Is the ‘Retail Apocalypse’ a false scare story in the Gulf?

Competition in the GCC retail sector has never been fiercer. Not only are retailers and brands having to sell more than just a product, they are also having to create experiences, foster relationships, deliver value and conjure emotions – at every touchpoint.

So what does all this mean for the Saudi retail sector? Last year, the kingdom approved rules that opened up its retail sector to greater foreign investment, as part of wide-ranging economic reforms. Things, of course, are not as sunny as they should be, at least in the short term. Saudi retail, specifically a couple of segments, has been impacted by sluggish oil prices whose impact has trickled down to the spending power of consumers.

As Deputy CEO of ABC Group Frank-Matthias Kuntermann, says: “Some retail segments such as fashion and accessories have been impacted more than others. In Saudi, it’s the premium and luxury brands that have suffered a lot, while the medium segment continues to function as usual. There are reports of some stores being closed down in Saudi, especially in fashion and accessories segments, but I think it’s pretty normal and there is still a solid basis of business for retail.”

According to a survey report by PwC titled They say they want a revolution: Total Retail – Middle East 2016: “KSA is the largest economy in the Gulf region, but very much less of a tourist destination than the UAE. However, household incomes are rising, and even though the oil price will be a dampening factor, growth in retail spending should still be fairly strong. Saudis are likely to buy more in segments like furniture and home, food and drink, and fashion, especially international brands.”

More than 800,000 households in KSA already have an annual income of more than $50,000, which offers opportunities for retailers. The new $1.9 billion Avenues Riyadh complex is set to open in the capital in 2019 and will include a shopping mall, the PwC report revealed.

Underserved

A report by Ardent Advisory, titled GCC Retail Sector Report, notes: “Riyadh and Jeddah, the two largest cities in the country, constitute majority of the retail sector infrastructure, with a total of about 60 malls. Modernisation of the retail sector with the construction of new malls has helped retailers attract customers. However, the country still lags behind the UAE in infrastructure, as it is still fairly under-served in terms of modern retail area per capita, which is among the lowest in the region. Additionally, Saudi Arabia has lower demand for consumer goods, with food retail accounting for almost 48 per cent of the total retail demand.”

The situation is likely to improve, as many retailing giants have set aggressive expansion targets. The number of hypermarkets in Saudi Arabia is expected to increase by nearly 70 per cent to 333 in 2018 from 197 in 2013, while the number of supermarkets will increase by 54 per cent to 1,046 from 678 during the same period, says the Ardent Advisory report.

Major retail projects include the Al Diriyah Festival City with an estimated value of $1.6 billion, the expansion of Red Sea Mall in Jeddah with an estimated value of $53 million, and the extension of Granada Shopping Mall with an estimated value $70 million.

Fragmentation

The KSA retail space is quite fragmented as it has a strong presence of traditional stores called bakalas. More than 40,000 bakalas dominate the market in the country, especially in food retail, accounting for a roughly 55 per cent share in Saudi Arabia’s grocery retail market, the Ardent Advisory report notes.

While hypermarkets and supermarkets try to attract more and more customers by providing best-in-class amenities, the bakalas continue to play a vital role in serving the common public and are especially important to women, who are not allowed to drive in the country.

The organised retail industry in the kingdom is very competitive, with the strong presence of some major retail giants, including Carrefour Saudi Arabia, Saudi Hypermarket Company LLC, and Panda Supermarket dominating the food segment and Alhokair Fashion Retail, Landmark Group, Jarir Marketing Company, etc., leading the non-food segment.

Al-Azizia Panda United is the market leader in terms of value, whereas Fawaz Abdulaziz Al Hokair has the most number of outlets. Al-Azizia Panda United is a leading name among food retailers and benefits from low prices and a widespread presence. Fawaz Abdulaziz Al Hokair, on the other hand, is the undisputed leader in franchised fashion retailing, bringing various international apparel and footwear brands to the country, adds Ardent Advisory report.

Food retail contributes approximately 45 to 48 per cent to the total retail sales in KSA, a share that has remained constant over the years. Within the non-food segment, retailers continue to see growth and are launching new products and opening new stores. The demand for consumer goods, particularly white goods, textiles, footwear and furniture, has been high since 2011 due to a strong economy and the government’s expansionary fiscal policies.

Consumers are developing a taste for high-end brands such as Louis Vuitton and Burberry. Mid-priced brands, such as those under the umbrella of Fawaz Abdulaziz Al Hokair, including Zara, Stradivarius, Aldo and New Yorker, are prospering as well, backed by the younger population, Ardent Advisory says.

Senior category development manager, Procter & Gamble Gulf FZE, Fares Hamade, adds: “Global brands will continue to open in Saudi and cater to the Saudi shoppers as the GCC and Saudi remain big markets for most of these brands, especially in fashion. I do believe the retail sector, especially luxury brands, will take a hit in the next couple of years due to the economic situation in the GCC.”

“However,” he continues, “It’s only a matter of time till the market stabilises again and prices adjust accordingly; but in the meantime, brands need to re-invent the way they talk to shoppers to stay relevant and strong.”

Government push

Recently, the Saudi government announced various regulatory initiatives to boost the retail sector. In September 2015, the government eased restrictions on foreign investors and allowed 100 per cent ownership in retail and wholesale businesses, from the current maximum foreign ownership of up to 75 per cent. The Saudi Arabian General Investment Authority (SAGIA) is also streamlining its investment rules and visa regulations to attract more high-end investors into the kingdom in order to create white-collar or technical jobs for Saudi citizens.

Other government programmes, such as building 500,000 new affordable homes, are providing employment opportunities, and thereby indirectly facilitating retail sales.

ABC Group’s Kuntermann says: “Several factors, such the Yemen issue, the low crude oil price for the past two-and-a-half years and the government taking measures to cut its budget deficit, will all have an impact on the buying power of the consumers. But I think the retailers are not worried really, as they’re aware of the situation and are restructuring and reorganising their operations to cut costs and improve margins.”

The road ahead

Saudi Arabia’s biggest strength is its large population base. It also has a huge inflow of religious tourists. The country’s primary retail centres have been Riyadh, Jeddah, Makkah and Madinah.

According to Ardent Advisory, the fundamentals that have driven the Saudi retail sector remain intact as the kingdom’s young population continues to witness improved employment levels and rising disposable income. Various government initiatives have also been favourable to the growth in the sector.

With the improving educational levels and tech-savvy individuals, there has been increased demand for high-end goods. However, there is a large scope for improvement as the market is fairly under-penetrated and has many unorganised players.

As the Saudi retail market witnesses more penetration from the organised players and Saudi customers get more sophisticated because of the rising standards of living, education, and disposable income, the retail industry will witness strong growth. Overall, Ardent Advisory estimates the Saudi Arabian retail market to reach $140 billion by 2018.

 

An expanded version of this article appeared in the May 2017 issue of Gulf Marketing Review. 

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