Retailers battle for market share

10 October 2012

Store openings are slowing in favour of consolidation in the GCC’s largest retail market and the fight is on for players wanting a bigger cut of sales

In the past 10 years, Saudi Arabia has seen a retail gold rush. Its malls have become populated by a slew of foreign brands, ranging from the UK’s Marks & Spencer and Debenhams to French hypermarket chain Carrefour. The prize on offer is a slice of the Gulf’s largest retail market, with estimated annual sales of SR368bn ($98bn) in 2011.

Despite this influx, the sector remains highly fragmented. Traditional souks and corner stores still maintain a significant share of the market, with more than half of grocery sales generated by small traders. For bigger chains, this represents a significant opportunity. The next wave of retail growth will be driven less by rapid store openings and more by organised retail edging out smaller players.

“Consolidation is the opportunity,” says Farouk Miah, head of equity research for Riyadh-based NCB Capital. “By taking market share from independents, the growth opportunity for organised retail is significant.”

Saudi Arabia’s retail market strong

Saudi Arabia’s retail market cemented its appeal during the global financial crisis. While stores in Dubai grappled with falling sales as the city’s once profligate shoppers turned thrifty, consumer spending in the kingdom held firm. It has shown few signs of slowing since. The latest figures for point-of-sale transactions, a proxy for retail sales, show SR10.4bn was spent by consumers in August, a rise of 15 per cent on the same period in 2011.

Withdrawals from automated teller machines (ATMs) passed SR54bn in August, up from SR52bn in the same month last year, indicating robust consumer confidence in the wider economy.

Annual value of ATM withdrawals
YearNo of ATMsCash withdrawals (SRm)
Source: Saudi Arabian Monetary Authority

The growth in spending has been driven by the twin triggers of economics and demographics. Bolstered by high oil prices, government spending has risen by an annual average of 15 per cent since the onset of the financial crisis, cushioning Saudi consumers against the swings of the global economy.

Trickle-down oil wealth has seen per capita gross domestic product (GDP) climb 30 per cent in the past five years, from $15,444 in 2007 to $20,504 in 2011.

Saudi Arabia also has the benefit of a young population. About two thirds of its 28.2 million residents are under the age of 30 and its population is expanding by 2 per cent a year. Paired with rising disposable income, the country is home to one of the world’s youngest and fastest-growing consumer bases.

“There is a lot of opportunity to grow in Saudi Arabia; not just in the primary cities, but in the secondary cities too,” says Vipen Sethi, CEO of UAE-based retail conglomerate Landmark Group, which operates more than 550 stores in the kingdom. “We generally open more than 100 outlets a year in Saudi Arabia. We expect to open as many again next year.”

The fastest-growing segment of the market is grocery retail. The sector has notched up double-digit growth in recent years as brands such as Panda and Al-Othaim Markets have rolled out new stores. Saudi Arabia now has between four and five hypermarkets per million inhabitants in its main cities, and 30 to 40 supermarkets, a ratio in line with that seen in other emerging markets. The industry, however, remains splintered.

The top five retail chains controlled less than 10 per cent of the market in 2010, with the bulk of sales still driven by corner shops and small traders, according to data from UK-based consultancy Planet Retail.

This is in sharp contrast to developed markets, such as the UK, where the four biggest players control nearly 75 per cent of sales.

Hypermarkets in Saudi Arabia also see lower sales of non-food items, such as consumer electronics and white goods, which help to fatten margins in other markets. Sales per square metre, at about SR20,000 to SR30,000, are about half that reported by hypermarkets in other GCC markets, according to US consulting firm Bain & Co.

Rising grocery sales

But that is not to suggest brands cannot reap strong rewards. Grocery sales are forecast to rise by 49 per cent to 2016, reaching $43.3bn, according to the UK’s Business Monitor International, as consumers increasingly favour premium products. The challenge for big brands will be in leveraging their buying power and shopping experience to seize share from corner shops.

“We saw a rush to build a modern retail network, but now we’re at the stage where that has been done,” says Cyrille Fabre, a partner in Bain & Co’s Dubai office. “We’re entering a new phase of the market, where growth is a little more incremental and must be driven by increasing the sales and market share of existing stores.”

There is also an opportunity to overhaul the type of retail concepts on offer, creating direct competition for corner shops with branded grocery stores or large-scale discount retailers.

“These retail formats sit well in large countries where the per capita income is relatively high, but they are still underdeveloped in Saudi Arabia,” says Fabre.

The shift towards consolidation is not confined to the grocery sector. Unlike the UAE, where mall construction tapered off in the wake of the economic crisis, Saudi Arabia has seen continued growth. Arabian Centres, the country’s largest mall builder, expects to add about 500,000 square metres of leasable retail space to its overall portfolio in the next 36 to 48 months. The company also acquired the existing Central Mall in Jeddah on a long-term lease in the second quarter and plans to relaunch the property with a revamped retail mix in early 2013.

There is … opportunity to grow in Saudi Arabia; not just in the primary cities, but in the secondary cities too

Vipen Sethi, Landmark Group

Majid Al-Futtaim (MAF), operator of six malls in the UAE, is seeking to build a mall in Riyadh, its first in the kingdom. “We’re pursuing potential land opportunities and we hope to get something going in the next few weeks or months,” says Iyad Malas, the firm’s CEO. MAF currently operates 10 hypermarkets in the kingdom through its franchise deal with Carrefour. “If we build a large mall, you’re talking [about an investment] in the region of $700m-800m.”

Strong demand for prime retail space

Tenant demand for prime retail space has remained strong. Al-Qasr mall in Riyadh opened in the second quarter of this year, bringing 85,000 sq m of leasable space online. According to developer Dar al-Arkan, some 80 per cent of the mall’s 350 retail units were leased before its launch.

Increased competition, however, is putting pressure on mall operators to offer more than just a shopping experience. Newer properties are now weaving in entertainment offerings to attract footfall and increase revenues. Cinemas are often used as anchor tenants elsewhere in the region, but are banned in Saudi Arabia. Simon Wilcock, chief operating officer of Arabian Centres, says older malls that fail to address the need for fresh attractions may struggle to remain competitive.

“Every mall looks the same, including ours to a degree, which is why we’re getting back into this cycle of revamping them,” he says. “I think what some malls have got at the moment is a very two-dimensional offering.”

Key fact

Saudi Arabia is the Gulf’s largest retail market, with estimated annual sales of $98bn in 2011

Source: MEED

Arabian Centres, the mall building arm of local conglomerate Fawaz Alhokair Group, has signed a deal to roll out the children’s ‘edutainment’ brand Kidzania in three of its malls. The first, in Mall of Arabia in Jeddah, is scheduled to open in 2013, alongside a snow park. The company has also launched its own soft-play brand, Billy Beez, which will be rolled out in all its malls.

For larger retailers, mergers and acquisitions are the way forward to increase market share. Alhokair, which has international brands Gap, Marks & Spencer and Monsoon in its franchise portfolio, agreed to acquire mid-market retailer Nesk Group in a SR730m deal in September.

The agreement, which added 120 outlets to its total store count, followed the acquisition of fashion retailer Wahba in 2009. According to NCB Capital, about half of Alhokair’s store growth over the past three years has been through acquisitions. It expects the retailer to operate 1,418 outlets by March 2013.

Mergers and acquisitions are an attractive route to expansion, in part because of the tightly-knit nature of Saudi Arabia’s apparel market. A clutch of privately-held conglomerates controls some 90 per cent of the retail brands, gained largely by franchise deals with foreign brands keen to enter the market. Organic growth via store openings is limited to a degree, as retailers run the risk of creating clone stores and curbing revenue growth.

“There are more international brands in Saudi Arabia than I see in UK shopping centres,” says NCB Capital’s Miah. “I believe it’s almost reaching saturation point, which is why we’re seeing this consolidation trend.”

Further consolidation

A further push for consolidation is likely to come from Saudi Arabia’s Nitaqat scheme, which aims to bolster the number of nationals working in the expatriate-dominated private sector. Saudis paid less than the public sector minimum wage of SR3,000 a month are not counted fully in company quotas, effectively enforcing a minimum pay scale for retail employees. Small traders are likely to struggle to bear the cost, potentially thinning the herd for larger retailers better able to absorb the wage increases.

The next five years will see market share shift to organised retail, as larger players look to capitalise on Saudi Arabia’s young, wealthy consumer base. “Look at the evolution in any market and it has been from unorganised retail to organised retail,” says MAF’s Iyad Malas. “There’s plenty of room for growth.”

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