SMEs in the UAE find good times from economic downturn

Four years after Tahir Shah started his pop-up food stand from a supermarket in Dubai Internet City in 2012, the year after he was laid off, the business is supporting an expansion.

His sales turnover from the Moti Roti food-truck business has increased almost 10 fold. He has hired more people and expanded into home delivery, which is now his major revenue earner, from the central kitchen in the Al Quoz industrial area in Dubai.

“During an economic downturn it makes sense to start up a business, and there is a budding community of entrepreneurship in the UAE, but the system should adapt itself to be more flexible for the start-ups,” he says.

“We still have to pay the same as big businesses in rent for kitchen or office, trade licences and to hire staff.”

A downturn is the ideal time for potential entrepreneurs to start a small business as it helps to create stronger business plans, better bargains in terms of rent and better access to the talent pool, according to analysts and entrepreneurs. There are about 300,000 SMEs in the UAE. With the impact of low oil prices sinking into the economy now, slow jobs growth in construction, oil and gas and media industries, and layoffs in some sectors, it is time to start out on your own, they say.

“This concept of a perfect storm for a start-up stands true in the UAE and the Arabian Gulf, despite the additional regulatory challenges to deal with such as restrictive visa regulations or the lack of bankruptcy laws,” says Samer Choucair, a vice president at Crescent Enterprises Ventures.

Besides the scope for thinking out-of-the-box, building a business during a downturn comes with a number of commercial benefits.

“The falling demand for office space results in more affordable rents for a small business,” Mr Choucair says. “Secondly, entrepreneurs have greater access to a competitive talent pool, including new graduates, or like-minded enterprising professionals with the right skills to support the business goals. In addition, suppliers are more willing to negotiate and reduce margins, which further reduces overheads.”

Multinational technology majors such as Cisco Systems, Hewlett-Packard (HP) and Google were all set up during difficult years. Cisco was founded in 1984, two years after a recession officially ended in the United States. Hewlett-Packard was founded in 1935, in between two economic depressions in the US. Google was founded in 1998 in the middle of the dot-com bubble that led to the US recession in early 2000.

This country is becoming more business-friendly. It improved its rank to 31 from 32 in the ease of doing business, according to the Doing Business 2016 Index of the World Bank. The ranking is among 189 economies. However, the UAE dropped three places to 60 in the ease of starting a business category.

The number of trade licences issued by Dubai Department of Economic Development has risen steadily during the past eight years, after a dip in 2009, when the global financial crisis hit the region. Last year, Dubai DED issued 22,025 trade licences, up from 11,743 in 2009.

As economic downturns hit certain sectors harder than others, such as oil and gas and property in the current slowdown, some areas can prove more lucrative than the others.

“I expect to see an increase in litigation as payment of invoices and disputes become an issue, so I am sure law firms with litigation teams will do well,” says Liam Mooney, the founder of legal recruitment consultancy Blue Pencil. He was a finalist in the Business Leader of the Year category at last year’s Gulf Capital SME Awards. “If there are job redundancies I would also expect an increase in business start-ups so alternative sources of finance will do well and company start-up organisations.”

Moreover, within a sector there might be specific categories of products and services to target as during a downturn people tend to replace luxuries with necessities, Mr Choucair says.

In the fashion retail industry, for example, the high-end segment is expected to see a decline of 30 per cent to 35 per cent during such times.

“[But] the lower to mid-level fashion lines are seeing declines in single digits and in some cases even growth,” Mr Choucair says. “The second-hand market is one that would also benefit from such downturns.”

Some entrepreneurs, however, say essentials such as health and education are among the evergreen sectors.

Sarah Rogers, who founded Early Years Educational Services in September 2008, is one of them. Her company trains teachers in early years education and it was awarded the MasterCard Small Business of the Year in last year’s Gulf Capital SME Awards.

When the company started, it was filling a gap in early years education, Ms Rogers says.

“I didn’t see [the global recession] coming but it didn’t affect us as we were basically creating a niche,” she says.

The firm started small, with a freelance visa in Dubai Knowledge Village free zone and two part-time teachers. The first year it had 70 students, and has now grown to instruct early education teachers from 350 schools and nurseries last year. It now has 27 employees.

It is looking for a 10 per cent growth in the number of students this year.

“Start small, be sensible, test your market out, and build relationships,” Ms Rogers says.

Anna Zickerman founded Upandrunning in 2010 as an integrated sports, exercise and wellness medical centre.

“I still would have started here as sports medical services would be needed,” Ms Zickerman says, adding that the current climate can provide benefits.

She is expanding the second clinic also in Dubai. The fixed rent for three years of her first clinic is expiring this year, and she is bracing for the rent rise. At the second clinic, she got a 10-year fixed rent deal.

The financial crisis in 2008 was a boost for the start-up scene, creating a new generation of companies and focused the Arabian Gulf on the non-oil economy, Mr Mooney says.

That said, there are a few more challenges to starting during a downturn than otherwise.

Availability of funding is a consistent complaint from small businesses who want to start. In 2014, Standard Chartered wound up its SME business in the UAE citing an increasing number of compliance issues and pressure on profitability. The year before, HSBC cut back lending to SMEs in the UAE.

Ms Zickerman, for instance, is mortgaging her home to raise money for the business.

“Banks are happy to give loans but there are a lot of hidden costs, and it is difficult to qualify for one,” she says.

Loan defaults from SMEs, however, are rising, with the UAE Banking Federation warning in November that a number of small business owners were fleeing the country, leaving unsettled debts of about Dh5 billion in total.

Cash flow and getting paid on time is another major challenges during a downturn, Mr Mooney says.

“Ensuring you have strong relationships with your clients, and signed business terms with a DIFC jurisdiction clause, should mitigate any potential problems with late payment,” he says.

Stronger competition and lower consumer purchasing power are also common during tough times.

“The key here is to tackle lower spending by providing more value for money with the product or service offered,” Mr Choucair says.

The trend of low oil prices is expected to improve efficiencies in the market.

“Our region traditionally suffers from extreme inefficiencies due to the abundance of cash and wealth or easy money,” he says. “These inefficiencies started being ironed out after the 2008 crisis, and will once again become a focus for businesses and governments alike, resulting in a more efficient economy.”

The outcome of such constraints will be innovative products and services, healthier competition and a less volatile market, according to Mr Choucair.

The high cost of living is also a hindrance. Ms Zickerman, who has spent almost 40 years in Dubai, says the cost of living in the city is now on par with London, if not higher.

“To support well educated staff to help run and grow a business costs money,” she says. “Most of the costs are not on the expensive licences or compliance [that the] companies have to adhere to, but the loss of revenue during start-up when rent is paid upfront, contractors need paying and equipment sourcing. This process alone takes around six months and is unpredictable with unexpected delays. If there is limited initial capital and patience there will be difficulties financially before the business even opens.”

Since 2009 most companies are more conservative in what they spend and invest in, and consequently they like to sit on cash, Mr Mooney says.

He sees the current situation as temporary, and the situation for start-ups remains opportune.

“If you have a good idea, business plan, customers and cash flow you can succeed,” he says.

Some SMEs are already prepared.

At Moti Roti, Mr Shah is waiting for the retail options coming up in non-prime areas to set up more pop-up stores.

Meanwhile, he will continue to operate his lone pop-up store in Dubai Internet City, and participate in more open-air events. The Moti Roti food truck is a regular at the Ripe Markets at Zabeel and Al Barsha parks.

“We want to stay lean and mean,” he says.

A beginners’ start-up guide

The following tips for entrepreneurs are useful in any type of economy but probably more so during a downturn, says Samer Choucair, a vice president at Crescent Enterprises Ventures.

• Seek out opportunities that provide real measurable efficiency improvements that will make your product and service easier to sell.

• Cash is king, hold on to it tightly, use it wisely.

• Take your time finding the right team to help build your business, there will be more talent available out there than usual.

• Shed all nice-to-haves and only hold on to the absolute must-haves.

• Do not get emotional about your business or idea. Use tough times as a real gauge for the viability of your business. If you are able to sustain it now then it is bound to succeed when the economy improves, if not, then let go and move on.

• Know when to say no to an opportunity and only focus on one start-up at a time. I myself have fallen victim to going after multiple opportunities at once only to be met with failure. What I have learnt is that, as an entrepreneur, the toughest decisions you make are what opportunities not to pursue.”

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