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Fri 14 Dec 2012 01:04 PM

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Saudi retail sector seen facing wage pressures

NCB Capital report says recent changes to Saudization policy could hit retailers' margins

Saudi retail sector seen facing wage pressures
Middle East shopping, Middle East retail, GCC retail

Recent amendments to Saudi Arabia's Saudization jobs policy are likely to hit the margins of retailers operating in the Gulf kingdom, a new report has said.

The outlook of the Saudi retail sector remains strong with macro as well as micro factors supporting growth, said NCB Capital.

Volume expansion through opening stores, margin support from economies of scale, and consolidation of fragmented markets are key drivers of growth.

But NCB Capital also warned that wage inflation pressures, execution risk and competition are key concerns for the retail sector in the Gulf kingdom.

It said the recent amendments to the Saudization programme called Nitaqat "will continue to lead to wage inflation and impact margins" of the Saudi retail sector.

The latest amendment in November increased the cost of foreign work permits to SR200 per month from SR100 per year.

"We believe the retail sector will be one of the most affected by Saudization rulings given the relatively low percentage of Saudis working at these companies," said Farouk Miah, head of Equity Research at NCB Capital.

"However, we acknowledge that the effective minimum wage rule of SR3,000 a month for Saudis working in the private sector and increased hiring of Saudis will support retail spending, particularly in the discretional sector," he added.

NCB Capital also said it believes that while the e-commerce potential is significant for Saudi Arabia, any meaningful growth is at least 5-10 years away.

"The primary reasons for this include the poor postal system in Saudi Arabia, low credit card penetration, and the importance of shopping outings for many Saudi families," said Miah.

Despite the obstacles, NCB Capital noted many retail companies are investing in their online presence.

NCB Capital also said it expected Saudi retailers such as Extra, Jarir, Al Hokair and Al Othaim to aggressively expand store count and revenues.

"For Al Hokair, growth in the mid-level branded fashion segment should remain steady with significant potential in the value-segment and expansion abroad," the report said.

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