Rising household income is driving retail sales growth in Saudi Arabia. The sector has traditionally been the preserve of the cornershop, but the large retailers are now elbowing their way in
SAUDI ARABIA KEY FACT
Household expenditure in Saudi Arabia is forecast to increase from $130bn in 2008 to $243bn by 2012
The small corner store dominates the Saudi retail sector, with minimarkets accounting for about 60 per cent of grocery sales in the kingdom.
Yet it is the large malls and hypermarkets that are poised to drive the next wave of retail growth in the kingdom, elbowing aside the small traders and souq merchants.
Consumption patterns are shifting and for the large retailers, the highly fragmented market represents a major growth opportunity.
|Saudi retail market (SRbn)|
|e=Estimate; f=Forecast. Source: Al-Rajhi Bank|
The top five retail players’ share of total sales is currently less than 25 per cent. This is far lower than in Western markets, such as the UK, where the top five control 59 per cent of sales.
Retail sales in Saudi Arabia totalled $57.9bn in 2009 and this figure is expected to climb by 9.8 per cent a year between 2009-14, according to UAE-based investment bank Al-Mal Capital.
Expanding retail market
A combination of demographics and economics is behind the growth of the retail sector. Household expenditure is forecast to increase from $130bn in 2008 to $243bn by 2012, representing an annual increase of 17 per cent.
The kingdom’s young population – 60 per cent are under the age of 30 – and rapid urbanisation are creating ideal conditions for large established players to open new stores and build up their market share.
The Saudi population is predicted to expand by 2.5 per cent a year over the next decade. Disposable incomes are also rising and there is now a more sophisticated awareness of brand and quality in the kingdom.
Average per capita income has climbed more than 70 per cent over the past 10 years, from $11,000 in 2000 to $19,000 in 2010. By 2015, the average wage is expected to hit $23,000. According to Al-Mal Capital, nearly 70 per cent of Saudi households have income levels in excess of SR55,000 ($14,665).
“There’s a young population and as it grows up it will consume more,” says Irfan Ellam, analyst at Al-Mal Capital. “They will leave school, start working and have children of their own – so long-term it’s a great sector to be exposed to.”
|Food, drinks and tobacco segment sales ($bn)|
|f=Forecast. Source: Al-Mal Capital|
Government regulation is also playing a role in shifting the balance of power to the larger players. Stricter Saudisation ratios have made it less commercially viable for the smaller stores to operate, many of which are reliant on low-cost expatriate labour. The government requires 30 per cent of employees to be Saudi nationals.
Changing lifestyles should ensure sufficient footfall for the new outlets. Retail is increasingly about the shopping experience, with consumers preferring to visit the mall rather than local corner shops.
“A weekly shop is more efficient for consumers,” says Ellam. “Shopping has become an experience. Going to malls and hypermarkets is now a family outing.”
Large retail outlets also attract a broader range of customers than traditional stores. Air-conditioned premises, a greater diversity of offering from low-end to luxury, along with the availability of food stores make the mall a more attractive shopping proposition.
Shopping has become an experience. Going to malls and hypermarkets is now a family outing
Irfan Ellam, Al-Mal Capital
“Like the European hypermarkets, large Saudi retailers are looking to attract both high-end and low-end consumers,” says Maher Akib, a Saudi retail analyst at market research firm YougovSiraj. “When hypermarkets started out in Saudi Arabia, they were generally located on the city edges, but now there’s a trend to put them inside malls.”
The ‘big three’ chains, HyperPanda and Al-Othaim Markets, both local, along with France’s Carrefour are planning a significant rollout of floor space over the next four years.
“Fifteen years ago, there were only 48 branches of HyperPanda in Saudi Arabia,” says Akib. “Now there are 150 and it is planning to build another 150 in the next three to four years.”
Aggressive retail strategies
The owners of these brands are looking to reap strong earnings. The local Al-Rajhi Capital expects supermarkets and hypermarkets to see combined annual growth rates of 4.4 per cent and 7.2 per cent, to reach SR24.2bn and SR18.7bn respectively, by 2014. This is far higher than the 3.2 per cent growth predicted for small grocery stores.
The promise of strong profits has sparked more aggressive strategies from the established players. In 2009, Jeddah-based Savola Group’s retail arm, Al-Azizia Panda – owner of the HyperPanda supermarket chain – acquired the Geant Saudi Arabia supermarket chain for SR248.6m. This followed its acquisition of the Giant chain of supermarkets in 2008.
Through HyperPanda, Giant and Geant, Savola already accounts for about one third of large retail outlets in terms of floor space in the kingdom. Within the next five years, Savola hopes HyperPanda will take a 10 per cent share of Saudi retail spend.
In a sign of the robust health of the Saudi retail sector, Savola announced in September 2010 plans to acquire an additional 7 per cent stake in its Al-Azizia Panda unit from Fawaz Alhokair Group, through a share swap.
“[Al-Azizia] Panda has invested a lot of money,” says Akib. It has bought Geant, and now it is competing strongly with Carrefour and Al-Othaim. Meanwhile, Al-Othaim is also expanding out of the central region that has been its base.”
Al-Azizia Panda’s current 10 per cent market share puts it ahead of the competition, with Al-Othaim in second position, with an overall selling space of 170,000 square metres. Al-Othaim is on course to expand this footprint to 291,000 sq m in 2013, according to Al-Rajhi.
For Carrefour, the rise of indigenous brands such as Al-Othaim and HyperPanda represents a challenge. Carrefour hypermarkets tend to be located on the outskirts of towns and this may prove a hindrance if HyperPanda and Al-Othaim are able to build more of their chains within urban centres.
Cross-sector retail growth
The move to large retail outlets is not confined to the food and beverage sector. Jarir, the largest Saudi book and electronics chain, is set to increase its selling space from 85,000 sq m to 140,000 sq m by 2014. Alhokair, a leader in the apparel market, with about half of the mid-market fashion retail business, is set to add another 108,000 sq m to its selling area of 188,000 sq m by 2013.
“Saudi Arabia is following the consolidation trend seen in Europe and the US and there’s nothing to stop that,” says Al-Mal Capital’s Ellam. “India has a strong lobby to stop the growth of hypermarkets that are threatening to put the cornershop out of business. Politicians are listening to that lobby there, but that doesn’t exist in Saudi Arabia – retail is more market force-driven.”
The mergers and acquisitions market is coming forward as a means for large retailers to expand their presence. Alhokair acquired Wahba, another mid-market local fashion retailer in 2009, taking its total store count to 864 at the end of 2009.
Mergers and acquisitions are particularly attractive to Saudi retailers as they are a less costly route to expansion than investing in undeveloped land at current high prices. Despite the strategic investments of companies such as Alhokair, Al-Othaim and Jarir in real estate, Al-Rajhi forecasts that at some point they will have to resort to acquisitions to avoid buying or leasing expensive land to expand their operations.
As cities expand at a rapid pace, Saudi retailers will have to pay a premium to acquire a land bank sizeable enough to erect their large selling spaces. An average 4,000 sq m is required to open a new store, but obtaining such land in the current real-estate market is proving exorbitant.
Some retail groups, such as Savola, have invested in real estate to complement their retail activities, which has enabled them to secure land at more reasonable prices. Al-Othaim is also planning to raise its stake in a sister real-estate firm to 100 per cent to support its retail activities.
Foreign retail competition for Saudi Arabia
For the time being, local retailers are unlikely to feel the force of foreign competition in the marketplace. Overseas retailers are obliged to join up with local partners. France’s Carrefour chain in Saudi Arabia is operated under a joint venture of the local Al-Olayan Group and the UAE’s Majid al-Futtaim Group.
However, if the government decides to lift the restriction on foreign ownership, it would herald an entry of non-Saudi companies, which would prove problematic for domestic players. No such move is likely over the near-term, but could prove a long-term competitive challenge for Saudi retailers.
The next five years will see the established large retailers seize a much bigger market share, improving the shopping experience for many Saudis and potentially transforming lifestyle choices for a whole generation.