Retail Sector Report - Al Rajhi Capital

Saudi Retail Sector
Retail –Industrial
05 January 2013
Figure 5 New format retail stores are under-penetrated
Figure 6 Share of Top 5 players in the retail market
100%
70%
80%
15%
25%
19%
60%
59%
59%
24%
50%
60%
40%
36%
62%
40%
30%
33%
25%
57%
20%
0%
39%
23%
16%
Saudi Arabia Spain UK UAE
Hypermarkets Supermarkets Small groceries
20%
10%
0%
15%
Saudi Arabia Brazil UK
Source: Savola investor presentation
Source: Savola investor presentation
Large formats to gain from the Kingdom’s demography
Sales in big-box stores in the US and developed countries of Western Europe have been
severely impacted with consumers switching to a savings mode due to the macro-economic
slump in these countries. While the baby boomer generation has begun to age, the current
young generation prefers to marry late and delay the arrival of children. These factors have
reduced demand for consumer goods in the developed markets. Moreover, consumers are
using online shopping to make comparisons and avail the best offers from retailers. Hence,
large stores, which were earlier seen as efficient due to their scale of operations, are now
becoming costly due to an inventory pile-up.
Large stores are the only
culturally accepted source of
entertainment in the Kingdom
Saudi Arabia provides one of
the best environments in the
MENA region for international
retailers
However, in Saudi Arabia, we believe the economic and cultural environment is conducive for
large stores to thrive. Apart from the strong growth scenario as discussed earlier, large malls
act as the only source of entertainment in the form of shopping and dining, which is
culturally acceptable in the Kingdom. Supermarkets and hypermarkets with in-house
facilities such as restaurants and theme parks are ideal locations for the Saudi population to
relax along with their families. We believe this cultural connection coupled with the healthy
income of a young population, will bring in more footfalls for the big-box formats over the
medium to long-term. Moreover, there are other factors due to which online retail will take
some time to catch-up in the Kingdom.
International and regional retailers to increase their presence
Leading retailers in the mature markets of the US and Europe are facing declining sales and
profits in their domestic markets, which are their largest source of income. With growth
expected to remain negative or at best at low single-percentage levels in their countries over
the medium-term, retailers can reverse their fortunes only by expanding abroad. This idea is
being promoted by leading built asset consultancy firm EC Harris in its first annual Retail
International Program Expansion (RIPE) Index published in September 2012. According to
the index, Saudi Arabia, Qatar, and the UAE offer attractive opportunities in the Middle East
among international destinations. While these countries ranked 8 th , 11 th and 15 th respectively
globally, they held the 1 st , 2 nd and 3 rd positions in the MENA region.
Further, the presence of strong local trading partners and franchise operators in these
countries implies lower-cost and ease of scalability for western retailers. We believe Saudi
companies such as Savola, Alhokair, and Alothaim can also provide similar, if not better
benefits and synergies to international retailers, who want to enter Saudi Arabia. Large
regional retailers such as Majid Al Futtaim, Al Tayer, Landmark Group, Chalhoub Group and
Alshaya have also been attracted by the growth opportunities available in the Kingdom. In
June 2012, the EMKE Group opened its popular Lulu brand hypermarket in Riyadh, and is
planning to open more stores over the next couple of years.
Disclosures Please refer to the important disclosures at the back of this report. 4