The Saudi Arabian retail sector is expected to continue to post solid returns, with strong prospects for expansion in the medium-to-longer term, although this year retailers will likely have to factor in the higher costs as they hire more local staff.
A report issued by the management consultancy and research firm AT Kearney at the end of last year said the Kingdom’s retail sector had significant potential for growth, thanks to high levels of disposable income, a relatively young and upwardly mobile population, and an expanding tourism trade. The report said the sector, which saw sales expand by around 11% in 2013, would increasingly be dominated by large-scale developments such as hypermarkets, with shopping centres spreading beyond the major cities.
Major international retail brands are also moving to step up their presence in the Kingdom, joining established chains such as H&M and Bershka. Burberry, Children’s Place and Tesco have signalled an interest in the market too, or have recently entered. Saudi Arabia requires all foreign retailers to have a local partner with majority ownership.
Fundamentals remain strong
Another positive sign for the sector came from a year-end report by Saudi investment firm Al Rajhi Capital, which said retail was one of the best performing areas of the economy in 2013, providing better returns on investment than both agricultural and petrochemicals.
“We believe the sector’s fundamentals remain strong, and it is likely to continue witnessing robust growth going forward, as consumer spending rises on the back of improving employment among locals, and sustained government spending,” the Rajhi report said.
In line with the Kearney projections for the sector, Al Rajhi said the strongest segment for expansion was in the large-store format, thanks to shifting consumer preferences. This will likely open up investment and business opportunities in a range of sectors, including construction and materials supplies, as Saudi Arabia’s stock of retail space expands.
Another factor some analysts see favouring the retail sector is government moves to gradually open up the workplace to the participation of women. Jeddah-based NCB Capital, in a study of the sector released at the end of last year, said increased employment rates, particularly for women, would boost retail sales figures.
Saudisation could come at a cost in the short-term
While most analysts are predicting a continued expansion of the retail industry in 2013, the rate of growth may slow due to a shift in the state’s labour policies. Last year’s decision by Riyadh to reduce the number of expatriates in the workforce is expected to have an ongoing effect on the sector for at least part of this year, with retailers having to recruit Saudi employees to fill the gaps left by foreigners the government has said will either be deported or not have their work visas renewed.
While this is a positive move and could help sales in the medium and long term, as local disposable incomes rise thanks to new employment opportunities, the Saudisation policy is likely to have a short-term negative impact on the industry, according to NCB Capital’s head of equity research, Farouk Miah. Factors that could slow retail growth include “1m fewer expatriates, the negative sentiment from remaining expatriates, a slowdown in new store openings and higher staff costs for companies, leading to pressure on margins”.
Estimates have put the level of Saudi participation in the retail workforce at around 16%, though this figure is set to rise this year and beyond as shop owners recruit to fill empty spaces behind their counters.
At least for some retailers, the higher costs of manning their counters with local workers will in part be offset by not having to pay visa and recruitment expenses for foreign employees.
Farooq Al Khateeb, a professor at the King Abdul Aziz University, says the costs of reducing the expatriate component in the retail workforce will be offset by the benefits the move offers.
“The retail sector can provide more than 700,000 jobs for Saudis,” he said in an interview with the local media in mid-January. “At the same time, the costs of hiring Saudis are less than for expat workers… A lot of Saudis have proved their skills in this sector.”
While the Saudi retail sector may experience an easing of growth rates for at least the first half of this year, looking further ahead, all the ingredients for improved earnings – money, market and demand – appear to be in place.