High levels of consumer spending, coupled with reforms allowing for greater foreign ownership of retail businesses, look set to drive expansion in Saudi Arabia’s retail sector through to 2020 and beyond.
Under Vision 2030, the Kingdom’s long-term development plan released at the end of April, the retail sector has been identified as an area of the economy well placed to stimulate growth and create employment for Saudi nationals.
Indeed, according to forecasts from consultancy McKinsey, the Kingdom’s retail and wholesale trade has the potential to triple in value and employ an additional 800,000 nationals by 2030.
However, near-term progress could be curbed by a slowdown in government spending and weaker GDP growth.
In May international real estate consultancy Colliers identified the Saudi retail market as having strong growth potential due to its young and expanding population. Nearly two-thirds of the country’s population of around 31m are in Generation X or Y (born after 1977), and according to a report released by Standard Chartered Bank, the population is forecast to grow to 33m by 2020.
Solid levels of disposable income – which expanded by 58% between 2011 and 2015 to SR1.1trn ($293.3bn) – and relatively low levels of retail floor space in the capital Riyadh, also offer strong openings for growth, according to Colliers. Some 2.4m sq metres of additional supply is in the pipeline, 412,000 sq metres of which is already under construction.
As of late last year, the Saudi retail market was valued at around SR170bn ($45.4bn), according to the UAE-based Middle East Council of Shopping Centres, making it the largest retail sector in the region – accounting for around 63% of the SR270bn ($72bn) GCC-wide market.
And while the sector has posted annual growth of 12% over the past decade, much of the industry is still dominated by traditional or small-scale traders, which account for about half of the market, compared to 20% in other Gulf economies.
To help formalise the sector, Vision 2030 aims to attract more local, regional and international brands, creating up to 1m jobs by the end of the decade and increasing the contribution of modern trade and e-commerce to 80% of the sector’s value by 2020.
To this end, in mid-June the Council of Ministers endorsed a proposal to allow foreign investors 100% ownership of retail and wholesale businesses operating in the Kingdom; the previous limit was 75%.
The rule change has already yielded results, with the UAE-based LuLu Hypermarket chain announcing plans to expand its footprint in Saudi Arabia this year – reportedly a direct result of the new foreign ownership cap.
The company’s expansion plans involve opening four more hypermarkets by the end of the year – two in Jeddah and one each in Hofuf and Hail.
While the new rule is widely expected to stimulate additional retail activity, some companies are treading cautiously due to the current macroeconomic climate in the region.
“There will certainly be more foreign direct investment as a result of the rule change,” Mohamed Tomalieh, an equity research analyst at Riyadh-based investment company NCB Capital, told OBG earlier this year. “But it is an open question as to when this will take place. Given the slowdown, some corporates have been delaying their expansion plans.”
According to the IMF’s latest forecast, growth of the Saudi economy, as in much of the GCC region, is expected to ease this year, from 3.5% in 2015 to 1.2%, due in large part to lower energy revenues and public spending cuts.
With a slowdown in wage increases and inflation projected to reach 4% on the back of higher utilities and energy prices – part of the government’s scaling back of subsidies – household spending could be curtailed this year, which could have carry-through effects for retail turnover.
“Lower government revenues and increased regional instability are hurting consumer confidence right now,” Samir Abdulhadi, managing director of the Mawarid Distribution and Trading Group, a major retailer in the Kingdom, told OBG earlier this year. “However, we expect a turnaround later in the year as the Kingdom’s economy continues to be resilient and promising.”
The IMF’s medium-term projections are similarly bullish, with growth set to range from about 2% to 2.5% through to 2021 as the pace of fiscal consolidation eases.
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