By Sarah Townsend
The largest economy in the GCC is emerging as a lucrative retail hub on the back of a fast-growing domestic population and efforts to diversify away from oil
The UAE is often hailed as the queen of shopping malls. After all, it has one of the world’s largest — Dubai Mall — with more than 300,000 square metres of gross leasable area (GLA) and a total floor size equivalent to 50 football pitches.
But its neighbour, Saudi Arabia, could soon overtake the UAE in terms of sheer scale and volume of opportunity.
As the biggest economy in the Middle East, Saudi Arabia has a retail market to match and it is rapidly growing.
Like-for-like sales in the kingdom increased last year by 6.4 percent to reach $96.3bn, according to AT Kearney’s Global Retail Development Index, and total retail space grew by 5.6 percent to 2.1 million sq m.
Retail experts operating in Saudi Arabia claim soaring population growth is fuelling the sector: the country’s population of 30 million is forecast to grow by 1.6 percent annually to reach 40 million by 2050 and the majority — 70 percent, according to official estimates — is aged 30 or under, a prime market for retailers.
Meanwhile, aggressive Saudisation policies are expected to bring more people into the workplace and boost consumer spending power.
“Everything about Saudi is big,” says Richard Morley-Kirk, Al Futtaim Group's Saudi Arabia country manager. “The population today is big and it’s going to get bigger.
“Riyadh is projected to grow to over 7 million by 2030 and Jeddah is set to grow from 3 million to almost 5 million. That’s big. It’s bigger than Sydney, bigger than Dubai, bigger than Berlin, and that’s only the second city.
“As retailers, we seek to make long-term investments in countries and we recognise that Saudi is the place to be.”
With a young population and high birth rates of around 500,000 per year, a key retail driver in Saudi Arabia is what experts call ‘household formation’.
“Three-quarters of the population is aged under 30 and that is prime buying territory,” says David Macadam, CEO of the Middle East Council of Shopping Centres.
“They want to acquire; they want to take advantage of the recreational opportunities malls present; they want to socialise and create homes.
“They are probably newlyweds so household formation is a big driver — think of the furniture and white goods needed in a new house, then all the other things that follow: nursery items, children’s outfits, and so on. There is no doubt that demographics play a key role in the success of the Saudi retail market.”
It is little surprise, then, that retailers are flocking to Saudi Arabia and real estate developers are responding with hundreds of thousands of square metres of shopping centre development in the pipeline.
For example, Al Futtaim Group is building the 250,000 sq m Al Diriyah Festival City ‘super mall’ in Riyadh in partnership with Kayannat Real Estate Company. The mall is to be anchored by Ikea.
According to Morley-Kirk, many global and regional brands have more stores in Saudi than anywhere else — they do not just focus on the three main cities of Riyadh, Jeddah and Damman.
“Landmark Group’s Centrepoint department store has 72 stores in 36 cities across the kingdom compared to 19 in Dubai,” he says, adding that Mothercare has twice as many stores in Saudi than it does in the UAE, as does H&M.
“Whichever category you look at — whether it is food & beverage, fashion, cosmetics — we are seeing positive like-for-like growth. As retailers we need critical mass to make a good return on investment, and in Saudi we can get this because of the sheer size of the country.”
Morley-Kirk says Al Futtaim, which entered Saudi Arabia two years ago, will have 74 stores across the kingdom by the end of this year and plans to quadruple that to 300 in the next five years, with a focus on clothing and sportswear.
“The Saudis want international brands,” he says. “The demand is phenomenal and some of those brands are just flying.”
He points to fashion retailer Ted Baker, which opened its first store in Riyadh last year and which, he claims, has had “phenomenal success”. Saudi Arabia accounts for 60 percent of Ted Baker’s international online sales business, he says, which has driven demand for bricks-and-mortar stores across the kingdom.
Morley-Kirk declines to reveal what proportion of Al Futtaim’s total retail revenue Saudi represents, but insists it is the focus of the group’s regional expansion and therefore the biggest market “by far” in terms of the amount of investment being ploughed into future growth.
Al Futtaim is even favouring Saudi Arabia as a test-bed for new retail concepts, when in the past it would have chosen more established markets such as the UAE, he says. The group plans to introduce to the kingdom by the start of 2017 four global food & beverage brands that are not currently operated anywhere in the Middle East. Morley-Kirk declines to reveal their names as memoranda of understanding (MoUs) have been signed but deals not yet completed. He remarks that the casual dining and coffee shop sector is “massively underserved” in Saudi Arabia at present.
Another reason Saudi Arabia presents growth opportunities for real estate developers is that half of its retail space remains “unorganised retail” — traditional souks, corner shops, markets — as opposed to formal shopping centres and covered malls.
AT Kearney says in its report: “Saudi Arabia is still largely untapped. Traditional markets (bakalas) still own much of the market so there remains plenty of room for modern retail to grow”.
The biggest mall operator in the kingdom is Arabian Centres, which has 17 malls with a collective GLA of 1 million sq m. It plans to open 12 new malls in the next three to five years and a total of 19 over the next decade, effectively doubling its floor space and adding modern covered retail to secondary and tertiary locations such as Jubail, Qassim and Dhahran, as well as the primary cities.
The first two malls in the pipeline are the 57,000 sq m Al Yasmin Mall in east Jeddah, which is expected to be completed in January, and the 55,000 sq m Al Hamra mall in north Riyadh, which is already 92 percent rented ahead of its planned completion in March.
Mall of Arabia Riyadh is intended to be the flagship mall in Arabian Centre’s portfolio and is scheduled to open in 2018. It covers almost 260,000 sq m, with a GLA of 163,000 sq m and is expected to house 336 retail stores.
In a statement issued in October, Arabian Centres reported that footfall had increased by 27 percent in the third quarter of 2015 compared with the previous quarter, attributed to “enhancement of the shopping and entertainment experience for visitors” and a further 7 percent increase during the Haj pilgrimage season.
Annual like-for-like footfall has grown by an average of 10 percent in recent years, CEO Simon Wilcock adds, and the company expects this to continue along with occupancy rates of around 97 percent.
“What we are expecting and seeing from the marketplace today is continued organic growth,” says Wilcock.
“Clothing and apparel is one of the fastest-growing retail sectors in Saudi Arabia, growing at roughly 11 percent per annum [according to research by Al Rajhi Capital], and we are seeing consumer spend up by 18 percent in the last 12 months and continued demand from international retailers to move into Saudi as a consequence.”
The country’s private wealth is expected to hit $2 trillion by 2019, according to BCG’s Global Wealth Report 2015.
“Look, the market is hugely underserved,” Wilcock says, adding that in Saudi Arabia there are just 3 sq centimetres of retail space per capita; in the US there are 3 sq m.
He also says the kingdom’s Saudisation policy will add 3 million additional workers to the market, including a growing number of female workers. “This represents a significant new revenue stream where ladies have their own incomes to play with, and it all means huge opportunities — helped by government efforts to diversify the Saudi economy away from oil and inflation rates at an all-time low of around 2.1 percent.”
Wilcock insists the drop in oil price has had “no impact whatsoever” on discretionary spending, and says retail market operators view Saudi Arabia as a stable environment.
“It is not subject to the sort of trending you see internationally and elsewhere in the GCC. For example, we are not subject to the vagaries of tourism and profound changes in economic condition.”
Wilcock refuses to comment on how average rents in Saudi Arabia compare with those in Dubai and elsewhere in the Gulf.
“Rent levels in Saudi are commensurate with the marketplace. We are here for the long-term and have positioned ourselves as so. We are not here to offload our investments tomorrow so we have rental rates that facilitate growth, confidence in banks and our ability to develop our product. You don’t do that on cheap real estate. Equally, you don’t overprice it because the risk is then that the retailers are unable to do business.”
During the recession, he says, many investors hit by the downturn in Dubai and elsewhere in the Gulf flocked to Saudi Arabia with the perception that rents and real estate would be very cheap and they could dominate the marketplace.
“What they actually did was buy cheap real estate and withdraw, then they came back recently and bought new real estate that properly reflects the changes, movements and developments in the sector.”
Still, commentators do not believe Saudi will ever present a direct rival to the UAE with its mega-malls and imaginative features such as indoor ski slopes and aquariums. A retail agent at one of the world’s biggest property consultancies, who asks not to be named, tells Arabian Business: “The market [in Dubai] is really very unique. While the Saudi retail sector is certainly growing quickly, I do not see it ever really challenging that of the UAE, which is heavily based on catering for tourists.
“The majority of tourists visiting Saudi are religious pilgrims who are not focussed on shopping.”
Wilcock agrees: “The way we develop our centres in the kingdom is more to do with looking at the indigenous population. An aquarium would not necessarily have a value-add in most of our community shopping centres where we are looking to engage customers three or four times a week.
“I’m sure Saudis will still visit the UAE to take a break, go to the cinema, to do those other aspects, and we wouldn’t want that to change.”
In September, the government announced it would ease restrictions on foreign investors to let them own 100 percent of retail businesses, which is expected to bring new players into the market.
While it may not beat the UAE for ‘wow’ factor and international appeal, Saudi Arabia is making a strong case to position itself as a lucrative essential in retailers’ Middle East portfolios.