New entrants to Saudi market shut out by invisible barriers

Published December 13th, 2011 - 08:42 GMT
According to David Macadam, head of Jones Lang LaSalle’s retail team in the region, “Retailers across the spectrum are looking to enter this market to cater to a growing domestic demand, driven by its sizeable young population.”
According to David Macadam, head of Jones Lang LaSalle’s retail team in the region, “Retailers across the spectrum are looking to enter this market to cater to a growing domestic demand, driven by its sizeable young population.”

The impression has always been that Saudi Arabia has punched below its weight in the Middle East’s retail ring. The reason? Control of the multi-billion riyal sector by a few business groups and a state of affairs which has proved a stumbling block for others trying to get in. “The commercial licensing regime in Saudi Arabia has traditionally reserved retailing and distribution activities for locally-owned companies,” says a new report from Jones Lang LaSalle, the real estate consultancy. “While there has been some relations, the process is still not perceived as completely transparent.”

The report estimates that a handful of groups hold the local rights for more than 90 percent of the retail brands represented in the market. This is a situation quite at odds with the situation in the UAE, easily the most mature retail market in the region.

Business houses in the other Gulf markets have tried to enter through the window provided by the Saudi Arabian General Investment Authority. But by common consent these moves have not yet yielded the desired results for many of them.

Great divide

It could be that the gap between promise and reality is quite a great divide. Then again, it may well be that the Saudi consumer is not as easily accessible by new entrants. Many other prospective entrants have now decided to delay their entry or wait until a new franchise partner from within the kingdom can be signed up.

That represents a clear state of concern for the kingdom’s retail industry. “Everyone acknowledges the market’s potential, but if the invisible barriers are not fully removed, they will test the patience of prospective investors,” said the CEO of a leading retail chain with pan-Gulf interests, but excluding Saudi Arabia. “There is so much happening in the UAE itself and elsewhere in the region and just beyond. Investors’ attention spans can be quite short.” Also, brand owners, especially those that are making an entry into the region now, are also wary of having to deal with multiple franchise partners. In an ideal world, they would like to nominate a single regional franchise operator which can then develop the brand’s interests across a wide footprint.

Some of the global brands which made an entry into the UAE have left open the Saudi question. “The best route to get into Saudi Arabia is still being debated internally and with our UAE partner,” said the CEO of a UK fashion label. “We will eventually get into the kingdom, but it will take time.”

Refrain

This is the refrain expressed by other retail powerhouses as well. All of which means that Saudi Arabia is losing out on valuable investments right now. And not only that, the creation of more job opportunities and making available more choices for the Saudi shopper.

In the Jones Lang LaSalle report, the authors point to the “lack of separation between brands and [mall] operators” resulting in a lack of financial transparency. This makes it even more difficult to “assess the true performance of either centres or brands and influence decision-making. This also acts as a barrier to entry for new brands”. “This will also act as an inhibitor for brands that may want to expand domestically but are unable to do so due to ‘retail politics’’. But there is no getting too far away from the potential the market invariably offers. According to David Macadam, head of Jones Lang LaSalle’s retail team in the region, “Retailers across the spectrum are looking to enter this market to cater to a growing domestic demand, driven by its sizeable young population.”


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