The boom last year should not hide the fact that existing retail concepts are maturing and retailers will need to innovate to sustain high growth rates.

In 2004 to 2008, the GCC retail market went through an exuberant growth—more than 20 per cent a year. That was followed by a steep slowdown in 2009 to 6 per cent and then a modest recovery in 2010 to more than 9 per cent.

Then last year brought a new boom, with sales by listed retailers increasing by as much as 16 per cent over 2010. Discretionary items outperformed staples significantly: in Saudi Arabia, sales by listed grocery retailers grew at more than 15 per cent, while sales at electronics and luxury goods retailers grew at about 25 per cent.

Also, thanks to a limited number of store openings, sales per square metre increased for the first time in three years. As a result, average operating profit also improved from 6 per cent in 2010 to 7 per cent last year.

Clearly, the boom last year results partly from the strong fundamentals of the GCC consumer markets and partly from a set of one-off factors.

According to figures from Banque Saudi Fransi, the Saudi government's decision to pay about 53 billion riyals (Dh51.91bn) of exceptional bonuses to public employees last year and to increase the minimum wages in the public sector by 37 per cent illustrates the scale of these one-off factors.

Last year was an exceptional year, and we expect the GCC consumer market to grow at a strong but slower rate in the future. Last year's exceptional performance should not hide the fact that existing retail concepts are maturing in the GCC. Historically, modern retailers have outpaced the overall consumer markets by opening stores to gain a greater share of overall consumer spending.

Ten years ago, there were few hypermarkets, mega malls or large specialised electronics stores. Today, penetration by these retail formats has reached high levels. The number of hypermarkets and supermarkets per million inhabitants in the large Saudi cities is now at levels similar to those of the UAE and other emerging markets.

The lower share of modern grocery retail in Saudi Arabia compared with the UAE (50 per cent versus 80 per cent) is not the result of lower store density but of differences in consumer behaviours and basket size.

Although there are still some opportunities in new districts or in smaller cities, the potential for store openings is inexorably decreasing. Currently, it does not stop competing retailers from continuing to open a high number of stores. The risk is that additional supply outpaces the market growth in the coming years, with new stores cannibalising existing ones, and retailers facing significant challenges to maintain their sales per square metre.

Sales per square metre and profit pressures are compounded by the increasing intervention of GCC governments to prevent food-price inflation. So far, GCC governments have focused their price-control efforts on food suppliers, but retailers have been affected in a few situations. If the prices of food commodities globally enter a new phase of inflation, retailers may not be allowed to fully transfer the cost increases to shoppers. Retailers need to manage prices carefully.

As the existing retail concepts mature, retailers will need to innovate to achieve sustainable profitable growth.

Comparison between the state of development of the GCC retail industry and that of more established markets such as the United States suggests there are several areas for innovation.

First, winning retailers will innovate in their existing formats. To do so effectively, retailers will need to invest in understanding their shoppers and in adopting a more segmented approach. As a first step, many GCC retailers such as Jarir Marketing, Landmark Group and Majid Al Futtaim, which franchises Carrefour stores in the Middle East and North Africa, have recently launched loyalty programmes for shoppers.

The next step will be to tailor their offerings and promotions to the needs of the customer mix living in the catchment area of each store. But retailers also need to consider seeding new sources of growth, outside of their existing core business. There is a significant scope for innovation in format, brands and geographies. In format, the region is still focused on a few models including supermarket, hypermarket, big-box specialised retail, and large malls. What about modern convenience stores, cash and carry, hard discounters, outlet malls and e-commerce? These concepts are vastly underdeveloped in the region.

Finally, GCC retailers have a unique opportunity to pioneer the development of a modern retail industry in less advanced Middle Eastern countries such as Egypt and Iraq. Initial geographical expansion of major GCC retailers seems to have been successful, and other retailers should consider these markets.

GCC retailers also have a tremendous potential for innovation in their core and adjacent businesses. Capturing this potential will require a focused strategy as well as the development of a stronger organisation able to manage a more complex business model.