Sleeping giant awakens

Despite internal security issues and a fluctuating stockmarket, Saudi Arabia’s economy continues to enjoy strong gains thanks to a thriving consumer market.

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By  Michael Thorne Published  July 4, 2006

|~|saudi-200.gif|~|Riyadh’s iconic Kingdom Tower dominates the city’s skyline. The Saudi capital is leading the country’s economic charge in the Middle East.|~|For many consumer electronics vendors Saudi Arabia is the most significant market in the Middle East. Undoubtedly, the country boasts a heady combination of consumer purchasing power and population size that should easily make it the most lucrative market in the region. However, Saudi’s consumer electronics sector has been slower to develop in many cases than neighbouring countries, such as the UAE, Bahrain and Kuwait, due to a number of factors including its geographical size, demographics and a distribution sector that has only recently begun to streamline the route-to-consumers in the Kingdom. Recent developments including the emergence of thriving power retail and hypermarket sectors, the planned development of a series of economic cities, and high international oil prices, have all served to buoy the market. Saudi Arabia’s large geographical size and diffused population leads to added challenges for vendors looking to cash in on consumers’ spending power. The country centres on three major consumer zones: the central Najid region, focusing on Riyadh as the capital; the western Hijab region, with Jeddah forming the core economic base, while also containing the holy cities of Mecca and Medina; and the oil rich Eastern Province with key cities Dammam, Dhahran and Al Khobar. Each region has a different consumer base and this leads to differing buying trends that distributors must consider when targeting the market. “Because of this, operating a distribution network presents key challenges in terms of logistics and consumer requirements,” says Raed Nasser, managing director of market research firm, GfK Middle East. “Consumer demands differ from Riyadh to Dammam or Jeddah, for example. This is reflected in the approach of retailers in the country that are acutely aware of the market trends.”||**||Seasonality key|~|Fujimoto200.gif|~|Takuzo Fujimoto, Sony GM sales & marketing for Saudi Arabia.|~|Saudi’s large geographical footprint and the impact of seasonality are two factors that vendors and distributors must be aware of in order to effectively service the market. “Seasonality is a big factor in Jeddah with all the pilgrims travelling to Mecca and Medina, most of which pass through the city,” Nasser adds. “They often take back goods, including many consumer electronics items, to their home countries. “Our research suggests this has a major impact on the domestic market. By comparison, you could say it has a similar impact as the Dubai Shopping Festival initiative has on the UAE channel sector.” Many Saudi consumers are also highly aware of technological trends, and seek the latest and greatest consumer electronics products as soon as they are released to market. This presents a prime opportunity for progressive vendors keen to ensure a high turnover of stock. “Consumers are becoming more aware of what technoligies are available in global markets, particularly younger consumers,” says Sony’s marketing manager for Saudi Arabia, Vikram Salvan. “Given that 43% of the country’s population is under the age of 15, Saudi presents a golden opportunity for consumer electronics vendors.” Takuzo Fujimoto, Sony general manager, sales and marketing for Saudi Arabia, claims the country accounts for almost 30% of Sony’s total business in the Middle East, and he says this figure is rising rapidly. “We are targeting double digit growth this year and this has been the trend for some time,” he says. “New retail players have sprung up across the country, such as power retailers and hypermarkets. It is essential that we collaborate with these businesses to increase our business in the country.” Fujimoto adds that having a distributor with a solid understanding of the Saudi Arabian market is key to success, given the market’s at times complicated nature. “We rely entirely on our distributor, Modern Electronics, for channel management,” he says. “The success of this relationship has played a key role in Sony gaining a 40% share of the Saudi Arabian audio-visual sector, excluding mobile phones and computers.” The consumer electronics and mobile industries have welcomed the recent announcements of expansion plans by a number of power retailers and hypermarkets as well as the establishment of two new retail chains in the Kingdom. Fawaz A Al Hokair Group, which operates Géant Saudi Ltd., will launch a new consumer electronics retail chain known as ‘Best’ next month, as reported in the May issue of ECN. The stores will be similar in approach to Best Buy, America’s largest consumer electronics chain, says Géant Saudi Ltd. CEO Mohammed Adil. There are other developments afoot in the Saudi retail market that will further impact the consumer electronics channel. eXtra, Saudi’s largest existing dedicated consumer electronics retailer, has announced extensive expansion plans. “We will launch three stores this year in Riyadh, Jeddah and Al Khobar, adding to the five we already have,” eXtra marketing manager Sherif Tawfic tells ECN. “We plan to expand our operations internationally in three to four years, probably starting with countries such as the UAE, Egypt and Lebanon.” ||**||Retail market heats up|~|Akel200.gif|~|Ayman Akel, general manager of BenQ’s Saudi Arabian distribution partner Rodana Digital.|~|Meanwhile, Al Bandar Trading Group will launch the e-Max consumer electronics chain across Saudi next month. Rival S2 has also negotiated a franchise deal with UAE-based Al-Futtaim Group to establish Plug-Ins Electronix stores across the country. Hypermarket retailers Carrefour, Geant and Saudi-based Hyper Panda have also announced ambitious expansion plans in Saudi Arabia. Carrefour opened a new hypermarket outlet in Jeddah in April and plans to unveil new stores in Al-Khobar and Riyadh in September and December respectively. “The main Saudi Arabian cities are our priority, however we have also worked to secure a position in the secondary markets of Hofuf and Medina,” Carrefour Saudi Arabia CEO Eric Poiret tells ECN. “Our market research identified these regional locations as boasting major growth potential. “Saudi Arabia is one of the fastest growing economies not only in the region but worldwide; it is experiencing phenomenal urbanisation and population growth rates. Our rollout strategy aims to maximise our reach in the major cities, keeping in mind the overall direction of the country’s retail sector,” Poiret adds. “The reaction so far has been positive and we believe that’s a direct result of the low prices and comprehensive product range we offer. “We believe the majority of Saudi Arabian consumers are turning away from traditional niche retailing in favour of the ‘everything under the same roof’ hypermarket concept.” Aymen Akel, general manager of BenQ’s Saudi Arabian distributor, Rodanna Digital, says that hypermarkets have quickly become the company’s most important channel to market in Saudi Arabia. “Hypermarkets have increased their presence in Saudi Arabia dramatically in recent years,” he explains. “We believe that strategically, our best option is to hitch our fortunes to these retailers. They come to us with big money and place bulk orders for our products – much larger than any other retailers we typically deal with. “The Saudi Arabian market is generating strong gains for BenQ and most other vendors and we feel that many more key players will increasingly invest in the country because of its potential.”||**||Slim channel margins|~|_X200.gif|~|Sherif Tawfic, marketing manager of Saudi Arabia’s largest consumer electronics retailer, eXtra.|~|However Nidal Al Zamil, electronic section manger for Al-Asasyah, Sanyo Electronics’ exclusive agents in Saudi Arabia, says that margins are generally diminishing as a result of the impact of hypermarkets and the entry of new players into the retail sector, which is forcing many distributors to reduce their wholesale prices. “The business has become very competitive,” he says. “Now when new products are launched on the market they are rarely priced higher than superseded items.” What sort of impact are these developments having on the consumer electronics channel? Ultimately it should see the consumer market being targeted more effectively, a similar process that has occurred in the UAE but without the added complications posed by the reseller market. Different stores with unique retail concepts will target niche consumers enabling distributors to manage their inventories and cater to the needs of specific segments of the market, from high-end specialised to low-end bulk goods purchases. “The consumer electronics channel in Saudi Arabia is not fully developed and the major vendors are rushing to consolidate their positions in the sector,” explains GfK’s Nasser. “The potential spending power of the country’s consumer base makes it one of the most appealing markets in the Middle East. “We expect, based on current market trends, that the increasing influence of hypermarkets and power retailers in Saudi Arabia will replicate trends seen in the UAE with the rise of shopping malls. This trend will, however, occur on a larger scale in Saudi Arabia.” The division of spending patterns between Saudi’s local and expatriate populations also casts similarities to the UAE, however the Saudi consumer market is less affected by the transient labour force synonymous with its GCC rival. Still, terrorist attacks within the Kingdom have led to many well-paid ex-pats fleeing the country. “Terrorism has had an impact on the economy, but the effects have been largely limited to immediately after the attacks,” claims Nasser. “Ex-pats do not account for a large percentage of the population by any means. They also have their own distinct purchasing patterns.” The recent announcement that Saudi Arabia would develop a series of economic cities could glean interest from consumer electronics vendors interested in establishing manufacturing bases in the country. A number of players in the IT industry, including HP and Bitcom, have already invested in assembly plants, looking to target the country’s commercial sector. Similarly to Egypt, Jordan and the UAE, the continued development of logistical infrastructure and concessions relating to Saudi’s complex trading laws could attract greater international investment aiding the country’s economy. The Saudi domestic market would thrive on such investment, while the country is also well located to provide foreign vendors with access to most Middle Eastern markets. The country’s recent ascension to the ranks of the WTO is also an encouraging factor for multinational investors. However, Saudi officials will have to work to assure these potential investors of its continued political and economic stability. The ongoing threat posed by terrorism and the recent stockmarket crash highlight the inherent instabilities affecting the country’s economy. Ultimately, the most encouraging sign for those involved in the country’s consumer electronics channel is its rapidly developing retail economy. An effective catalogue of point-of-sale partners, with clear market strategies and inventory provisions should help to clearly define the various routes to market for consumer electronics vendors hoping to gain a share of the lucrative consumer market.||**||

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