JEDDAH, 4 July 2005 — Even though franchising is seeing tremendous growth in Saudi Arabia it continues to face challenges in terms of financing, marketing and management. Young Saudis looking for self-employment or start-up businesses are venturing into franchising, but frequently they lack funding, market research and management skills.
At a seminar organized last week by the small businesses development center at the Jeddah Chamber of Commerce and Industry on financing investment opportunities, it was announced that talks are under way between Commercial Franchise Company and the Saudi Arabian General Investment Authority (SAGIA) to agree on establishing a loan guarantee company. With most of the young Saudis applying for loans to start their business do not have collateral to secure the loan, the idea is to assist them get the loan by acting as guarantor for the lender.
Talal Badkook, chairman of Commercial Franchise Company, explained that the new company will act like an insurance company. The loan applicant would agree to pay an annual fee for the duration of the loan he receives from the financing institution and the company would then guarantee repaying the loan to the financing institutions. The proposal is being studied by SAGIA but some experts are already predicting trouble for the venture.
They cite the lack of laws and regulations concerning franchises and the undefined legal procedures in settling commercial disputes. These concerns, however, are being addressed especially with the recent approval by Crown Prince Abdullah on reforming and developing commercial and legal transactions.
According to franchise expert Sari Hamawi, the size of the franchise market in Saudi Arabia is between SR3 billion and SR5 billion. There are 200 foreign franchises but only 20 local ones, but they have the potential to reach 100. Franchising opportunities, which already exist in the food sector — especially restaurants and fast-food — can be expanded in many other sectors including apparel, laundry and dry cleaning services, automotive parts and servicing, hotel and motel services, mail and package services, printing and convenience stores. Some emerging ideas have also proliferated here in the recent years, especially fitness centers, vitamin stores, language and IT training, and real estate brokers.
Franchising is a growing sector in the Kingdom but its success in the Saudi market depends on finding the right franchiser and location. Furthermore, knowing what the Saudi consumer likes is uncertain and so is knowing how to market a good brand.
Just because the young entrepreneur favors a certain brand or thinks that a certain concept popular abroad will catch on in the Kingdom is no guarantee that the business will succeed. He needs to carry out market research and know his target customer well; this kind of service is still relatively primitive here and most young businessmen are not always keen on spending time and money on proper research and advertising.
The success of any franchise also depends on training, support and staff. While franchising offers investors a proven concept and tested business model, the business will not run on its own. In addition to the product and market conditions, its success will depend on the businessman’s managerial skills.
Part of the JCCI’s role in supporting small and medium businesses is in providing training opportunities and workshops in starting and managing a small business as well as connecting the young businessmen and women with the franchising companies and financing institutions.
