SAUDI ARABIA. In a research paper covering the retail sector and the Kingdom's leading fashion retailer Al Hokair (Fawaz Abdulaziz AlHokair & Co), Global Investment House says the Saudi apparel retail industry is one of the high-growth markets in the Arab region especially in the women and children segments.

The apparel business grew rapidly over the last few years as people became more fashion-oriented. The growth in the sector is attributed to the high young population and increasing purchasing power in the backdrop of the recent economic boom. Growth of this sector is evidenced by the growth of fashion retailers.

In fact as per Colliers International, Riyadh has 2.5 million square metres of gross leasable shopping mall space in the city, compared to 1.1 million in Jeddah and 1.7 million in Dubai as of 2007.

Considering the clothing style in Saudi Arabia, men mostly wear the traditional white thobes along with the red shemaghs. Women on the other hand, wear the black abayas and tarhas for everyday use. Despite the fact that all women wear the traditional abaya on top of their clothes, underneath the abaya, Western dress is most common. Western dress is adopted more by the younger Saudi generation outside of school. Non-Saudi adults usually wear the Western dress code.

The market for apparel sales in Saudi Arabia is still made up of varied products not representing global brands in addition to unbranded items, which are generally imported from Asia. However, with the maturing of the market, there has been a shift towards branded apparel sold through international retail chains. Sales of braded apparels are estimated to be around 25% to 30% of total apparel sales. This share continues to increase as evidenced by the expansion of the number of outlets and the number of malls specialised in international retail chains, with these modern malls spreading to smaller cities and towns.

The market share of branded apparel has witnessed a steady increase in the last decade due to changes in consumer tastes and converging global fashion trends. Saudi consumers have become increasingly sophisticated, demonstrating brand awareness and brand loyalty, demanding quality service and value for money and carefully looking out for new product lines from their preferred brands.

The Saudi Arabian apparel market is heavily reliant on imports especially when it comes to fabric, cloth, accessories and ready-made Western style clothes. These imports come from all over the world depending on price range and quality. There is a noticeable distinction and a clear line between the high-end and low-end types of clothes. European and American clothes are usually classified as high-end and targeted towards the upper social class, whereas, garments imported from the Far East especially from China offers much lower prices and quality and is geared towards the lower social class, which represents the largest section of the pie. Saudi manufacturers, on the other hand, mainly supply military uniforms and traditional abayas.

Apparel outlets in Saudi Arabia range from exclusive boutiques carrying true haute couture and top international designer labels to souq stalls. In Saudi Arabia, Riyadh is currently the largest market for retail apparel in Saudi Arabia accounting for around 40% of total apparel sales, and is followed by Jeddah (around 30%) and Dammam/Khobar (around 20%).

The growing presence of international branded apparel in these big cities has contributed to growth in branded apparel sector. Jeddah is larger on the mid-tier segment due to the large number of pilgrims it receives during the Hajj and Umrah seasons, while Riyadh is more important for the top end of the market due to the presence of a larger base of wealthier consumers.

Dammam/Khobar comes in the third place, although it does gain some seasonal importance during Hajj and Umrah seasons when pilgrims coming from Bahrain and Kuwait stop over for shopping on their way back form the pilgrimage. Though going forward the smaller cities are expected to grow at a higher rate, the larger cities like Riyadh, Jeddah and Dammam will continue to contribute bulk of the sales, according to Global Investment House.

Market segments

The major market segments in retail apparel include womenswear, footwear, childrenswear and menswear.

Some segments of the market like womenswear are more developed whereas other segments are yet to catch up. Menswear represents a small segment of the ready-made clothing sector in comparison to womenswear and childrenswear.

Women and children are the majority shoppers in the apparel market. They are mainly targeted by providing excellent service, wide variety and quick turnover of products and regular promotional campaigns to win their loyalty and regular visits. The smaller segments are expected to grow at a higher rate in the coming years relative to the mature segments due to their lower base. This growth will stem from the effective targeting of hitherto underdeveloped sectors, namely eyewear and menswear, while the more mature areas of womenswear and childrenswear will remain the backbone of the market and continue to experience healthy growth.

Saudi Arabia is a major market for women and children’s clothing. The market is segmented between the high-end branded sector, the mid-market branded sector and the lower-priced market. The high-end and mid-market sectors of the apparel market are dominated by imports from Europe and the United States. The lower end of the market is characterised by imports from the Far East and South East Asia, some of which are styles copied from European and American brand names.

Womenswear is the largest retail apparel segment in the Saudi market. Womenswear accounts for around half of the total branded retail sales, and is considered the most mature segment of fashion retail. In the Womenswear, casual and evening dress accounts for the major share. Womenswear has been the main driver of growth of branded retail apparel sales over the past few years. The sector is highly competitive due to the constant flow of new brands and quick stock turnover in existing chains. The sector is well-segmented with international brand representation in market niches such as out size clothes, lingerie, accessories, teens, and maternity.

Footwear is the second largest sector after womenswear, accounting for around one-fifth of apparel sales. The footwear segment is well segmented with shops covering a range of prices, branded and unbranded merchandise. For men, while spending on clothing is low due to a continuing preference for traditional clothing, spending on shoes and accessories is higher.

Sales of childrenswear are high in Saudi Arabia due to the young population and the high birth rate. Childrenswear account for around 15% to 20% of total sales. The influence of global media on the young population (representing around half of the total population in Saudi Arabia) is also a driving factor. This segment is becoming more fashion-oriented and brand-conscious, demanding the presence of ophisticated international brands to satisfy their changing tastes and styles. In the childrenswear segment, babywear, newborn, and pre-natal clothing are all relatively under-penetrated.

Menswear is a minor segment in the Saudi fashion retail market accounting for less than 10% of total apparel sales. Men still prefer to wear the national traditional clothing at home, at work, and in public. With the majority of the Saudi population at a young age, a shift in consumer tastes may be the catalyst for the future growth in this segment.

Economic growth an important driver of retail sector

The Saudi economy has witnessed an economic boom over the past few years thanks to the high crude oil prices, which have risen from US$25 per barrel in 2003 to exceed US$130 per barrel in 2008. This oil boom led to the increase in government revenue and expenditure, which in turn boosted the economy. Furthermore, the government is investing revenue surplus in building infrastructure and growing the manufacturing and services sectors in the long term. This in turn will help in preserving the country’s economic strength for the upcoming years.

The impact of a healthy economy on clothing spending is notably positive. With higher levels of disposable income, and consumer confidence, Saudi consumers are spending more money, particularly on non-necessities such as mass market branded clothing. Continued growth in GDP for the short to medium term will have a positive affect on the growth of purchasing power for consumers.

Government initiatives like Saudization are expected to have a positive impact on retail sector. Saudization will impact the composition of workforce and therefore will increase income levels for Saudis nationals. This in turn may increase expenditures on consumer products as a whole and primarily expenditure on clothes and accessories.

Shopping malls a growth enabler

The construction boom of residential, commercial, and leisure projects, which has taken place all over the kingdom in the last few years, has led to the availability of large retail space. The rise of the modern shopping malls in Saudi Arabia has been taking place at a fairly steady rate over the last ten years, with malls becoming increasingly sophisticated. Openings of numerous shopping malls and the ease and convenience this has provided shoppers with has contributed to growth in branded apparel sector. This trend is expected to continue in the near future with the openings of new shopping malls, providing retail companies with thousands of square metres to do more business in Saudi Arabia. Mall development is likely to be extremely important to the future of the branded fashion market. Mall development is expected to spread to smaller cities during the forecast period.

Competitive scenario

The branded retail apparel market is quite competitive in Saudi Arabia. The competition is further set to as more business families who were quite successful in other retailing areas are actively seeking to enter this potentially lucrative market.

The big players in this sector focus on acquiring franchise agreements with well-known international suppliers. Currently there are four large companies dominating the branded apparel market, each representing a considerable number of international franchises: Al Hokair, MH Alshaya, Al-Sawani and Nesk Group of Trading Projects (Al Jedaie).

In addition to these, there are a few smaller companies with just less than five international franchises. Brands offered by Al Hokair include Marks & Spencer, Zara, Promod, Monsoon and others. Brands offered by Al-Sawani include Guess, Esprit, Levi’s, Fossil, Benetton. Brands offered by MH Alshaya include BHS, Debenhams, Mothercare, River Island and NEXT. Well-known brands of Nesk include Mango, Gerry Weber, OUI, Taifun and Okaidi.

Additionally, an important segment in this market is the small retailers who own one or more shops. With their low overheads, these retailers are able to offer very competitive pricing on their products especially in the medium to low category.

The competitiveness of the market is shown in the results of AlHokair for 2007-2008. The gross margin of the company has come down over the past few years. In the past couple of years, the gross margin has been impacted due to decline in US Dollar (to which Saudi Riyal is pegged) against major currencies. With the weakening of US Dollar against major currencies in recent years, the profit margin of the company has been impacted. This is due to the fact that like the other major retailers, AlHokair sources a significant amount of merchandise from the countries whose currencies have gained against US Dollar, notably the Euro.

Strategic locations

One of the most important factors in fashion retail business is location of the stores, and relations with the mall owners. In Saudi Arabia, there is a high demand for quality retail spaces. AlHokair has been able to position its stores in prime retail locations on premier commercial streets, and in upscale shopping centres. This has been helped by the fact that the sister concerns of AlHokair are engaged in the business of shopping mall development and management. Therefore, AlHokair has been able to secure a good number of strategic locations in upscale malls.

Fawaz AlHokair Group (which consists of AlHokair and other companies of the group) owns and operates over 5 million square feet of premium retail real estate across the Kingdom. The malls owned by Fawaz AlHokair Group include Mall of Dhahran, Salaam Mall, Aziz Mall, Khurais Plaza, Sahara Plaza, Al Nakheel Plaza and Ibn Khaldoon Plaza.

Mall of Dhahran is one of the largest malls in Saudi Arabia’s Eastern Province with Gross Leasable Area (GLA) of 150,000 square metres. The upcoming malls of the Group include the Mall of Arabia, Al Noor Mall, Yanbu Mall and Al Ehsa’ Mall. Mall of Arabia in Jeddah, which will open in September 2008, has a GLA of 185,000 square metres (including an extension). This will give a big boost to AlHokair as it plans to open a good number of stores in Mall of Arabia.

Changing nature of fashion

One of the key risk features in the fashion retail business is its constantly changing nature. The designs, which are widely accepted in one season, might be outdated in the next season. This entails close understanding of the fashion sense of people. Due to this changing nature, one of the biggest challenges faced by the fashion retailers is to sell its products. Redundant stock at planned levels ties up capital and affects the potential growth of the business. Retailers have to remain committed over the years to sell merchandise within the season it is purchased.

Another market risk is the launch of a new concept/product, which is generally characterised by relatively high start-up costs. The success of new products introduced depends on the ability to anticipate the tastes and habits of consumers and to offer brands that appeal to their preferences. However, there are possibilities that some brands may not perform up to the expectations or sales may decline over a number of years, due to competitive activity or lack of partner support. This poses a significant risk for the franchisee given the fact that they have invested in the brand. 

The key success factors in the market include the ability to bring new brands into Saudi Arabia and to open the stores in strategic locations, and iin particular the new upscale malls. Some big brands like Gap, M&S and Banana Republic still have a long way to go with growth in the Saudi market, which should be reflected in performance in the coming years. The local franchise partners also continue to develop their infrastructure in terms of management, logistics and technology. In view of the macro-economic trends, we can expect the market to continue to grow rapidly, though with greater divergence between the placing of the high end and low end brands, and growth in the middle.

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