Saudi Arabia Thrives from a Growing Retail Industry
The retail market in Saudi Arabia has become a strong focus for the government, primarily driven by a desire to boost and maintain ongoing economic success in the country. The Saudi Arabian retailing market was worth SAR374 billion in 2013, 12% growth from the previous year, according to Euromonitor International. A large part of this interest comes from the government’s desire to diversify beyond the oil industry. This is seen as a means to reduce unemployment and increase average disposable income. Already, better living conditions and higher income levels are having a positive impact on retailing.
Tourism Drives Retailing
One key factor is tourism, primarily religious tourism, as Makkah, the birthplace of the prophet Muhammad, is considered the holiest city in the religion of Islam. International arrivals increased in 2013, reaching 18 million trips, following the massive expansion of projects at the holy mosques in Makkah, which has expanded its capacity for visitors. Furthermore, the Ministry of Haj recently gave approval to 62 travel companies to offer low-cost Hajj (pilgrimage) packages, following strong demand. As a result, the program was expanded to accommodate 41,000 pilgrims in 2014, up from 17,000 the previous year. Moreover, the Saudi Commission for Tourism and Antiquities (SCTA) is trying to drive tourism by deregulating air travel by breaking the monopoly of Saudi Arabian Airlines, inviting local and foreign airlines to operate in the country.
While religious tourism is key, domestic tourism is also receiving a boost from government, with the Saudi Commission of Tourism & Antiquities (SCTA) continually investing to promote cultural festivals such as Jenadriyah Festival, held near the city of Riyadh each year. Moreover, historical sites, such as Madain Saleh, Al Dir’iya near Riyadh, as well as hill areas, such as Abha and Taif, are gaining popularity amongst local Saudis for visits on hot summer days. SCTA is also working with the General Authority of Civil Aviation (GACA) to increase the number of flights to different domestic destinations, as well as to upgrading the facilities at various domestic airports. In addition, SCTA is also promoting the National Museum, housed in Riyadh, to encourage interest from locals in the history of Saudi Arabia. These developments are making Riyadh a fast growing domestic tourist destination. Furthermore, domestic business tourism is showing continued growth. This is due to growing business activities in the region, as the government seeks to attract investors on the back of the thriving Saudi economy.
Not surprisingly, this strong growth of tourist arrivals has impacted positively on retailers, where grocery retailers, especially in the cities of Makkah and Madinah, are able to pull in extra business. As a result, retailers are expanding the number of outlets, as well as introducing new formats, including convenience stores, which have also benefited from the busier lifestyles and growing youth populations in these cities. For example, in 2013 the retailer Al-Azizia Panda United Inc introduced the convenience store, Pandati.
Equally, growth in pilgrims has impacted the fashion sector. Fawaz Abdulaziz Al Hokair Co, one of the leading apparel companies that represent retail brands such as Zara, Bershka and La Senza in the Kingdom, is focusing on further retail projects, and in particular apparel retail, and has aimed to add 400 new stores across various categories on an annual basis.
Socioeconomic and demographic trends also driving demand
In addition to tourism, retailing also benefits from a strong consumer base due to the country’s high population, nearly 29 million, and strong economy. With two-thirds of its population dominated by those under the age of 30, Saudi Arabia is driving retail fashion and beauty trends in the region, encouraging more retailers to open. Moreover, an affluent population is also driving trends in the luxury market, since middle-aged consumers typically have high sums at their disposal. For example, the luxury department store, Rubaiyat, has expanded, following high demand for luxury apparel. Furthermore, growth in consumer spending per capita has enabled well-known brands, hypermarket chains and big shopping centres to expand.
And unlike past generations, the young are better educated and more willing to accept new ideas. Young consumers are also changing their consumption habits, following various trends in urban locations, such as the growing demand for healthier alternatives and fresh food. Shopping is also a key leisure activity in the Kingdom, and part of the population’s daily lifestyle. This has benefited grocery retailers, encouraging them to introduce more international brands in the country.
Apparel specialist retailers have equally benefited from the growing middle classes’ appetite for status symbols. As urban consumers have better access to modern shopping formats, apparel sales are booming. And despite being a country where luxury spending is strong, there is also growing demand for affordable brands after the success of budget retailers such as Citymax/Max, which have introduced aggressive expansion plans to the country. Also, the first F&F budget retail outlet by Tesco, launched in May 2012, with local partner Fawaz Abdulaziz Alhokair Co is proving successful.
Though still niche, e-commerce is also growing in Saudi Arabia, due to the burgeoning convenience trend, with many retail chains now selling their products online. This has been assisted by Saudi Arabia’s growing internet penetration, at 60% in 2013. As such, the country is seeing growth in online purchases for items such as clothes and accessories. Apparel and accessories retailer Markavip’s recent deal with Paypal in 2013 highlights the country’s potential.
In addition to trying to increase tourism, the government is investing in housing. Key to this is the government’s desire to increase home ownership among Saudi nationals, currently standing at 30%. As a result, there is a residential construction boom in the Kingdom worth about USD784 billion. This has already driven demand for furniture imports, and has encouraged several premium international furniture brands to exhibit their collections for the first time at Decofair, an annual home furnishings exhibition. Ikea also plans on expanding its number of stores over the next five years.
With the government’s investment in tourism and housing, the retailing market – from grocery retailers to apparel stores – are expected to thrive with 8% and 10% constant value CAGRs respectively over 2013-2018. With upcoming projects such as Kingdom City, Jazan Economic City and King Abdullah Economic City, the retail industry can be expected to continue to boom, with more opportunities for brick and mortar establishments, as well as online retailers, to reap its rewards.