing brands, or through geographical expansion outside the UAE, or by investing in newer brands, both homegrown and franchises. Operators’ positive longer-term outlook means continued investment and an increasing number of outlets, brands and concepts - all of which are good news for consumers.

36% Expand into new markets and geographies

27% Invest in new brands and franchises

Note: Multiple choice question - therefore, the total does not add to 100%.

Operators might be well advised to take a cautious approach – trying to achieve growth through continually opening new outlets or rapid geographical expansion could be unsustainable. In the longer term, the appeal and the quality of the concept will determine success. Operators need to test, understand and protect the viability of their concepts. In a market characterized by discerning consumers and ever-increasing competition, simply focusing on geographic expansion rather than developing strong brand presence could be counter-productive.

KPMG 2016 UAE Food & Beverage Report

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RECIPE FOR SUCCESS Flavors

Ingredients

Cuisines and formats that are popular

Aspects of the business that separate success from failure

Quick service and fast casual

Customer experience matters

Indian, Italian and Arabic

Get the concept right

Chicken

Location is king

Cafés

Quality counts

KPMG view The UAE's F&B market, despite issues and challenges, continues to be resilient. Our consumer survey shows that residents are spending more and are eating out as much as last year. The UAE continues to evolve as a tourism destination, attracting more visitors from across the world. The UAE as a whole – and Dubai in particular – has developed a reputation as a ‘go to’ market for owners, operators, chefs and brands. While the overall market is growing, there is increasing competition among brands BOEPVUMFUT*OEJWJEVBMCVTJOFTTFTBSFěOEJOHHSPXUINPSF challenging. Many of the operators we have spoken to have not seen same store sales growth this year – and don’t expect this to change in the near term. Consequently,

businesses are having to realign their expansion strategies with competitive realities. We see the medium-term outlook for the sector as positive, particularly as the number of tourists is widely predicted to continue to grow. We expect to see increasing investment in the market in anticipation of medium to long term success. Operators will, however, need to work harder to identify gaps in their market offerings and get the ingredients for success right.

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Fusion We look at customer preferences, including how and why we choose the cuisines and formats we frequent and how consumers react to market forces.

Same again please! Our consumer survey shows remarkable consistency in the choices of cuisine and format compared to last year. Indian was once again the most preferred cuisine, followed closely by Italian, Lebanese and Chinese.

Which are your preferred cuisines?

No.1

Choice 1 80

Choice 2 Choice 3

147 105 111

101

54 161 105

117

235

55

63

44 61

22

24

18

31

30

52

97 30

29

14 9

Pakistani

23

Other South Asian

Italian (includes pizza)

Indian

French

Emirati and GCC

Chinese

Central and Latin American

33

20

Lebanese and Levantine

47

3 6

48

24

Japanese

51 16

25 110

Other European

84

32

Other East Asian

17

North American (includes burgers)

38

Other Middle Eastern or North African

28

KPMG 2016 UAE Food & Beverage Report

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How often do you visit?

1-3 times a month Quick service /fast food

89 128

Café Casual dining Fine dining

107

47

More than three times a month 314

290

141

301

169 125

Never

230

425

159

492

126

57

Only on a special occasion

Consistent choices Quick service restaurants (QSRs) and cafés continue to be the most popular formats, suggesting a preference for speed, value for money and a sociable environment. While ěOFEJOJOHJTMBSHFMZLFQUGPSTQFDJBMPDDBTJPOT JUDPOUJOVFT be popular with a smaller, select set of respondents. Most market observers have suggested that macroeconomic conditions have had limited impact on this end of the market.

How often do you visit a bar?

12%

More than three times a month

18%

1-3 times a month 22%

Only on a special occasion 48%

Never

30%

Only of our respondents visit bars or lounges regularly (at least once a month)

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Quality rules There is also consistency in the way consumers chose restaurants – once again, consumers rated quality of food and service and their favored cuisine as the key factors determining the choice of restaurants.

How do you choose a restaurant?

6%

Food quality and taste

Variety in the food

Cuisine

Ambience

Good quality service

Location and travel time

Value for money

Enough parking or valet service

Interestingly, while consumers said that price was not the QSJNBSZESJWFSPGSFTUBVSBOUDIPJDF GPVSPVUPGěWFTVSWFZ respondents reported that price increases would change eating out behavior. This resonates with the industry executive view that the market has become increasingly price sensitive, with reactions to price increases felt most strongly in the fast food and QSR segments.

2%

7%

Consumers indicated that travel time is not a key consideration when choosing restaurants. Nearly two thirds of survey respondents are willing to travel for more than 20 minutes to get to their choice of restaurant.

25%

7%

16%

How many minutes are you prepared to spend traveling (including parking) when eating out?

18% 18%

<10 min 10-20 min 7% 28%

20-30 min 41%

>30 min 9%

Travel time is not important 15%

How do price increases impact your eating out habits? I eat out more Price increases don't affect my eating habits I am more conscious of what I order I look for coupons, deals and promotions I look for lower-priced restaurants I eat out less frequently

4%

17%

28%

17%

15%

19%

KPMG 2016 UAE Food & Beverage Report

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Adventurous palates? Similarly, while most respondents said they were willing to experiment with food choices, data from the survey suggests that experimenting is limited to restaurants serving familiar tastes. While 48 percent of our respondents have tried a new restaurant in the last six months, only a quarter of respondents had tried a new cuisine.

88%

An overwhelming of our respondents say they like to experiment with new cuisines and restaurants.

Have you tried a new cuisine or restaurant in the last six months? Yes

No

24%

KPMG analysis 42%

76%

48% Restaurant

Cuisine

Our surveys – of both consumers and industry executives – suggest that consumer preferences are reasonably consistent. Preferred cuisines are much the same as last year. Quick service restaurants, cafes and casual dining are still popular formats. Operators should continue to invest in enhancing the customer experience as quality – of both food and service – adds considerable competitive advantage. Operators also need to understand and attempt to predict customer behavior – which can be challenging when consumers don’t always understand their own behavior. With the wide array of formats, concepts and cuisines offered in the UAE mirroring its varied demographics, we understand the attraction of trying to bring something completely new to the market – and this will be a route to success for some. On the whole, however, we see that, in the current market, there is merit in developing concepts that already have wider acceptance and appeal.

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Delicacies We look at the importance of engaging effectively with consumers. We question how quality service, deals and promotions attract and retain consumers. We also investigate how social media and data and analytics are affecting the sector.

What makes you try a new restaurant?

Word of mouth from friends and relatives

Online ratings and reviews of restaurants

Known brands from home and abroad

Deals and promotions

Advertising

Reviews by food critics in magazines and newspapers

Getting the word out Our consumer survey indicates that reviews, whether personal recommendations or online ratings, strongly JOĜVFODFCFIBWJPS8PSEPGNPVUIJTCZGBSUIFNPTU JNQPSUBOUJOĜVFODFSĸXIJMFBCPVUQFSDFOUPG respondents rated feedback from friends and family as UIFUPQJOĜVFODFS PWFSQFSDFOUPGSFTQPOEFOUTTBJE UIBUTVDIGFFECBDLXBTPOFPGUIFUPQUISFFJOĜVFODFST when weighing up a new restaurant. Just under half of respondents look for online reviews. This underlines the need for proactive customer engagement at all times. Operators have suggested that, while advertising might persuade consumers to try something new, it was less effective in the long term – a view that resonates with consumer feedback. To build brand loyalty, positive reviews are key. Interestingly, however, poor reviews have a greater impact on F&B businesses than good reviews. As a result, operators are actively looking for ways to engage with consumers, increasingly through social media.

KPMG 2016 UAE Food & Beverage Report

The human touch Top quality service is a key element in generating positive reviews - eating out is as much about human interaction as it is about food. While the vast majority of our respondents believed service in restaurants was good, about a third of them felt that there was potential for further improvement, mostly in relation to staff training.

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What percentage of your revenue is invested in staff training and retention? <1% 11%

1-2% 2-4%

11%

Operators have a dilemma here – while they would like to offer a best-in-class experience to their customers, they are wary of over-investing in staff training as increasing competition has led to continuous staff churn. More often UIBOOPU JUJTUIFCFTUTUBGGUIBUMFBWFěSTU.PTUPQFSBUPST QSFGFSUPTUJDLUPUIFJSTUBOEBSEUSBJOJOHQSPHSBNTCVUěOE ways to incentivize their staff for good service – through rewards, recognition and the sharing of tips.

33%

>4%

45%

Service level

Tips I don’t tip Service is included 1% - 10% 10% - 20% 8%

23%

3%

>20% 10%

? 56%

65% Level of service and staff is generally good

6% Most restaurants are understaffed and quality suffers

29% Restaurants have enough staff but they aren't very well trained

To tip or not to tip is good service properly rewarded? While customers appreciate good service, they don't seem to be particularly keen on tipping generously. Only about a quarter of respondents said that they regularly tip more than 10%. From an operator perspective, outlets with more generous sharing schemes tend to have a reputation for better service and higher staff retention.

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What's the big deal? 8IJMFEFBMTBOEQSPNPUJPOTBSFOPUUIFUPQJOĜVFODFSPG buying behavior, they do have some sway on the eventual choice. In particular, they seem to be effective once a customer has decided on a cuisine or has a shortlist of SFTUBVSBOUTUPUSZ0OMZBěGUIPGPVSSFTQPOEFOUTBDUJWFMZ look for deals while choosing a new restaurant.

How do deals affect your choice of restaurant? %FBMTJOĜVFODFNZDIPJDF I only look for deals for cuisines I like I only look for deals from the restaurants I know I only look for deals on special occasions and am not too particular about the restaurant or cuisine

Operators see coupon-based deals as something of a double-edged sword. They can be very effective in getting people through the door – useful for a new venue PSJGBOPQFSBUPSJTIBWJOHUPěHIUGPSDVTUPNFST)PXFWFS  operators don't want consumers to expect a deal or a promotion every time they eat out. Operators suggest that, once you start offering deals to consumers, it can be EJGěDVMUUPXJUIESBXUIFNXJUIPVUBEWFSTFMZBGGFDUJOHUIF business.

I rarely, or never, use deals

20%

Some operators are moving to more customized incentive DBNQBJHOTXIJDIPGGFSJOTUBOUHSBUJěDBUJPOUPDVTUPNFST  such as on the spot discounts and offers.

10% 26% 20% 24%

Deals and promotions:

*OEVDFěSTUUJNF trials

27% Do Michelin stars shine bright?

Increase footfall

27%

Don't generate customer loyalty

50%

28% 57% 15%

Yes No *EPOijUGSFRVFOUěOFEJOJOHSFTUBVSBOUT

Note: Multiple choice question - therefore, the total does not add to 100%.

Despite the UAE’s reputation for glitz and glamour, Michelin stars don't seem UPCFBNBKPSJOĜVFODFS8IJMFPG our respondents said they don't go to ěOFEJOJOHFTUBCMJTINFOUT POMZPOFUIJSE PGQFPQMFXIPEJOFEBUUIF6"&ijTěOF dining establishments were swayed by the presence of a Michelin star.

KPMG 2016 UAE Food & Beverage Report

Shall I Instagram that for you? With high levels of smartphone penetration, social media JTQMBZJOHBHSPXJOHSPMFBTCPUIBOJOĜVFODFSBOEBUPPM for customer engagement. According to the Arab Social Media Report 2015, 88 percent of the Middle East's online population use social networking sites daily with ěWFQFSDFOUPGVTFSTTQFOEJOHNPSFUIBOGPVSIPVSTQFS session. Nearly two-thirds of regional social media users regularly use social networks to get recommendations on products and services. This resonates with consumer feedback on the relevance of online reviews and underlines the growing importance of customer engagement through social media. 0QFSBUPSTVOEFSTUBOEUIBUUIFZOFFEUPěOEXBZTUPCPOE and remain connected with their customer base. They are investing in social media capabilities, along with data and analytics, to gain consumer insight and promote their brands. Operators believe that data and analytics will help them establish a competitive advantage in a rapidly evolving digital economy.

All the operators we spoke to were engaging in some type of social media activity with their customers, although objectives and uses varied. Key themes of social media engagement include:

Operators are also using some form of data and analytics to help improve:

Customer insight Brand and product management

Pricing decisions

Market expansion Portfolio rationalization

Campai g ns Geo-targeting Pictures

share experiences facebook

food apps

monitor

Virtual clicks SEO media instagram SURVEY

Celeberation

CONVERSATION

track

network

activity

Feedback

Twitter Google Ads

experiences

KPMG view Engaging - and remaining connected with - customers is a key differentiator for successful F&B businesses. From personal recommendations to the increasing use of social media, consumer feedback is playing an increasingly important role. Our surveys suggest most operators are still adapting to the challenges of an increasingly digital world – but they are making progress. Proactive engagement with customers is seen as an effective way to develop and protect brand loyalty in a congested market. We see human touch points as being critical to customer experience and engagement. Operators should consider further investing in both retention of and training for staff which aligns with their brand ethos. Positive customer experiences lead to better reviews, better engagement and, eventually, better bottom lines.

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Specialties We explore how innovation is affecting the UAE's F&B market, paying particular attention to the growth and popularity of digital (including food apps), healthy eating and food festivals.

Consumers use their smartphones to: Choice 1 Choice 2 Choice 3

Call me maybe? As with almost everything else, smartphones are transforming the way consumers buy F&B. Food apps have been a major catalyst in this change. Consumers use UIFJSTNBSUQIPOFTBOEGPPEBQQTUPěOEOFXSFTUBVSBOUT and read online reviews, and also - according to 40 percent of respondents - to buy meals.

No.1

126

Do you own a smartphone or tablet? 209

146

Yes

149 76

127

75

5%

142 125 182 238 178

42

55

22

Write restaurant reviews

124

Read a restaurant reviews

112 39

Order meals

Look for directions to restaurants

Look for discounts, promotions, or deals

Find a restaurants to try

Book tables at restaurants

19

17 7

95%

No

KPMG 2016 UAE Food & Beverage Report

Apps on the up Given the growth of food apps and their impact on operators' volumes and topline, they are seen as an important contributor to success. Most operators we spoke to are not just listed but also get a reasonable volume of business through these platforms.

How are food apps affecting your business?

We see reasonable bookings from these apps.

Food apps continue to evolve, looking to offer new propositions to consumers that drive convenience and add value. What started with search and discovery PGGFSJOHT BMMPXJOHDPOTVNFSTUPěOESFTUBVSBOUTBOESFBE

We don't track volumes separately but we know they contribute.

18%

36%

Food apps do not contribute much to our business.

Do you see value in food apps? 46% Yes, we are already listed on all the food apps in the market. 9%

No - although we are listed.

9%

No - we aren't listed.

82%

reviews, was further augmented with capabilities to call and order and then online ordering and delivery, allowing customers to order with a few clicks. One prominent food tech player reported that nearly 20 percent of orders channeled through their platform are now online. Having captured a sizable share of the delivery business, food apps are now playing a role in restaurant reservations as well as table management, going well beyond just lead generation.

How food apps have evolved Search and discovery Description Search for restaurants, write reviews, get suggestions, rate experiences, call outlets Revenue model Primarily dependent on advertising revenue; potential to explore premium listing charges Key players Zomato, Foodonclick, Talabat, 24h.ae, RoundMenu

Increased operator engagement is the next step

23

Online ordering

Online reservations

Web or app-based food delivery

Web or app-based table reservations

Charges per order which can either be ěYFEPSMJOLFEUPPSEFSWBMVF

Fixed charges per table or person; potential to charge a percentage of bill value

Zomato, Talabat, Foodonclick, Deliveroo, 24h.ae

Reserveout, Zomato, OpenTable, RoundMenu

– Integrated platforms for order and table management – Customer analytics

– Integration of payment gateways – Geo-targeting ĸ/FBSěFMEUFDIOPMPHJFT

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Hungry for more?

Are operators offering more healthy food options now?

Yes, there are more healthy items on the menu now than a year ago. I have not noticed any changes in healthy options over the last year. No, there are fewer healthy options now.

10%

37%

Counting calories Healthy eating is another trend that is increasingly popular in the UAE. With ever-changing lifestyles and increasing health awareness, consumers are looking to eat more healthily. Over three-quarters of respondents indicated that they are either eating more healthily or at least are more health conscious. 8IJMFPQFSBUPSTDPOěSNUIBUDPOTVNFSTBSFNPSFIFBMUI conscious, operators do not think consumers' eating choices are as healthy as consumers would like to believe. Operators believe there is still huge scope for building awareness so that consumers understand what is – and what is not – healthy. Consumers also feel that there is a need for a wider range of healthy food options. Only a third of respondents believe there are more healthy options on menus than last year.

53%

Healthy eating - consumer and operator views Do you eat healthily?

Are people in the UAE eating more healthily?

I always eat healthy food.

Yes, the trend has really picked up.

I eat healthily during the week, however, I indulge a bit at the weekend.

Yes, but it is still early days for healthy eating. No.

I have become more health-conscious. I am not particular about. nutritional value; I prefer taste over health.

14% 23%

27% 36%

22%

41% 37%

KPMG 2016 UAE Food & Beverage Report

Feasts and festivals Both Dubai and Abu Dhabi host gastronomic extravaganzas in the cooler months, which offer smaller but innovative brands and concepts an opportunity to showcase their offerings. Operators see these developments as positive as it gives both operators and consumers an opportunity to experiment. Operators can gauge enthusiasm for new concepts without having to invest heavily in a traditional venue. At the same time, consumers can try different cuisines and formats without having to travel widely. 5IFTFUSFOETEFěOJUFMZIFMQDSFBUJOHBOBDUJWFJOUFSFTU in food. However, operators believe that food festivals will continue to be niche events with limited appeal in UIFNFEJVNUFSN5IFZBSFDPOěEFOUUIFTFGFTUJWBMT do not pose an imminent threat to the more traditional segment of the business.

What do operators say about food festivals?

Food festivals are a great opportunity for smaller (and newer) operators to offer new concepts

Food festivals don't generate much revenue - but will continue.

New brands and concepts are introduced during food festivals. I don't think food festivals do anything for the F&B sector.

LATEST FOOD INNOVATIONS – Social media engagement – Personalized dining experiences – Authenticity of cuisine – Organic food and restaurants – Food festivals

– Self-ordering – Organic food and restaurants – Street concepts – Themed restaurants – DIY food

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KPMG view Food apps are playing an increasingly important role in driving business and transforming the way consumers interact and transact – as might be expected in a region with such high smartphone adoption. Food tech players are becoming stakeholders rather than simply generating leads, integrating themselves within the operator value chain. Although healthy eating is growing in popularity, it is still a niche in the UAE. While the F&B industry has a key role to play in educating consumers about healthier options, they won’t have mass appeal until they can consistently match the price, taste and convenience offered by some other formats. Operators understand innovation and the NBSLFUEJGGFSFOUMZ SFĜFDUJOHUIFWBTUSBOHF of opportunities in the UAE. Where you stand on innovation depends on where you sit – operators need to clearly understand their strategy and identify and invest in innovation which is implementable and aligned to their brand strategy.

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Hungry for more?

Hot bites We examine some of the challenges F&B operators may have underestimated, JODMVEJOHUIFJNNJOFOUJOUSPEVDUJPOPG7"5 UIFEJGěDVMUJFTPGQSFEJDUJOHDPOTVNFS behavior, and how to sustain top line growth.

What is on the radar...

Competition for good locations

Too hot to handle? Operators have highlighted a number of challenges, including rising food and rental costs, staff attrition and growing competition. Other short and medium term challenges which may have been underestimated include: – VAT – operators seem to be under-prepared although this is likely to be introduced in 2018 – Consumer insight – operators need to better understand what people eat and drink - and why

High rents

Staff attrition

1SPěUBCMFBOE sustainable growth

– Effective expansion strategies – expanding simply by introducing new brands, opening new locations, and locking competitors out of venues is only likely to work in the short term – Controlling costs – reviewing operational processes and controls is more likely to QSPUFDUQSPěUTUIBOBOVOSFNJUUJOHGPDVT on cutting costs

… and what might be missing?

VAT

Cons u insig mer hts Expansion strategies

Ope rat revie ional ws

KPMG 2016 UAE Food & Beverage Report

With VAT expected to be introduced in the UAE on 1 January 2018, it is striking that a number of industry operators currently seem to have limited awareness of how VAT will impact their business. With limited time, operators should start now to prepare their businesses for an upcoming change which will bring new challenges.

27

VAT do I do now?

How will I recover VAT paid to suppliers?

How will my pricing change?

What does VAT mean for my customers?

a third

Less than of operators we spoke to thought VAT was HPJOHUPTJHOJěDBOUMZBGGFDUUIFJSCVTJOFTT

Are all my sales liable to VAT? What incremental costs will VAT add to my business?

How will VAT affect operations and IT systems?

What are the implications of VAT on franchise agreements, royalty payments and other contracts?

What should UAE F&B businesses be doing to prepare for VAT? Phase 1: Plan and analyze

Phase 2: Design and implement

Phase 3: Test, train and register

Phase 4: Go live

– Identify project resources – Map supply chains – Map business units and systems – Document key VAT touch points – incorporate these into the VAT impact assessment (phase 2) – Review existing long-term contracts which straddle VAT implementation – Consider VAT clauses in new contracts and tender documents

– Review legislation - when released - to validate VAT UPVDIQPJOUTJEFOUJěFE in phase 1 - classify transactions for VAT – Build input tax credit allocation model – Agree requisite IT changes with IT vendor – Build log to monitor and resolve issues where the law or its application remains unclear – Log transitional provisions in the long-term contracts register

– Validate the impact assessment – Action issues in log – Validate applicable transitional provisions for long-term contracts – Test VAT systems (IT vendor) – Ensure VAT system SFQPSUTBSFTVGěDJFOU – Train staff

– Test exceptions ĸ1SFQBSFBOEěMF VAT returns – Resolve any teething issues – Fine-tune compliance practices

Now

Before the end of 2016

During 2017

Registration – Register for VAT

From 1 January 2018

28

Hungry for more?

Operational reviews

Customer insight

Strategy

Other considerations for F&B operators

Expansion and entry strategies should, but too often don’t, address issues including: ĸ)PXUPRVJDLMZBOEQSPěUBCMZFOUFSOFXNBSLFUTBOETFHNFOUT – How to develop and commercialize innovative products to support growth – How to attract new customers and enhance loyalty ĸ)PXUPBDDFTTOFXBOEVONFUSFWFOVFBOEQSPěUQPPMT

To open an outlet or introduce a new brand, industry operators need to understand: – Consumer preferences and behaviors – Location demographics – now and in the future – Engagement tactics – when, where and how

Through operational reviews, businesses can develop a holistic view of current operations and: – Understand consistency of application and experience – Identify gaps in controls and checks – Optimize costs ĸ%SJWFPQFSBUJPOBMFGěDJFODZ

KPMG analysis Robust strategic planning is going to be needed in the current market environment. Expansion strategies have too often been based on unrealistic growth objectives and implementation capabilities may not have been considered. Businesses must also align their offerings with consumer requirements - which can only be done through a focused effort to gather and analyze data around preferences and behaviors. Finally, operational reviews based on leading practice, which offer industry-focused external perspectives, are an increasingly important way of maintaining focus on both top and bottom line growth. We also believe that VAT will have more of an impact on the sector than many of the operators we spoke to are

currently predicting. While prices will increase, the impact on current systems and business functions will be more TJHOJěDBOU We have seen that the market is resilient and that consumer engagement, combined with innovation, is key to sustainable F&B success. However, there are challenges beyond location, staff attrition and high rents that businesses need to prepare for. In our view, those businesses that take note of - and most importantly are proactive in addressing - such challenges are those likely to face the least amount of disruption to their operations.

KPMG 2016 UAE Food & Beverage Report

Key takeaways 1.

2.

3.

4.

5.

The UAE's F&B market remains resilient and the outlook is robust in the longer term. F&B operators continue to invest with an eye on the future.

Consumer preferences are relatively consistent. Differentiating on quality and customer experience is crucial to stand out from an increasing number of available choices.

F&B businesses understand the importance of engaging with their customers – and are getting better at it. The effective usage of social media BOEEBUBBOEBOBMZUJDTPGGFSTJHOJěDBOU competitive advantages.

Innovation is impacting the market as a whole but there seem to be very few individual disruptors that are having a marked effect - getting the basics right is still key.

While there are numerous F&B opportunities across the UAE, there are also a number of challenges, which are multifaceted and substantial.

29

30

Hungry for more?

Desserts We explain who we questioned - both consumers and industry executives - and highlight the services KPMG provides to F&B clients.

Hungry for more?SFĜFDUTUIFWJFXQPJOUTPG respondents living across the UAE. The online survey was conducted in the second quarter of 2016.

How old are you?

Where are you from?

<21

Asian expatriates

<150

21-30 31-40 41-50

UAE nationals and Arab expatriates

151-250 251-400 401-600

Western and other expatriates

>50 3%

What’s your annual income (AEDk)?

>600

3%

9%

8%

13% 12%

32%

10%

40%

45%

19% 77% 29%

We spoke to key decision makers at more than a dozen UAE F&B businesses, representing more than 60 brands and over 550 outlets, and two of the UAE's predominant food tech players. Using a combination of open and closed

questions in wide ranging interviews held in the second and third quarters of 2016, we tested hypotheses suggested by our consumer survey and elicited views on the current and future state of the market.

Key aspects of your F&B business – and KPMG service offerings

"DDPVOUJOHBOEěOBODF

Strategy

Deals

Digital

KPMG services: – Audits and reviews of ěOBODJBMTUBUFNFOUT – Agreed upon procedures ĸ$PNQJMBUJPOTPGěOBODJBM statements – Outsourced payroll, bookkeeping and accounting services – Attestation services

KPMG services: – Business planning – New market entry – Strategic transformation – Consumer insight – Go-to-market planning

KPMG services: – Valuation services – Financial due diligence – Fund raising – Financial restructuring – Partner search – Negotiations and closure – Sell-side M&A

KPMG services: – Digital strategy – Customer experience transformation

Tax

Operations

IT and cyber security

KPMG services: – VAT impact assessments and preparation – Tax structuring – International tax – M&A tax solutions

KPMG services: – Internal audit – Operational reviews – Store audits

KPMG services: – Cyber security – IT system reviews – System selection and implementation – Sourcing advisory

About KPMG "TBMFBEJOHQSPGFTTJPOBMTFSWJDFTěSN XFBSFQSPVEPG our reputation for delivering cutting-edge solutions and exceptional client value. With over 50 partners and EJSFDUPSTMFBEJOHQSPGFTTJPOBMTBDSPTTTJYPGěDFTJO the Lower Gulf, we work shoulder to shoulder with our clients, offering independent audit, tax and consulting advisory services to business corporations, government CPEJFTBOEOPUGPSQSPěUPSHBOJ[BUJPOT,1.(JTQSPVEPG its reputation for developing its people and the wider business community. We actively support our staff and are proud to be recognized as a leading employer.

About our retail and F&B capabilities Our retail-focused team, with a dedicated F&B function, serves a range of diverse industry segments across the retail, consumer goods and F&B sectors. Complemented by a global network of dedicated partners and professionals located across the global OFUXPSLPGJOEJWJEVBM,1.(ěSNT PVSWBMVFMJFTJO our depth of talent and the experience we have gained helping clients respond to industry, market and regulatory changes and challenges. We work with our clients to adapt and capitalize on the trends being set by today's rapidly changing environment. With deep industry FYQFSJFODF JOTJHIUBOEUFDIOJDBMTVQQPSU PVSRVBMJěFE retail and F&B professionals deliver a broad range of audit, tax and advisory services to meet the unique needs of F&B companies.

For more information, contact:

Anurag Bajpai

Matt Parsons

Vikrant Rohatgi

Partner Head of Retail +971 50 553 6117 [email protected]

Director +971 56 683 3410 [email protected]

Associate Director +971 56 683 3401 [email protected]

The Head of Retail for KPMG in the Lower Gulf, Anurag is widely recognized as a leading expert on the nation’s food and beverage sector, responsible for writing a wide range of thought leadership, speaking at conferences and developing a range of leading practice. Anurag advises the C suite and boards at a number of UAE-based family businesses and leading global multinationals.

Based in Dubai, Matt has advised UK, Emirati and international clients within the FMCG, retail and F&B sectors on issues ranging from acquisitions and disposals to business planning and strategy. Since helping to author the 2015 F&B survey, Matt has worked with a number of UAE-focused F&B organizations on a range of different assignments.

Vikrant has been advising clients on strategy, business planning and transactions for over 11 years. Focused on the consumer markets space, Vikrant has a particular interest in the food and beverage sector, having recently worked with leading local, regional and international operators on a number of different assignments.

0GěDFMPDBUJPOT ABU DHABI Level 19 Nation Towers Corniche Street PO Box 7613 Tel: +971 2 401 4800 Fax: +971 2 632 7612

DUBAI Level 13 Boulevard Plaza Tower One Mohammed bin Rashid Boulevard Downtown Dubai PO Box 3800 Tel: +971 4 403 0300 Fax: +971 4 330 1515

Level 17 Saba Tower 1 Jumeirah Lakes Towers Sheikh Zayed Road PO Box 346038 Tel: +971 4 424 8900 Fax: +971 4 437 0274

Level 12 IT Plaza Building Dubai Silicon Oasis PO Box 341145 Tel: +971 4 356 9500 Fax : +971 4 326 3788

SHARJAH Level 20 Al Batha Tower Buhaira Corniche PO Box 28653 Tel: +971 6 517 0700 Fax: +971 6 572 3773

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation and circumstances. Ń,1.(-PXFS(VMG-JNJUFEBOE,1.(--1 PQFSBUJOHJOUIF6"& NFNCFSěSNTPGUIF,1.(OFUXPSLPGJOEFQFOEFOUNFNCFSěSNTBGěMJBUFE with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the United Arab Emirates. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Publication name: Hungry for more? Publication date: September 2016

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KPMG 2016 UAE Food & Beverage Report

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