Tesco Looks to Expand F&F into Saudi Arabia

After finding success with its apparel range in Eastern Europe, Tesco is looking to progress its plan to become a global player in fashion by expanding the F&F brand into the Middle East.

The supermarket has created a new franchise model for this expansion, partnering Saudi retailer Fawaz Abdulaziz Al-Hokair. Al-Hokair is the second largest player in the Saudi apparel market and already counts Miss Selfridge, Zara, Marks & Spencer and Gap in its portfolio. Operating in partnership with Al-Hokair, Tesco plans to open 19 stand-alone F&F stores in the country, with the first due to open later in 2012.

F&F finds favour in Eastern Europe

F&F was launched as Florence & Fred in the UK in 2001, becoming F&F in 2006, and now retails in 11 countries. The clothing range achieved like-for-like sales growth of more than 20% in its 2010 financial year and Tesco has made no secret of its ambitions to further expand the brand globally.

F&F has so far found particular success in Eastern Europe, and in 2011 it accounted for 6% of both the Czech and Hungarian apparel markets, more than that of the leading branded players in both countries. According to the retailer, the brand is now worth over £400 million in the region. Building on its success in supermarkets, the retailer opened its first stand-alone F&F store in Prague in 2010 and a second in Brno, also in the Czech Republic, last year, both of which are wholly owned and operated by Tesco.

Central European consumers view the F&F brand significantly differently to consumers in the UK. It is distinct from the Tesco mother brand, which allows a fashion-led position and approach. This positioning as a fashion brand rather than a supermarket spin-off will be vital if the brand is to succeed on a global scale over the long term. As well as developing the F&F brand globally, the Eastern European stand-alone stores have enabled Tesco to test and refine ideas on which the Saudi franchise format will be based, and Tesco will of course be hoping that the brand’s success in Eastern Europe can also be replicated in Saudi Arabia.

A wealthy country with a growing interest in Western trends

Although Tesco’s ambition to grow the F&F brand is not surprising, the fact it has chosen Saudi Arabia for its first franchise may seem strange given the many differences between the country and Tesco’s home market, not to mention its strict religious codes which also dictate how people dress. However, when looking at the specifics of Saudi Arabia’s apparel market, it becomes evident that the country has much potential.

Saudi Arabia is the wealthiest state in the Middle East and average annual spend on apparel stands at US$586, having registered absolute growth of US$106 per capita over the review period – one the of fastest rising spending rates on apparel in the world. Healthy sales growth in apparel is being supported by strong wider economic growth, a growing interest in Western fashion trends – from younger consumers in particular – and rapid developments in retailing. The increase in number of shopping malls has boosted the popularity of shopping as a leisure pursuit – particularly among women – and quickly increased consumers’ brand awareness.

These factors combined mean younger Saudi consumers are increasingly buying a wider range of apparel purely for fashion reasons. Younger men in cities such as Jeddah, Mecca and Dammam are no longer restricting themselves to traditional dress, while women, who are required to wear an abaya in public, are buying fashionable items to wear in the home. Saudi Arabia’s promise as an apparel market is heightened by the fact that consumers below the age of 30 – prime candidates for adopting Western fashion – account for a dominant 70% of the population.

Fragmented market with space for new entrants

In Saudi Arabia, Tesco is entering a highly fragmented apparel market in which ‘others’ account for more than a 90% share, with outdoor markets, which offer a wide range of economy and often unbranded products, remaining extremely popular. This fractured market may, however, benefit Tesco. Firstly, the retailer does not have to take on the might of one or two established and dominant brands to gain share – drawing consumers to one’s brand is always an easier task when they are not loyal to another brand to begin with. However, it must be noted that other fast fashion retailers – H&M, Bershka and New Look to name three – have already established their identity in the country, and F&F will not be without similar priced competition in its new market.

Franchise brings important local knowledge

While Tesco, as a foreign retailer, is required under Saudi law to have a local partner in its ventures in the country, the benefits the partnership brings to Tesco are vital. Through the partnership, Tesco has gained Al-Hokair’s market know-how in a country that differs greatly to the retailer’s current core markets. This local expertise is extremely important in a country with such a different culture and means that F&F will have a far greater chance of appealing to local customers than if it were to enter the market alone. In addition, a franchise model enables Tesco to expand the F&F brand at an accelerated pace on a much wider scale, allowing the manufacturer to benefit from economies of scale through its supply chain without spreading itself too thinly in terms of day-to-day management.

Possibility of expanding further into the Middle East

Looking ahead, Al-Hokair has a significant presence in apparel in both Jordan and Egypt in the Middle East, as well as in Kazakhstan and Azerbaijan in Asia. In Jordan, as is the case in Saudi Arabia, the growing number of shopping malls is encouraging consumers to spend more and save less, while traditional dress is falling out of favour and being replaced by Western fashions. Annual disposable incomes are, however, much lower, around half of those in Saudi Arabia. The apparel market is, however, predicted a healthy 5% value CAGR (modelled) over the forecast period, albeit from a very small base.

Egyptian clothing has long had a poor reputation for quality in its home country, and those who can afford to will buy their clothing from international brands or abroad – although the numbers who can afford to do this are small and disposable incomes for most are low. This lack of spending power is holding back the growth of international brands and the category itself. Given that Tesco has ambitions to be a global player, expanding further into the Middle East in partnership with Al-Hokair could well be an option, and Jordan would at present seem the best prospect. However, the retailer has certainly made the right move in selecting by far the most affluent market to test the waters in the region.

Risks in the Saudi market

While the potential of the Saudi apparel market is evident, the country’s strict religious rulings cannot be ignored. Saudi Arabia is a deeply religious country and while young women are more economically and intellectually powerful than a decade ago, too strong a shift towards Western lifestyles may well result in condemnation by religious authorities and bring about a reversal in the trend for Western fashions. Any event of this nature would certainly serve to stifle apparel growth, particularly that of Western retailers operating in women’s categories in the country.

Going head to head with George

Tesco’s announcement that it is to expand into the Middle East was followed very swiftly by an announcement that its main rival in apparel, Asda, owned by Wal-Mart, is also taking its George fashion brand into the Middle East. Although no definite locations or number of stores have been announced, Beirut seems a likely option as the Lebanese-based Azadea Group will be taking on the franchise. The retailer already operates a number of Western fashion brands across the region, including Zara and Bershka.

Although George clothing is currently only sold in seven countries compared to Tesco’s 11, Tesco’s apparel sales currently lag well behind those of George, with George’s global sales topping £4 billion – F&F reached £1 billion for the first time in 2010. That both companies have taken similar steps in their global expansion plans is not surprising given that domestic sales remain sluggish. Which will come out on top in the Middle East remains to be seen, but given that Tesco looks likely to enter the region first, this could be the chance for F&F to make headway on its long-term rival.

Strategy has plenty of promise

While it may seem an unusual choice, Tesco has made a savvy move in opting to drive the global growth of the F&F brand by targeting the Saudi Arabian apparel market. A healthy economic environment and a young and increasingly fashion-conscious population, together with developing retail channels and a lack of consolidation in the category, all suggest that Tesco can make a success of its push into the Middle East. Tesco believes F&F has the potential to become one of the leading fashion brands in Saudi Arabia and, while only time will tell, the claim is perhaps not over-ambitious.

For further insight, please contact Magdalena Kondej – Head of Apparel Research – on magdalena.kondej@euromonitor.com