Focusing on the Kingdom's retail real estate market, the report outlines that whilst Saudi Arabia is subject to many of the same issues impacting the retail sector at the global and regional levels, the local market is characterized by a number of unique challenges.
The report highlights the considerable market potential resulting from favorable demographics and domestic demand but outlines how this opportunity is constrained by a number of unique challenges including seasonal aspect of religious tourism, market concentration, recruitment issues, supply chain constraints as well as cultural limitations. The report concludes that while retail spending continues to grow rapidly, new retail space is being developed to the point that there is retail saturation in some areas which is leading to a growing polarization of the winners and losers.
Saudi Arabia is the largest and one of the fastest growing retail markets in the MENA region and continues to attract strong interest from retail brands from across a range of categories as they respond to the many opportunities available, principally driven by the Kingdom's relatively youthful population. A number of global brands as well as "up and coming" retailers from the UAE, Lebanon, Turkey and Asia are currently looking to increase their presence in the country. Responding to this strong demand, the amount of retail floor space in Saudi Arabia has increased rapidly, with the area of mall based retail space increasing by almost 80 percent in Jeddah and 65 percent in Riyadh since 2005.
This rapid development has created challenges as well as opportunities as parts of the market are increasingly reaching saturation point. As the sector continues to mature some of the older malls are now starting to lose market share to more modern centers that offer international shopping environments in terms of brand mix facilities, and amenities along with complementary leisure components. This means that some centers are starting to struggle and now require repositioning or possibly even conversion to alternative uses.
David Macadam, head of Jones Lang LaSalle's retail team in MENA, said: "Despite its unique challenges, Saudi Arabia remains an exciting retailing opportunity. Retailers across the spectrum are looking to enter this market to cater to a large and growing domestic demand, driven by its sizable young population. Those retailers and retail centers that can create a uniquely Saudi experience will be the ultimate winner as they will be able to fully capitalize on the market potential and increasing levels of spending power available to the Kingdom's consumers."
He said: "We also see tremendous opportunities for retail asset managers in Saudi Arabia. A key take away from our report is that retailers and mall operators need to work more closely together to create environments that provide an enjoyable experience rather than just a shopping trip. With the market becoming more competitive, consumers and retailers have a greater choice and centers must continue to evolve to match consumer demand or face becoming obsolete."
Macadam said there are opportunities for more mixed use projects that combine retail with offices and hotels such as the Jabal Omar project in Makkah and the King Abdullah Financial District in Riyadh.
The Jones Lang LaSalle report highlights a number of key characteristics that contribute to the unique nature of the Saudi Arabian retail market, each of which will have implications on both existing and proposed projects. These characteristics include:
Cultural considerations
Visiting malls has developed into a favorite Saudi pastime as there is a limited range of entertainment venues and public spaces in the Kingdom. The attraction of indoor air conditioned malls is further enhanced by the harsh summer weather conditions. Although these factors represent an opportunity for the growth of the shopping and indoor leisure/recreation sector, the retail market is constrained by cultural factors such as the inability of malls to offer cinemas which are a mainstay of their entertainment offer in other markets.
Women represent a significant opportunity for retailers in Saudi but the ease of shopping is reduced by current restrictions on their ability to drive. Another unique cultural consideration is the limitations upon single men visiting malls during week-ends where access is only available to families. This has resulted in the growth of street retail and showroom formats, especially for categories targeting single men such as electronics, menswear, sportswear, watches, fast food, etc.
Importance of religious tourism
The 2.5 million pilgrims performing Haj each year (with many others visiting Saudi Arabia to perform Umrah during other times of the year) provides a major boost to the Saudi retail market as well as a challenge due to its extreme seasonality. The Makkah and Madinah markets have traditionally been underprovided with retail facilities but large new mixed use developments are now being built around the Grand Mosque incorporating major retail components. While Makkah and Madinah will be the primary beneficiaries of retail spending from the millions of pilgrims that flock there for religious occasions such as the Haj and Umrah, Jeddah is the principle international gateway for such visits. Many of the pilgrims on their way to Makkah and Madinah spend a few days shopping in Jeddah after their journey and this provides a huge boost to the city's retail sector that is not currently being fully exploited.
Concentration of franchisors and operators
A handful of groups control the vast majority of the retail brands in Saudi Arabia, with some of the same groups being among the largest shopping center developers and landlords in the country. This unique situation creates both barriers to entry for aspiring independent retailers and also potential conflicts of interest in the relationships between retailers, landlords, investors and lenders. This concentration element has resulted in many malls ending up not only carrying the same brands, but also looking exactly the same which is increasingly becoming unsustainable.
Recruitment
The ability to attract and retain a knowledgeable and qualified work force is becoming a key differentiator of retail brands globally, so this is not a uniquely Saudi issue. In Saudi Arabia the human resources challenge is increased by workplace segregation, complex labor regulations, the unique permit system for foreign labor, and skills gaps among local and expatriate candidates. The underlying theme here is that human resourcing restrictions, whether gender based or otherwise, will pose a challenge in attracting the right talent across the entire retail sector.
Logistics and supply chain management
The ability of retailers to import goods into the country and distribute them efficiently to their stores is currently a challenge. While there have been improvements in these areas in recent years, the supply chain infrastructure in Saudi Arabia remains less advanced than in other markets in the region. The government recognizes the importance of connectivity and has allocated record amounts to infrastructure and transport projects.
"Shopping centers in the Kingdom will need to offer activities beyond shopping to sustain or maximize consumer footfall. Some of the unique cultural challenges cannot be addressed directly by retailers or mall operators but there remain opportunities to 'add value' to the overall shopping experience and differentiate both brands and malls more effectively. Proactive asset and property management is required to overcome a feeling of 'sameness' caused by the concentration of franchisors and operators. It is important that the quality and design of a shopping centre creates a sense of belonging and has a 'soul'" Soraka Al-Khatib, co-head of Jones Lang LaSalle, Saudi Arabia, said.
"While the fundamental economic and demographic drivers within Saudi Arabia remain attractive and suggest the overall retail market will continue to expand over the coming years, retail stakeholders will have to have particular regard to the unique characteristics of the Saudi market. Their ability to adapt to these factors will, to a large extent, determine the success of specific brands as well as specific shopping centers in the increasingly competitive market," he added.
