Saudi rides the retail boom

Vivian Salama

• Last Updated: June 17. 2008 7:39PM UAE / June 17. 2008 3:39PM GMT

Just a few minutes walk from the Great Mosque of Haram, a shiny new mall will soon open, featuring the likes of Tiffany and TopShop.

To many, this is just another example of rampant globalisation. To others, it is a simple business opportunity.

Brands as diverse as Hugo Boss and Juicy Couture are jostling for a foothold in Saudi Arabia, leaving the kingdom caught in a dilemma between commerce and reverence.

"Some people see it as McDonaldising the world, putting a KFC or a Starbucks a few metres from [Masjid] al Haram, but we are traders and for us, Saudi Arabia offers a great opportunity," said Khalid al Sehaibany, the leasing director for Mohammad al Habib, a Riyadh-based developer.

As the religious centre for 1.2 billion Muslims and home to over 20 per cent of the world's proven petroleum reserves, Saudi Arabia has long trod a fine line between its desire for prosperity and attachment to tradition.

Now the kingdom is striving to foster an improved business climate as, like many oil-producing countries, it seeks to decrease its oil dependency. As with other GCC countries, retail has the potential to become a significant contributor to the economy.

While much attention has been focused on the UAE, analysts say that Saudi Arabia is on its way to becoming a regional retail leader. Worth US$6 billion (Dh22bn), the sector in Saudi Arabia holds second place regionally after Dubai's.

Some seven million square metres of new retail space are due for completion in the kingdom by 2010. Fuelled by these projects and a rapid population growth, sales are forecast to increase at a healthy five per cent per year until the end of 2012.

"This is a country with a lot of potential," said Naeem Ghafoor, the chief executive of Skyline Retail Services. "The people have money, are well travelled and well cultured."

As in most countries in the region, malls function as entertainment centres, providing people of all ages with a safe and culturally acceptable gathering place. The retailers reap the benefit of this guaranteed footfall. However, the enormous spending power of Saudi Arabia's 21 million citizens is the real force behind the sector's massive potential.

"Saudi consumers have the strongest purchasing power in the GCC," said Mr Sehaibany. "They have money and they like to shop. What more can the [retailers] ask?"

According to government estimates, the average Saudi per capita income has grown 10.6 times, from about 5,083 Saudi riyals (Dh4,978) in 1971 to about 55,216 riyals in 2006. As a result, the kingdom finds itself in a mad rush to meet the demand for bigger and better residential complexes and shopping centres.

Among the developers working on ambitious new projects, the UAE-based MAF Shopping Malls has teamed up with Al Ghazzawi Group, a Saudi-based developer, to build malls and mixed-used properties in several cities in the kingdom. Projects include the Jeddah Riviera Mall, at 1.1bn riyals, a 100,000 square-metre complex scheduled for completion in 2010. It will house more than 300 retail outlets, including Carrefour, MAF's hypermarket partner.

In typical GCC fashion, Saudi Arabia has been seeking to distinguish itself by building unusual retail developments. For instance, it is home to the world's only floating mall. Located in Al Khobar, the $1.6bn Grand Mall, developed by Khalid Al Shobily Group Real Estate Investment, is one of the largest mixed-use developments in the region.

The developer, Mohammed al Habib, has four malls under construction in different parts of the country. Among them are al-Manar Plaza, a 80,000 square-metre project in Al Madinah Al Munawarah, and Dereen Mall, at 60,000 square metres, in the Gulf city of Dammam - both of which are scheduled for completion next year. "I cannot even think of going into other GCC countries when there is so much demand in Saudi Arabia," said Mr Sehaibany.

Some retailers are finding new ways to capitalise on Saudi's unique cultural environment. Among them, the Swedish fashion group H&M recently opened its first women-only store, staffed exclusively by women. This also plays into the government's push to boost female employment.

"These malls are not just to make money," Mr Sehaibany said. "When you create different kinds of jobs you help to build up the economy."

As the economy diversifies, its non-oil sectors grow as a source of employment, particularly for Saudi nationals, 40 per cent of whom are under the age of 15.

"We have a very young population here, so when people talk about the retail potential of the country, these young people are the ones with the underlying buying power," said Mr Ghafoor. "Watch how much things change as this generation of Saudis grows up."

And change is already under way. Industry leaders say the recent easing of bureaucratic restrictions has already improved the business climate in Saudi Arabia. A report released by the World Bank and the International Finance Corporation, entitled Doing Business 2008, ranked the kingdom among the top 10 reformers last year, ahead of all other Arab countries for its ease of doing business.

According to the report, reforms include speedier trade procedures, with minimum documentation and shorter transit time for traded goods.

There are still major hurdles to cross before Saudi Arabia's business climate reaches the level of ease and transparency that the business community has long demanded. However, Mr Ghafoor believes that Saudi Arabia will institute the desired reforms in due course. "You can't look at the system from a Western perspective and say that it is slow," he said. "Reforms are taking place at their own pace but the important thing is that they are taking place."

The tourism sector, which contributes so much to the retail sector in other parts of the region, remains a challenging area for retailers.

Visa controls and a lack of infrastructure mean that visits are limited mainly to religious pilgrims. Mecca captures the bulk of visitors, receiving some nine million a year.

"Attracting tourists remains one of the biggest challenges for us [in the rest of Saudi]," said Mr Sehaibany. "Unfortunately we've seen a lot of people going to invest in developments in other countries because they got frustrated with things in Saudi Arabia."

Along with the challenges of working with a limited tourism market, industry insiders say the sensitivities involved in doing business in the holy cities demand careful planning and consideration.

"We have to be careful that what we build doesn't insult the Muslim people who are coming to pray," said Sajida Arwa Ismail, of the Jeddah-based firm, PMDC Property Managers. "But we also need to provide them with convenient things for when they finish praying," she added. "People, when they come for hajj or umrah, have certain time to do their [pilgrimage] and then they usually take a few days to go shopping,"

Epitomising the conflict between business and reverence, just 300 metres from the Haram, Islam's holiest site, stands the colossal Abraj al Bait mixed-use development, which is now partially completed. Spanning more than 91,000 square metres, the $1.5bn development, which will be managed by PMDC and built by the Saudi Bin Laden Group, includes a massive shopping centre, 21 towers, a five-star hotel, 19 four-star hotels and a commercial centre. At a cost of between $250 and $300 per square foot, retail space in the Abraj al Bait mall is among the most expensive in the region. Even though non-Muslims are forbidden from entering the city limits, critics of such developments in the holy city say that Western influences have crept in through various channels.

However, Mr Sehaibany believes that forbidding development is not the solution. "All we can do for these people is provide them with many options so if they don't like restaurant 'X' then they can go to restaurant 'Y'," he said. "I cannot close my country to the world just because the minority doesn't like it."


vsalama@thenational.ae