Saudi Arabia: Retail rising

The retail sector appears set for an extended period of solid growth, thanks to Saudi Arabia’s expanding economy and higher domestic spending power. The industry, however, may have to act quickly to redress a few challenges, such as staffing shortages and the need to broaden the appeal of some of the Kingdom’s large shopping complexes.

Retail sales in Saudi Arabia are expected to surge in the coming years. The domestic retail market was worth a total of SR226bn ($60.2bn) in 2009, having grown by 46.5% over the previous five years, according to a December 2010 report by Al Rajhi Capital (ARC), the investment division of Saudi Arabia’s largest Islamic bank.

Sales are projected to rise from an estimated $73bn in 2011 to around $112bn by 2015, a recent report by market analysis and research firm Business Monitor International (BMI) said, and Euromonitor forecasts that the sector will reach a value of SR276bn ($73.6bn) by 2014. In total, the retail sector represents 17% of Saudi Arabia’s GDP, making it one of the most-significant players in the local economy.

Underpinning this strong projected growth for the sector is the healthy state of the Saudi economy. At the end of January, Saudi Arabia’s finance minister, Ibrahim Al Assaf, said that the economy was isolated from the crisis threatening Europe and forecast that GDP would expand by 6.8% this year.

Not all analysts share the minister’s optimism, however. In a research note issued at the beginning of February, regional lender Emirates NBD predicted expansion of a more modest 3.8% in 2012. However, the bank also stated the retail sector should benefit from the trickledown effect of increased government spending and consolidation in certain segments of the industry.

These increased state outlays, which will place particular emphasis on infrastructure, housing, education and job creation, should add liquidity to the marketplace and reinforce already-high disposable incomes. Additionally, the provision of unemployment benefits, which were introduced at the end of last year and are expected to pump an estimated $5bn into the economy annually, will help boost consumer spending power and increase retail cash flow.

Though most forecasts point to a strong performance for the retail sector in the medium term, it is possible that some developments in the short term may be affecting shoppers’ enthusiasm. According to the findings of a survey conducted by research firm Nielsen, consumer confidence across the Middle East and North Africa dipped in the last quarter of 2011, with the fall most notable in Saudi Arabia.

Released in mid-February 2012, the report showed the confidence level in Saudi Arabia had slipped by seven points in the final three months of last year. Arslan Ashraf, the managing director for Nielsen Saudi Arabia, said political turmoil in the Middle East and doubts over future oil demand had contributed to weakening consumer sentiment.

However, that slip could be written off as something of a correction, with the previous Nielsen survey showing the Saudi index jumping by a massive 13%. That study, issued at the end of October 2011, ranked the Kingdom second globally in terms of consumer confidence − second only to India − with 120 points. As any score above 100 indicated a positive sentiment, even the seven-point decline posted at the end of 2011 still suggests the Kingdom’s consumers remain upbeat.

While the knock on effects of the weak state of the global economy may have an impact on Saudi Arabia’s retail sector, the industry faces some challenges closer to home that could affect its bottom line. A report issued by real estate investment and advisory firm Jones Lang LaSalle at the end of 2011 warned that, despite favourable demographics and increasing domestic demand, the sector could find itself constrained due to a lack of trained and experienced staff, thanks to changes in regulations governing the granting of visas to foreign staff. The report said retailers needed to step up training programmes for local employees or risk a shortfall in qualified Saudi workers.

Soraka Al Khatib, co-head of Jones Lang LaSalle Saudi Arabia, said the Kingdom’s shopping centres also needed to offer activities beyond direct retailing to sustain or maximise consumer footfall. Retail managers faced the challenge to add value to the overall shopping experience, thus differentiating both brands and malls more effectively, he said.

“Proactive asset and property management is required to overcome a feeling of ‘sameness’ caused by the concentration of franchisers and operators,” said Al Khatib. “It is important that the quality and design of a shopping centre creates a sense of belonging and has a ‘soul’.”

In particular, the report said some of Saudi Arabia’s older malls were at risk of losing market share to more modern centres that offer international shopping environments in terms of brand mix, amenities and complementary leisure components.

As long as the Kingdom’s retail sector can keep pace with the expectations of its youthful and increasingly affluent customer base, it should continue to expand at a steady rate over the next few years and beyond.

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