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Creating a Home-Grown F&B Concept in the United Arab Emirates – Advantages and Challenges from a



Having worked in the UAE for over 13 years, I have had the privilege of helping some of our home-grown UAE brands (such as Jumeirah’s the Noodle House and Pascal Tepper's French Bakery) successfully expand internationally so this is a topic that I am passionate about. The UAE already had a long established history of bringing international brands to the region e.g. the Hard Rock Café and Subway back in 1998 but it is great that we are now seeing a steady flow of home-grown concepts such as Japengo, Left Bank, Noodle House, Mandilicious, Reem Al Bawadi, Tom & Serg, Okku, Nolu’s Café to name but a few.

Advantages

There are many benefits of setting up an F&B business in the UAE including:

  • The UAE is an excellent gateway / testing ground for an F&B concept before launching in the wider GCC / Middle East;

  • There is an attractive retail market (7th in the world according to AT Kearney’s Global Retail Development Index 2016, which states “The UAE remains an attractive and relatively low-risk market option for retailers”);

  • There is still no corporate or income tax (other than municipality charges on some F&B);

  • VAT will be introduced in Jan 2018 but is due to only be 5% and is likely to exempt certain basic food items;

  • There is a proliferation of freezones with numerous benefits including no foreign ownership restrictions;

  • The UAE always ranks highly in the World Bank Group’s Ease of Doing Business Rankings (26th out of 190 countries in 2017). The UAE’s overall ranking recently rose based on a number of metrics including the ease of starting a business, obtaining permits, electricity, registering property, getting credit etc.;

  • There is an affluent population (GDP per capita of $39k+) with diverse tastes who spent around 14% of their income on F&B in 2016 (Dubai Chamber);

  • There is a steady flow of new venues due to the mega projects such as Expo2020, City Walk, Mall of the World, Dubai Harbour as well as the new leisure attractions such as Dubai Opera and the various theme parks; and

  • There is political stability and security (ranked with a perfect 100/100 score by Kearney’s Global Retail Development Index 2016).

Challenges

There are however various challenges that an F&B business will need to overcome in the UAE including the following:

1. Corporate Set-Up

The current corporate regulatory environment in the UAE could do with being simplified to facilitate growth. If you take my two favourite Sushi restaurants in Dubai for example - Zuma is based in the DIFC freezone which requires a DIFC entity which allows 100% foreign ownership and English law concepts apply, whereas just across Sheikh Zayed Road, Okku is onshore and therefore needs an onshore entity and DED licence. Depending on where you want your F&B outlets in the UAE, you may therefore require multiple corporate entities in different Emirates and different freezones. The cost of these entities is not cheap – the minimum cost for a freezone company is around AED 15k per annum, which does not include the cost of any employee visas. This cost increases substantially for onshore LLCs where you need to negotiate a shareholders agreement and associated agreements with a local partner. Compare this to England, for example, where it costs just a one-off fee of £12 (approx. US$15) to set up a company and this entitles you to operate across the whole of England.

One good measure of the challenges of setting up corporate entities is the World Bank Group’s sub-ranking for ‘Starting a Business’, where the UAE is currently ranked 53rd out of 190 countries. This is up 12 places from the 2016 ranking and is improving but could still do with further development.

It is important therefore to plan your corporate structure early on in the process and integrate it with your outlet roll-out plans across not only the UAE but also the wider region.

2. Intellectual Property

For independent home-grown concepts, the protection of your brand is obviously a key requirement. The good news is that, in contrast to the company set-up requirements mentioned above, a UAE trademark provides protection across all the Emirates, including all freezones.

There are however a number of challenges on the IP front such as:

  • The cost of TM protection here in the UAE is one of the highest in the world – around US$4k+ to register a trademark in 1 class (with no option for mutli-class applications). Again by way of comparison it costs just £170 for an online TM application in the UK in one class with only an additional £50 per additional class. Rather than these costs coming down to align with international levels, the UAE official fees actually doubled in 2015;

  • There is no GCC wide trademark registration system similar to the EU Community Trade Mark and the cost is consistently fairly high around the region; and

  • Other than in the DIFC, there is no concept of passing-off, so there is very little in the way of protection for unregistered brands. You therefore really need to obtain a TM registration if you would like any of the authorities to take any action for infringement of your IP.

Due to the high expense it is therefore imperative to have a good IP strategy that aligns the date of your TM applications with your planned roll out of your outlets around the relevant regions. See our checklist for registering your brand in the Middle East for further considerations - http://www.thebenchlaw.com/single-post/2017/02/03/Checklist-for-Registering-Your-Brand-in-the-Middle-East.

3. Regulatory Compliance

Another challenge for F&B outlets here in the UAE is keeping up-to-date with regulatory changes e.g. smoking regulations such as Federal Law No 15 of 2009 on Tobacco Control and the Decision No 24 of 2013. The Decision states that smoking of tobacco is prohibited in restaurants, except in permitted areas meeting certain conditions and where a licence is obtained. There has in the past been a rather relaxed approach to enforcement of this law but just 2 days ago (19 Feb 2017) it was reported that Dubai Municipality closed down a café for allowing smoking and fined 74 other establishments up to AED 122k. Apparently Dubai Municipality also recently requested the Dubai Economic Department to not new licenses for a further 119 cafes and fined a further 500+ outlets.

Last year there were quite a few media articles about a total ban on smoking in public places. Enforcement of a total ban on smoking in F&B outlets in the UAE will obviously have an impact on the P&L of certain outlets but the new regulations may also influence the design and layout of future F&B outlets.

In addition to the smoking regulations there are also detailed food safety regulations and, where your F&B serves alcohol, there are additional liquor licensing regulations, which also must be strictly adhered to and a permit needs to be obtained from the police. If you F&B outlet is located in a hotel in Dubai, the Dubai Tourism & Commerce Marketing (DTCM) regulations will also apply.

Again, each Emirate and freezone has its own regulations therefore even if you have mastered it for one restaurant it can require starting the learning process from scratch at the next outlet just up the road.

We therefore recommend that restaurateurs regularly check the various regulations e.g. those issued by the Ministry of Health, Dubai Municipality and DTCM.

4. Funding

Running a restaurant requires a great deal of capital in terms of fit-out but also on-going working capital until it breaks even. If your first outlet in Dubai is going to be your flagship outlet / proof of concept then the investment demands are even higher.

Unfortunately, the UAE scores fairly low on getting credit in the Doing Business Report (101st out of 190 and down 4 places from last year). Many banks are reluctant to invest in untested home-grown brands and other innovative options such as crowd funding are still in a nascent stage here in the UAE. Some new entrants such the peer-to-peer marketplace Beehive and real-estate crowd funder Durise are however worth exploring and there a number of government initiative underway to increase loans to small and medium enterprises.

5. Competitive Market

According to AT Kearney’s Global Retail Development Index 2016, the UAE dropped from 4th to 7th in the index reflecting the maturity of the market now nearing saturation but noting that new retail projects such as the Mall of World and the theme parks are continuously opening. This should not however deter those with a unique F&B offering, which is bringing something new to the UAE market.

Closing Thoughts

As we move closer towards Expo2020 I think we need to embrace their theme of ‘Connecting Minds, Creating the Future’. We need to collaborate more to encourage, foster and facilitate home-grown brands here in the UAE. In addition to providing growth, revenue and employment (which a franchised-in F&B brand would also provide) this also creates local innovation, entrepreneurship and intellectual property. It also aligns with the Tourism Vision 2020 by increasing the product offering with unique F&B brands that visitors to the UAE will not find at home.

If we can assist you with the development, operation, expansion or franchising of your F&B concepts please contact me at joby@thebenchlaw.com.

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