Markets Update: Al Othaim Markets has barged aside small corner shops to claim a large share of Saudi Arabia's retail market, but analysts say the stock still has plenty of room to grow.
Saudi retailer's use of foreign model pays off
Al Othaim Markets has muscled its way into Saudi Arabia's retail industry after utilising a proven strategy borrowed from western retail giants such as Wal-Mart and Tesco.
The grocery and consumer goods retailer, which is based in Riyadh, has reaped big rewards from taking market share from corner shops, as the kingdom's retail industry begins to favour bigger organisations. But though small stores may be losing out from the company's rapid expansion, Al Othaim's profits are delighting investors.
The company's stocks have risen 22.7 per cent per cent to 95.75 riyals each so far this year, compared with a slide of 8.6 per cent on the benchmark Tadawul All-Share Index.Growth is expected to continue as Al Othaim has "at least two years of double digit growth", analysts from Al Rajhi Capital wrote in a research note.
"Driven by rising population, improving education, and changing lifestyle, we expect the retail sector in Saudi Arabia to continue growing," the report said.
"Al Othaim has a very strong position in the grocery market."
Al Othaim's sales are expected to rise 16 per cent next quarter, making it a good defensive play in a slowing economy, according to analysts at NCB Capital. "The key driver enabling this growth is the structural shift in the grocery retail market in [Saudi Arabia], which is seeing organised retailers taking market share from corner stores," Farouk Miah, an analyst at NCB, wrote in a research report.
"With economic growth for the global economy expected to slow in 2012, a repercussion of this may be lower soft commodity prices and hence lower [cost of goods sold] for Al Othaim," Al Rajhi Capital added. However, Mr Miah said some caution was warranted regarding a takeover of the 86.4 per cent of Al Othaim Real Estate Investment and Development Company it does not already own.