Retail Sector Report - Al Rajhi Capital

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Saudi Retail Sector Retail –Industrial 05 January 2013 The Jabal Omar Development Company is developing a massive hotel and retail project on a 2.2mn sq m land in Mecca near the Grand Mosque, which is scheduled to be completed over the next five years. The project, being the largest in the Kingdom, will be executed in phases at a cost of SAR20bn and shall add 38 hotel towers and a retail space of 89,000 sq m. In Medina, the King Abdullah Waqf project will add around 10,000 sq m of retail space. The store rents in shopping centers such as the Abraj al Bayt in Mecca are already 50-100% higher than that of premium locations in Riyadh or Jeddah, indicating the attractiveness and business potential of the holy cities. Online retail is yet to catch the fancy of the people due to a number of factors Online sales yet to catch-up Online retail sales still remain under-developed in the Kingdom, restricted to sales of consumer electronics and home appliances, booking air tickets, and hotel reservations. Some of the successful online businesses are those of United Electronics Company (under the brand Extra), mobile handset retailer Axiom Telecom, and sports & health equipment company U-Mark. Although companies like Savola’s Al Azizia Panda and Jarir display products on the internet, online payment and delivery systems are not available. In the former’s case, a printout of the shopping list can be taken from the website and processed at the nearest actual store. Alothaim started accepting online payment and making home delivery in July 2012. However, this service is limited to Riyadh currently. We believe that it will take some time before online retail sales pick-up rapidly even as a young Saudi population — who extensively use mobile, internet, and social media tools — begins to buy products online. The main reason for this delay could be that traditional brick and mortar retail stores are one of the main sources for entertainment in the Kingdom. Nonreligious music, cinema, gambling and drinking alcohol are forbidden in the Kingdom. Outdoor sports and adventure activities are also not possible due to the harsh weather conditions in the country. As a result, it will be hard to wean away the young population from retail malls, which are the main source for pastime and social interaction in the country. The reasons why online sales could pick-up is the convenience that it provides in receiving goods at home and it allows women to carry out purchases from the comfort of their home. Other reasons for limited development of online or e-commerce transactions in the Kingdom are: Lack of proper infrastructure (no secure payment gateway mechanism, lack of multiple payment options, limited technical knowledge to design e-commerce platforms, etc.) Non-availability of an efficient delivery system (the current postal system uses P.O. Box systems rather than postal addresses and the new Wasel service, which uses geographic information systems (GIS) covers only 2% of the Saudi population) Legislations regulating e-commerce retailing are still under development While online retail may take some time to establish in the Kingdom, we believe it is the way to go ahead, considering the success stories in developed countries. Hence, retailers who quickly adapt to technological and logistical requirements as they develop will be able to capture major the market share in this segment. Selling products will become a part of the entire customer relationship experience Saudi retailers will have to build relationships Saudi Arabian consumers are becoming more discerning because of availability of information on comparable products on the internet. Along with this, competition has intensified due to the presence of regional and international players. Hence, Saudi retailers will have to leverage on their local presence and proximity, and will have to provide competitive (best prices, discounts, financing arrangements, extended warrantees, etc.) and value-added services (door delivery, free installation, after-sales support, etc.) to ensure customer satisfaction and brand loyalty. Customizing products and developing marketing campaigns to target specific groups would also facilitate long-term growth. For instance, Extra launched a month-long “Women Festival” in early 2012, where women were offered products specific to their needs at discounted prices. Disclosures Please refer to the important disclosures at the back of this report. 6
Saudi Retail Sector Retail –Industrial 05 January 2013 Grocery retail: promising despite competition Demand for more diversified and protein-rich forms of food will be driven by an ever increasing population in the Kingdom and increasing disposable income in the hands of Saudi citizens. Food is the third most imported commodity by value after machinery and transport equipments, which highlights its importance. According to the EIU, a major part of the Saudi retail sales will be driven by sale of food products. The EIU estimates the retail sales to increase from US$83.3bn in 2011 to US$131.2bn by 2016, of which food sales’ contribution is expected to increase from 50% to 53%. Figure 9 Food is the third largest imported commodity Figure 10 Composition of food and non-food in retail sales SAR bn 500 400 300 200 100 41.7 66.0 53.0 62.2 77.6 13.9 45.2 49.5 56.7 63.2 73.6 13.4 US$ bn 160 120 80 Title: Source: Please fill in the values above to have them entered in your report 117.3 99.0 0 2008 2010 40 Machinery, appliances & equipment Foodstuffs Metals & their products Textiles & clothing Transport equipment Chemical & metal products Other goods 0 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E Non-food retail sales Food retail sales Source: SAMA, Al Rajhi Capital Source: EIU, Al Rajhi Capital Large players have an advantage in a fragmented market Opportunities exist but new challenges emerge Large players maintain a strangle hold on the market With big-box retail set to play a major role in the Saudi Arabia’s retail sector, we believe large grocery retailers like Savola, Alothaim and Tamimi will remain key players in the sector. Savola through its Panda brand leads the organized grocery retail market followed by Bin Dawood and Alothaim. Azizia Panda (the retail arm of Savola) opened 4 hypermarkets and 7 supermarkets in 2011 to reach a total of 132 stores in Saudi Arabia. The company plans to open 5 hypermarkets and 14 supermarkets by the end of 2012. A large chunk of the grocery retail market (more than 80% as per our estimates) continues to be catered by small stores and the unorganized sector. Hence, we expect these retailers to continue launching new stores across the country to capture a larger share of the market over the next few years. Figure 11 Top five big-box retailers, 2011 Sales area Avg. sales area Grocery sales Market share Company No. of stores (sq m) (sq m) (US$ mn) (%) Panda 144 628,500 4,365 1,742 4.2 Bin Dawood 30 205,000 6,833 929 2.3 Al Othaim 106 162,440 1,532 879 2.0 Carrefour 17 107,000 6,294 683 1.7 Farm 43 115,850 2,694 327 0.8 Total 340 1,218,790 21,718 4,560 11 Source: EIU, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 7
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Retail Sector Report - Al Rajhi Capital

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