Chairman of retail giant says consumption stabilising after government austerity policies
The slump in Saudi Arabia's retail sector may be close to ending as consumption starts to stabilise after shrinking because of low oil prices and government austerity policies, the chairman of one of the kingdom's biggest retail chains said.
"We think the sharp decline is fundamentally over, or will be over by the end of this year," said Muhammad Alagil, chairman of Jarir Marketing Co, which focuses on selling consumer electronics, books and office supplies.
Next year, the company may be able to grow both profit and sales at rates in the high single digits or low double digits, he added - though much of that growth would come from opening new stores rather than increasing business at existing outlets.
Saudi Arabia faces its most difficult economic times in a generation as the government cuts spending in order to curb a huge budget deficit caused by shrunken oil revenues. The retail and wholesale sectors, including restaurants and hotels, shrank 0.6 percent from a year ago in the second quarter of this year.
Jarir's net profit edged up 0.7 percent from a year earlier to 220 million riyals ($58.7 million) in the third quarter as its sales dropped 1.0 percent to 1.52 billion riyals. Alagil said low oil prices were hurting his stores' business not merely in Saudi Arabia but also in other Gulf Arab economies.
"If it falls 15 percent in Saudi, it is falling 10 percent at our stores elsewhere in the Gulf," he said in an interview at the Reuters Middle East Investment Summit.
Alagil said there was uncertainty in the Saudi retail sector because of cuts to the allowances of public sector employees announced last month and the risk of more austerity steps to follow. Authorities have said they plan to introduce value-added tax, at a rate of about 5 percent, in 2018.
"It is very difficult to be clear about how much the impact of these steps will be. Nobody is really sure."
Reflecting that uncertainty, Jarir's share price has plunged 45 percent this year to 87.00 riyals, a level which Alagil described as excessively cheap. He said he didn't exclude the possibility of a share buy-back, although that would depend on the board's decision.
Alagil said there were several reasons to think the worst of the slump was ending. One reason was that many people had begun dipping into their savings to sustain spending.
Also, consumer spending by many millennials - young adults in the late teens, 20s or early 30s - was remaining quite strong because they had little debt or family obligations.
While Jarir's sales of office supplies fell at annual rates of 20 to 25 percent earlier this year as companies cut back, especially in the embattled construction industry, the pace of decline has slowed substantially, Alagil added.
If consumption stays sluggish next year, it could trigger a shakeout in the retail sector that allows Jarir to gain market share, he said; the company plans to open four new stores in Saudi Arabia and two in Kuwait next year, and is sticking to a previously announced plan to have 60 stores by the end of 2018 compared to 44 now.
"Because a lot of people think the situation is bad, it is an opportunity to push the envelope for growth," Alagil said, noting that the 1980s, another period of low oil prices which hurt the Saudi economy, was a time of growth for Jarir.Saudi Arabia news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.