Fast-moving consumer products in Saudi Arabia set to expand with diversification efforts

The fast-moving consumer goods (FMCG) industry supplies Saudi shoppers with local and international brands. A select group of domestic family-owned trading businesses are suppliers for the household brand names of the global FMCG business. Through joint ventures (JVs) and subsidiaries, these regional conglomerates are involved in the manufacture, import and wholesale distribution of the goods that supply consumer demand. As Saudi Arabia looks to diversify its economy and find private sector careers for its young citizens, the FMCG segment looks to be a source of growth and employment opportunities.

Brand Partners

Basamh Trading Company, Abudawood, Binzagr, Olayan Groups’ General Trading Company (GTC) and Mohamed Yousuf Naghi & Brothers Group are among the Saudi companies bringing international products to the growing domestic consumer base. Nestlé, with more than $90bn in global revenues in 2016, is partnered with Basamh Trading Company, while Procter & Gamble (P&G) and PepsiCo – with earnings of $65bn and $63bn, respectively, in 2016 – both work with Abudawood. With international turnover of $59bn in 2016, Unilever is represented by Binzagr, while GTC’s portfolio includes Coca-Cola and Mondelez International, with revenues of $42bn and $26bn, respectively, in 2016. L’Oréal, which sold $29bn of beauty products in 2016, partners with the Mohamed Yousuf M Naghi Group’s Arabian Trading Supplies firm.

While the presence of these multinational companies is pervasive in the retail market, their overall footprint on the economy varies, as some have manufacturing plants in the country, while others limit their work with Saudi partners to the import, distribution and promotion of their brands.

Historic Presence

As domestic demand for foreign FMCGs grew, import and trade companies have evolved from trade to manufacturing. In the 1940s the late Ahmed Saeed Basamh started Basamh Trading Company in Jeddah, and by 1973 it branched into manufacturing pasta and speciality foods for international partners Buitoni and Goody Foods at the Saudi Modern Foods Factory. Then, in 1982 a JV between Nestlé and Saudi Food Industries saw the production of Maggi brand stock cubes, soups and noodles, as well as Libby’s ketchup and baby food. Meanwhile, a new partnership with SC Johnson & Son – the Saudi Johnson Company – saw the manufacture of household insecticides, air fresheners, toilet cleaners and furniture polish begin in 1989.

The late Sheikh Ismail Ali Abudawood established his eponymous company in Jeddah in 1935, and by 2017 Abudawood grew to 4000 employees, with revenues of $1bn, 250,000 retail and wholesale outlets, and partnerships with international FMCG clients including P&G, Quaker Oats Company, PepsiCo and Ferrero. The firm became the exclusive domestic distributor for P&G in the 1940s, and in 1956 a JV with the Modern Industries manufacturing plant was established to produce Tide washing powder. In 1979 P&G opened a factory in Dammam producing washing powder, dishwashing liquids and shampoos, followed by another plant in Jeddah in 1981 to make hygiene products. P&G’s operations in Saudi Arabia have grown to employ 950 people.

Working with Al Jomaih Company, carbonated beverage producer PepsiCo opened domestic bottling plants in 1957 and by 2017 had a workforce of 2000 people. The Jeddah trading enterprise Binzagr opened in 1881 and has built its reputation on distribution and logistics, working with 55 global brands including Unilever, Heinz and the Hershey Company.

Branching Out

The FMCG segment is not limited to trading companies. From its founding in 1947, the Olayan Group has established a range of interests from manufacturing to finance and real estate. Initially, the firm provided oilfield services, but subsequent business developments came with the establishment of JVs and subsidiary FMCG businesses. In 1954 it founded GTC and earned exclusive rights to distribute brands including Kimberly-Clark, General Foods, Pillsbury and Hunt-Wesson.

In 1971 it entered into an agreement with Kimberly-Clark to produce the Kingdom’s earliest tissue converting plant, and in 1990 it started the Saudi franchise for Coca-Cola foodstuffs, opening the first of three bottling plants six years later. In 1991 it established a JV with Colgate-Palmolive, followed by agreements with Nabisco and Mondelez International. In 2017 the Olayan Group comprised 12 FMCG businesses working across a range of food and home products. It also bottles beverages including Coca-Cola, juices and water.

Founded in Jeddah in 1911 and employing 15,000 people, one of the largest private conglomerates is Mohamed Yousuf Naghi & Brothers Group. Its Arabian Trading Supplies subsidiary has three FMCG divisions: Mars; L’Oréal, Garnier and Vichy Laboratories; and a general division with partners including Reckitt Benckiser and cleaning supplies brands.

Another third-generation family business integral to the FMCG segment is the Tamer Group, dating back to 1922 when Dr Mohammed Said Tamer opened the first pharmacy in the Kingdom. The group operates five companies to support the import, marketing and distribution of pharmaceuticals; health care investment; and consumer goods.

Tamer Group operates a JV with Japanese partners Sankyo and Yamanouchi Pharmaceuticals called SAJA, and also holds at 50% share in the Saudi Pharmaceutical Distribution Company, with exclusive rights to import and distribute Novartis products.

Regional Rivals

While the Kingdom boasts a number of long-standing agreements and partnerships with international FMCG players, further marketing and promotion efforts are ongoing to remain competitive in the ever-evolving marketplace. The Kingdom offers a range of advantages for FMCG manufacturers in terms of skills, labour costs, access to raw materials, ease of doing business and proximity to customers, including its own sizeable population of over 32m people.

The region is not without competition, and some global giants of the FMCG sector have established new factories in other parts of the GCC. Bahrain was chosen as the location for Olayan Group’s Kimberly-Clark paper mill in 1994, a Reckitt Benckiser factory in 2013 and a $90m Mondelez biscuit factory in 2017. P&G’s first factory in the Middle East was in Jeddah, but more recently it has been expanding in the UAE, with 300 staff employed in Jebel Ali, where the company established a raw materials mixing unit in the industrial free zone in 2002. In 2016 Unilever also selected Dubai for a $272.3m personal-care liquids plant employing 400 people to produce 100,000 tonnes of product annually. Popular brands will be manufactured in the UAE, and 80% of the factory’s output will be exported.

Market Strengths

Alongside developments in its neighbours, the Kingdom continues to attract new deals. In August 2016 Mezzan Holding Company of Kuwait acquired a 70% stake in the Saudi Al Safi Food Company in return for capital of SR90.8m ($24.2m). Al Safi will be renamed Mezzan Food Company and will have exclusive rights to import, manufacture, sell and distribute Mezzan brands. The company will continue to produce and sell its Al Faisaliah Group bakery products. The company has said it hopes to build local factories to serve demand both in the country and across the wider region.

Domestic players continue to post strong results. The sector index on the Saudi Stock Exchange ( Tadawul) significantly outperformed the general index in the first seven months of the year, rising by 25.9% as of July, compared to 2.3% for the Tadawul All Share Index. This growth took place at a time when austerity measures were affecting consumer confidence and spending. Performance can be expected to improve as austerity measures are eased.

Challenges

This is true even despite the introduction of a 5% value-added tax (VAT) in January 2018, which though likely to have a short-term affect, is not expected to have a significant long-term impact. As essential items, a number of specific products are exempt from VAT, with the added cost passed to consumers on taxed items offset by increasing efficiencies among organised and vertically integrated retailers. “We have yet to see the impact on the market; possibly [the new VAT] is going to be reflected in the final retail price,” Hazem Saklou, CEO of Alkanaah Trading Group, told OBG.

In the longer-term potential challenges include the possible reduction of the expatriate market, whose spending – and staying – power is falling in line with rising visa fees and Saudiisation efforts. Increases to the cost of power could also have a negative impact, though the sector maintains strong fundamentals to weather any such storms.