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Retail Me Magazine - Saudi Grocery Market Set For Growth - October2012 Pg 42 46


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Retail Me Magazine - Saudi Grocery Market Set For Growth - October2012 Pg 42 46

  1. 1. analysisSaudi grocery market set for growthThe Saudi retail grocery market, which was worth around $22.3 billion in 2011, isexpected to grow at a CAGR of about 4% to reach $28.2 billion by 2017, accordingto Glasgow Consulting Group Dmitriy Shironosov / Shutterstock.com42 IMAGES RetailME octoBER 2012
  2. 2. analysisT he grocery market in the Kingdom is Recording a steady growth, hypermarkets consolidation through new store develop- driven mainly by a rising population, and supermarkets now account for about ment and acquisition. In February 2008, it improving education and changing 44% of grocery sales but notably the smaller acquired all 20 Giant Stores from Al Mu-shopping habits, but it continues to be frag- stores still retain the balance 56% of the haidib Group. This was followed in July 2009mented with small stores still accounting market. The ‘bakalas’ which offer a very lim- , with the acquisition of all 11 Géant stores infor majority of grocery sales. GCG expects ited product range but are widespread and Saudi Arabia from Fawaz Alhokair Group.big retailers to corner increased market provide convenient locations, continue to Azizia Panda is currently the market leadershare by opening new stores at the expense account for one in every six riyals spent on with 134 stores and some 10% of the Saudiof smaller ones as the changing lifestyle grocery items. grocery market.of the Saudi population is favouring large Following closely is Al Othaim Group,format grocery retailers. The report also Competitiveness which has a clear strategy of opening super-notes that shopping habits in the Kingdom Table 4 below lists the leading retail chains market and hypermarket outlets. Al Othaimare changing and moving closer to a west- in Saudi Arabia together with the number has set a target to open 10 stores per year,ern lifestyle. This change is driven by a of stores they have and estimated market although this figure is a little optimisticyoung population, which increasingly shops share. considering the scarcity in locations, fierceat supermarkets and hypermarkets rather Savola Group’s Azizia Panda is the lead- competition and upfront investments re-than traditional stores. Even the older gen- ing retail chain and has been leading in quired. Al Othaim may succeed in openingeration’s preference for the convenience 7-9 outlets per year to reach 132 stores Table 2offered by supermarkets and hypermarkets Saudi Arabia: Grocery Retail Breakdown by Category by 2014, with a retail space of close to 3.1is pronounced. Given the limited options million sqft. This will increase Al Othaim’s Category Share (%)for entertainment, Saudi families tend to Grocery food 76% market share of grocery market by 1.4%visit large format stores for entertainment. of which: to reach around 6.4%. While the number Beverages (hot and cold) 16% of stores owned by Al Othaim and PandaRetail market size All dairy (long-life/short-life) 15% is similar, their market share seems to beTable 1 shows how the retail grocery market Meat, poultry, fish 15% slightly less. This can be attributed to thehas developed and is expected to develop. Confectionery, snacks, biscuits 6% fact that both Al Othaim and Panda con- Table 2 presents GCG’ estimates of break- Sauces, spreads, condiments 2% tinue to operate some smaller size stores, Bakery products 2%down of total retail spend by product type. which may not qualify as supermarkets un- Other foods 20%For the sake of simplicity, sales direct from der formal definitions. Grocery non-food 18%wholesalers to consumers, which is signifi- of which: Another prominent locally grown brandcant for some products, has been ignored in Household products 4% is Bin Dawood that currently controls aboutthis analysis and accorded the same break- Personal care 4% 4% of the countrywide market share. Bindown by outlet type as other products. Others (tobacco, paper products etc) 11% Dawood’s strategy is price based, ie, offer Food is clearly the most important catego- Non-grocery 6% best value to its customers and be a familyry, accounting for about 76% of retail sales. Total 100% retailer.This is followed by non-food with 18% and Note: Minor inconsistencies in the above table due to rounding The entrance of international retailersthe remaining 6% being non-grocery. The Source: GCG research and estimates. such as Géant and Carrefour has spurredimportance of different product categories Table 3 local retailers such as Panda and Al Oth-varies widely by retailer type as discussed Grocery Retail Universe by Outlet Type, 2011 aim. Operators like Carrefour have broughtbelow. Category Number of Outlets Share of Sales in fancier stores and aggressive retailing Despite significant consolidation over the Supermarkets /Hypermarkets 500 44% trends. Local retailers have become more Other Self-service /Mini Markets 3,670 20%past five years the distribution network for Large Grocery 11,130 20% active in expanding their operations bygrocery items (including food) in Saudi Ara- Small Grocery 18,800 6 1% opening new stores and acquiring smallerbia is still relatively fragmented as can be Total 34,100 100% retailers, and the trend is expect to continue.seen from Table 3. Source: GCG research and estimates Despite the very significant expansion In the Saudi context, the current grocery Table 4 by leading retailers the top four retailersand non-grocery retailing sectors (including Saudi Arabia: Market Share and combined account for just 23% of the retailclothing, consumer durables etc) make up Store Numbers of Leading Retailers, 2011 market. In comparison four UK retailers35% and 65%, respectively, of the total re- – Tesco, Sainsbury, Asda (Walmart) and Retailer Number of Stores Market Sharetailing market size. The non-grocery sector Morrisons – account for some 75% of the Azizia Panda 134 10%grew by 47.5% from 2005 to 2010 (implying entire UK grocery market. However, further Al Othaim 103 5%a CAGR of 8.1%), outperforming grocery consolidation in the Kingdom is inevitable. Carrefour 15 4%sector growth of 44.2% (with a CAGR of 7.6%over the period). GCG expects the grocery Bin Dawood 29 4% Retailing trendssector to grow at a slightly lower CAGR of 4% Other 33,819 77% Grocery retailing in Saudi Arabia is expe-to reach $26.6 billion by 2015. Total 34,100 100% riencing exceptional transformation. On Source: GCG research and estimates the one hand, customer expectations are Table 1 Saudi Arabia: Grocery Retail Market Size (SR billions) changing and growing, while on the other 2010 2011 2012 E 2013 E 2014 E 2015 E 2016 E 2017 E hand the steady emergence of large and Grocery Retail 81.3 83.7 87.0 90.4 94.0 97.7 101.6 105.6 well-managed chains, either of local or in- CAGR 3% 4% ternational origin, is redefining the retail Source: GCG research and estimates landscape. In order to remain competitive, IMAGES RetailME octoBER 2012 43
  3. 3. analysis Al Othaim supermarketsall grocery retailers will have to constantly Al Othaim vs. International Retailers, 2010 density to do well. Although the standardinnovate and offer a superior retail product Gross EBITDA size differs for the type of store and even Company SSS Margin ROA ROEand experience. Some recent and upcoming Margin from one retailer to another, an averagetrends and challenges include: Sainbury 2.2% 5.4% 5.9% 5.6% 12.5% land area of 43,000 sqft is required (either The Saudi retail sector remains attractive; buying or leasing) to open a decent sizethis is evident from the country’s “attractive- RESCO 4.0% 8.1% 8.5% 5.1% 16.9% hypermarket format store. As a result, it isness” in AT Kearney’s 2011 Global Retail Kroger 5.0% 23.1% 8.5% 0.3% 1.4% quite difficult to find available land at rea-Development Index (GRDI). The Kingdom sonable prices considering that real estate Al Othaim 5.5% 7.6% 5.2% 10.0% 33.4%is placed seventh in 2011 GRDI global rank- markets are booming. In order to open aings: Source: Bloomberg, GCG research store, a retailing company can either buyl Represents high market attractiveness or rent the land. Buying land can be very and low country risk cities (such as Tabuk) and more rural areas. expensive and it is often not feasible. Rent-l Second best among MENA countries Currently, many of these are still served ing land is usually much better; however, after Kuwait (rank 5) by small local groceries and convenience not many landowners are tempted to enterl The UAE is placed 9th in the ranking stores. There can be little doubt that leading into long-run rental contracts when they People enjoy the experience of shopping in retailers such as Azizia Panda and Al Oth- may get much better sale opportunities.supermarkets and hypermarkets as a form of aim are examining this potential. Similarly, renting stores within buildingsentertainment. Whereas the present super- Large retailers normally enjoy bargain- is getting more expensive as a result of in-markets and hypermarkets account for only ing power over suppliers. In the Saudi retail creasing demand for spaces within cities. As44% of aggregate grocery sales but a shift to market, large grocery retailers have yet to mentioned, rural areas where real estate islarger retail formats is an almost inevitable fully exploit this power because the market reasonably priced offer new opportunitieslong-term trend. This trend is further sup- is still relatively fragmented; even the larg- for retailers to expand. As a result, someported by the ‘mall’ culture as hypermarkets/ est retailers still do not have a large enough retailers have invested in real estate to com-supermarkets move into these malls as ‘key’ market share to dictate to major suppliers. plement their retailing operations. Althoughanchors and offer a complete one-stop-so- Nevertheless, the aggressive expansion that this doesn’t solve the fundamental problemlution and a diverse shopping experience to grocery retailers are undergoing is increas- of the booming real estate market, it doesa retail customer. This is an emerging trend ing their bargaining power gradually. Al help them to find lands at reasonable prices.not only in Saudi Arabia but also regionally Othaim, for example, was able to improve its For example, Savola owns some real estateacross the Middle East. gross margins during the last two years from investments to support its retailing busi- Grocery retail markets in big cities are 6.7% in 2009 to 7.9% in 2011. The company ness (Panda). Similarly Al Othaim owns aalready well penetrated by the main chains, explicitly stated that this increase was main- 13% stake in a sister real estate company tobut there remain significant growth oppor- ly due to better contracts with suppliers. The complement its core business. It also planstunities both through the massive expansion largest retailers will improve their margins to increase its stake to 100% to attain fullof these cities (eg, Riyadh is extending so as a result of expansion in a way that smaller control, which should help the companyrapidly that small cities that used to be retailers cannot. more in its core business. Again, the largestoutside Riyadh have started to fall within The larger format grocery retail sector re- retailers with the strongest financial back-the Riyadh city boundaries) and in smaller quires good locations with high population ing will obtain advantages unavailable to smaller rivals. Al Othaim Stores Overview, 2010 Increased customers options when it comes to grocery shopping, mean that most Number of Total Sales Average Sales Grocery Retail Grocery Spending Stores Area(Sqm) Area (Sqm) Banner Sales (SR) Market Share (KSA) retailers have resorted to promotions and discounts to attract customers and hence Al Othaim 103 151,400 1,577 Approx 4 Bn 5% gain market share. This has put pressure Note: Al Othaim had not yet released 2011 results in early February 2012 on margins and hindered their profitability.44 IMAGES RetailME octoBER 2012
  4. 4. analysisAgain, the largest retailers are better able tobear this cost. According to GCG research,Al Othaim is one of the competitive retailers,offering low-priced items. Furthermore, it isactually perceived by customers as the bestretailer in terms of prices, even though thisis not always true. While international (eg US, UK) and evenregional retailers like Carrefour in the UAEhave successfully implemented onlineshopping, its introduction in the Kingdomhas been hampered by the lack of clearstreet addresses (although of course many‘bakalas’ have made home deliveries basedon telephoned orders for years). Severalmajor retailers are bound to adopt onlineshopping services as soon as the addressproblem is solved.“Saudisation” is imposing pressure:According to industry sources, the “Saudi-sation” policy is currently one of the majorchallenges to Saudi retailing. The Kingdom’scurrent school leavers and graduates oftenlack both the skills and motivation neededfor satisfactory employment in the privatesector. This is imposing financial and opera-tional pressure on the industry. Financially,Saudis are more expensive than many for-eign workers, such as Filipinos. However,the financial pressure has been relieved bythe Human Resource Development Fund.This fund supports the state policy of “Sau-disation” by paying 50% of Saudi worker’s Azizia Pandasalary. Of course the fund imposes tough prayer, five times a day. Most chains allow ans etc). There are, therefore, a multitudeconditions, but many companies have shoppers already inside the store to remain of tastes to be catered for which, accordingagreements with the fund that help them to inside. The exact prayer timings vary from to some in the trade, contributes in part tohire more Saudis. day-to-day and from city-to-city. While this the very large number of SKUs stocked by Operationally, the problem seems to be has a disruptive influence on the continu- most supermarkets. It is likely that in themore difficult; for example, many of the ity of shopping, retailers often welcome the long-term this diversity will decline, but thatSaudis who work as cashiers, generally in- breaks as an opportunity to restock shelves impact is probably some years away.side retail stores, are teenagers and youth with their often largely non-Muslim work-who are often uncommitted to work. Al- force. The impact is also lessened by the fact Seasonality: Retail sales in the country canso, their productivity is low compared to that stores are open for longer hours. Many fluctuate significantly from month to monththat of foreigners. This issue is somewhat in the trade believe that this compulsory depending on the season and the product.pressurising retailers and impeding their closure may in time become optional and at For example, consumption of certain prod-expansion. To solve this problem, many each store’s discretion. ucts such as jelly and crème caramel hasleading retailers including Savola Group, a strong seasonal peak at Ramadan, withAl Othaim Group etc have developed their Mix of cultures: A diverse population some suppliers estimating that more thanown training centres aimed at upgrading the mix in the country comprises Saudis and 90% of sales (ie, supplier sales) take place insales skills of new Saudi employees. non-nationals, mainly Asians (eg Indians, the 2-3 month Ramadan selling-in season. Pakistanis, Bangladeshis and Filipinos), While retailers/wholesalers sell-on most ofClosure of outlets for Salah (prayer time): other Arabs (eg Egyptian, Lebanese, Jor- what they buy-in at this time, some productsAll retail outlets loose up to four hours per danians) and Western expatriates mainly must also be held back to avoid stock-outsday due to the closure for 30-45 minutes for living in compounds (Americans, Europe- later in the year. Depending on the retailer, the winter holidays can be even busier than Panda Stores Overview, 2010 Ramadan, with other peaks in September (back to school) and in late spring (the tradi- Number of Total Sales Average Sales Grocery Retail Grocery Spending tional sales period). With the Hijra calendar Stores Area(Sqm) Area (Sqm) Banner Sales (SR) Market Share (KSA) based on the cycles of the moon, the timing Panda 134 577,000 5,151 Approx 8 + Bn 10 of these seasonal sales does move slightly Note: Panda had not yet released 2011 results in early February 2012 every year. IMAGES RetailME octoBER 2012 45
  5. 5. analysis Fedor Selivanov / Philip Lange / View of Doha downtown skyline, Qatar growth in their domestic markets,” says John Williams, regional leader, Middle East at EC Kingdom tower in Riyadh, Saudi Arabia Harris. “Consumer appetite for luxury interna-Saudi Arabia first pick of global tional brands is strong across the Middle East, and our report suggests that retailers are able to set up much more easily hereretailers for regional expansion than in markets such as China or India,” he adds. “Successful international expansion is about balancing the desirable with the fea-Global retailers looking to make early international sible. Success is down to making a carefulmoves, particularly at the luxury end, found and committed choice, maintaining realistic expectations and making plenty of adapta-Saudi Arabia, Qatar and the UAE offering greater tions along the way,” he says.opportunities, according to the RIPE Index The RIPE index ranks 40 important con- sumer markets based on five success factorsI n the first annual Retail International to understand the people, the culture and for large-scale rollouts, drawing out the nu- Programme Expansion (RIPE) Index, the procedures,” EC Harris says. ances property leaders should consider as published recently by global built asset The presence of ‘strong’ trading partners their own organisation’s expansion plansconsultancy EC Harris, Saudi Arabia, Qatar and franchise operators such as Majid Al evolve.and the UAE, which were ranked 8th, 11th Futtaim, Al Tayer, Landmark Group, Alshaya “International expansion is the new bat-and 15th, respectively, scored well for the and the Chaloub Group, meant that market- tleground for retailers experiencing lowquality of their transport infrastructure, testing moves can be made with relatively growth in their domestic markets. Consum-capability of their construction supply chain low resource and capital requirements. er appetite for Western brands in Asia makesand their supporting legal framework. Luxury retailers are profiting from the these markets attractive, but not always easy Luxury brands such as Bloomingdales ease of being able to deliver in this market, to enter. Successful international expan-are succeeding in the Middle East with high EC Harris says. sion is about balancing the desirable withquality retail space on offer and an overall It cited Bloomingdales, as an early mover, the doable. Much like a marriage, successwillingness to do business in the region. whose first store outside of the US opened is down to making a careful and committed Saudi Arabia topped the list for MENA two years ago, anchoring the Dubai Mall. choice, maintaining realistic expectationsregion. The 161,000 sqft, three-level development and making plenty of adaptations along the Qatar took the second position in the was undertaken in partnership with Al Tayer way,” says Colin Turner, head of retail at ECregion. and is trading well. Harris. The overall ratings for all the MENA coun- Qatar’s World Cup success presents inter- In August, Jones Lang LaSalle’s thirdtries were ‘high’ but the only watch-out esting brand showcasing opportunities, the quarter global market perspective, said thebeing project delivery issues. report said, adding it was anticipated that slowing global economic environment had “What we find is that even the most several major malls will come to market in resulted in European retailers seeking toopaque local bureaucracy can be overcome the lead up to 2022. increase their presence in the Dubai marketif the investment into the relationship is “International expansion presents great in recent months, which was fuelling rentalmade by native speakers with the patience opportunities for retailers experiencing low growth in popular centres. n46 IMAGES RetailME octoBER 2012