Prospects of Using Smart Technology in the Saudi Retail Sector

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1 Executive Summary This report is prepared with an objective to highlight the key accelerator to the pre-determined growth factors (i.e. favorable demography, economy and so on) in KSA retail sector. The historical evolution in the Kingdom s retail sector was mainly attributed to the government s sincere efforts to upgrade local living standard, favorable demographic and economic factors. In addition, these factors led the local retail sector to witness the significant shift in all aspects from the level of customers sophistication to the market infrastructure. At present, the key growth factors in the retail sector are; 1) Increase in number of young population. 2) Increase in literacy rate. 3) Rise in the local community s compatibility with modern technology; and 4) Increase in Saudi tourism to developed countries; which impacted heavily on the choices and preferences of the local population (opened room for fashion apparels). In addition, we cannot rule out the role of technology that transformed the local retail market standard equivalent to the existing world-class. However, these equipment and existing market infrastructure are now becoming a basic necessity to conduct retail operation. We believe the local players in KSA should have to design their strategy with a focus to optimize the benefits of (above) identified growth factors. We believe it will be harder for the existing players to get a competitive edge and raise entry barriers to new entrants; while considering the known fundamental growth factors continue to design their strategy. We make our assumptions on the back of following reasons; 1) All other players are also working on similar lines (to cater the existing opportunities) including the new entrants. 2) Continuous change in the customers preferences, choices and taste and macro factors. We, therefore, have concluded that the induction of smart technology in the existing retail operation will further strengthen the ability to maximize the benefit of the existing opportunities. In addition, the increase in stimulation of e-services will lead the retailer to distinguish themselves from the competition; as the offerings in local retail market are becoming more identical. And in the near future we expect the smart technology will also become the norm for retailers and whoever misses out on utilizing it will lag behind and fall short of catering rapid changes in the society. We have identified the following four tools which will supplement the implication of smart technology in retail operation; 1) Online shopping/order booking. 2) Social media. 3) Location on e-maps (i.e. Google maps). 4) Self-service. Furthermore, the induction of smart technology will help the local retail players to; 1) Improve local customers shopping experience; which is among the major factors that lead the local wealthy to fly outside for shopping in neighboring or Western markets. 2) Cater the expected change in the lifestyle (due to increase in recruitment of females); which will reduce the time allocated for shopping and other stuffs. 3) Get the benefit of increase in utilization of portable electronic and smart devices. 4) Utilize the evolution in e-media on local front. Smart technology to optimize the profitability Smart technology helps to optimize the profit from existing opportunities. Smart technology reduce physical visits and promote online retailing Source: Industry sources & Aljazira Capital Research 1 Senior Analyst Syed Taimure Akhtar s.akhtar@aljaziracapital.com.sa Analyst Saleh AlQuati s.alquati@aljaziracapital.com.sa

2 Retail industry - An introduction The local retail industry, over the period of time, witnessed a major shift from its traditional structure i.e. aswaaq (where; the shops were not sophisticated with narrow streets and mostly categorized as seller-oriented markets) to world class shopping malls. It should be noted that the degree of developments vary from the sector s sub-segment to sub-segment; where the massive development was witnessed in general retail (i.e. grocery and normal clothing). At this point, we like to attribute the development in this specific sub-segment to the local government s continuous efforts to improve the living standard of its local citizen. However, the advancement in other sub-segments was mainly associated with the increase in awareness of local resident due to increase in (i) youth population percentage of total population, (ii) in literacy rate, (iii) compatibility with modern technology and (iv) Saudi tourism; which impacted heavily on the local choices and preferences of the local population (opened room for fashion apparels; other than tradition wears). Besides the above factors, the local retail sector was also influenced by the rapid development on other macro factors i.e. (i) economic growth with effective measures to control inflation 1, (ii) population growth and (iii) private consumption per capita. According to the Economic Intelligence Unit (EIU) 2, the Kingdom s population is expected to reach 32.8mn in 2016 from estimates of 28mn in Consequently, this will lead the number of households to increase at CAGR of 2.0% to 4.7mn in In addition to this, the country s GDP per capita is expected to reach USD35,163 in 2017 as compared to USD28,326 recorded in KSA - Population growth KSA Number of households (Million) % 3.4% 3.3% 3.3% 3.2% % 2.1% 2.1% 2.1% 2.0% 2.0% % % 2.0% % 2011Est* 2012Est* 2013e 2014e 2015e 2016e Population growth (mn) - RHS Population (mn) - LHS Source: EIU February 2013 * EIU estimates & e = EIU forecast % 2011Est* 2012Est* 2013e 2014e 2015e 2016e Number of households (mn) - LHS Growth - RHS Source: EIU February 2013 * EIU estimates & e = EIU forecast We believe it is worthy to mention that Saudi Arabia (as per EIU) is the 2nd largest retail market in the MENA region (after Egypt); where the estimated size of local retail market was recorded at SAR303.5bn (~USD80.9bn) and forecasted to reach SAR468.9bn (~USD125.0bn) in On the other hand, in comparison with other developed countries, the Kingdom s retail market size is too small (considering the estimated retail market sizes of USD3.3tn, USD1.7tn, and USD1.9tn, in USA, Japan and China, respectively, recorded in 2011). KSA - Retail sector figures CAGR of 9.1% SARbn Est * 2012Est * 2013e 2014e 2015e 2016e Non-food retail (SARbn) Food retail (SARbn) Source: EIU February 2013 * EIU estimates & e = EIU forecast Hence, we believe the (i) strong purchasing power, (ii) rising awareness, (iii) changes in preferences & choices, (iv) higher disposable income and (v) attractive & stable business opportunities along with the government support will supplement the local sector to continue its growth trajectory According to IMF World Economic Outlook April 2013, KSA real GDP is expected to witness a growth of 4.4%, 4.2% and 4.3% in 2013, 2014 and 2018, respectively, as compared to 6.8% recorded in In addition, IMF expects real GDP growth of 4.3% in On the other hand, the Kingdom s inflation is expected to remain 3.7%, 3.6% and 3.5% in 2013, 2014 and 2018, respectively, as compared to 2.9% recorded in EIU - Consumer good & retail report - Feb 2013

3 Virtual everywhere - A new growth accelerator in Saudi Arabia retail industry Over the period of time, the Kingdom s retail sector witnessed several developments (virtually and physically). There was the time when the Kingdom s retail sector was mainly based on small shops (baqaalas), unorganized traditional markets (local aswaaq) and medium size retail stores. The consumers had little knowledge with limited choices and the trend was buy and feel. In other words, the local retail industry was seller-oriented; similar to the markets of other 3rd world economy at that time. The successful outcome of the local government s sincere efforts to strengthen the Kingdom s economy created several growth avenues for businesses. Consequently, the Kingdom witnessed massive developments in business activities during the last two decades. This was translated into the creation of new job opportunities in the local market and reduced local unemployment level. Thus, the Saudi economy witnessed considerable increase in the personal disposable income that resulted positively on the buying power of local citizens, improved living standards and increased the local aggregate demand. Where, the huge inflow of non-saudis, during the last two decades, acted as an additional growth stimulator. In addition, the past economic development made Saudi Arabia more attractive for international retailers and manufactures that led to increase in the choices. Consequently, the induction of international products/services along with rise in the local living standards increased the consumers products/services awareness and led the local consumers to demand more sophisticated products/services. This led the market to be more consumer - oriented, the buyer negotiation power (indication of increase in competition). Hence, in order to remain intact with the (above mentioned) economic and demographic developments, the local retail sector evolved from its traditional form to the latest world-class structure (i.e. from traditional souk to world-class hyper malls). Evolution in KSA retail market structure Traditional Souq World class Hypermarket mall Economic development Increase in awarness Increase in employment Entrance of foreign retailers Higher disposable income Supermarket mall Business opportunities 3

4 It s worth mentioning that the local retail industry has already leveraged all the growth factors (mentioned earlier). Hence, we believe the expansion in remote areas would be economically beneficial for the retail players. However, based on our understanding, the next big thing for the retail industry will be the ongoing evolution of technology in retail sector. We have based our assumptions on the back the following rationale; Limited penetration of e-commerce in Saudi Arabia in comparison with other emerging economies. Rising internet penetration among the local Saudi citizen i.e. ~49.0%-50.0% in 2012 (as per internet world stats). Increase in penetration of smart gadgets i.e ~190%-200% in 2012 (as per internet world stats). High usage of internet through featured and smart gadgets; where ~>70% of hits on YouTube and other social media are through these devices in the kingdom. Reduction in age gaps due to high concentration of young populations. Gradual change in the local consumers preferences to make online purchases. At present, most of the customers prefer offline shopping. Rapid change in perception; digital devices become regular devices and smart devices are Becoming obsolete. Rising trend of marketing products through social media rather than high cost advertisement. Hence, reduce costs. Technology will be the growth accelerator for the Kingdom s retail sector. Potential evolution in shopping pattern Offline shopping Online shopping PC Online shopping Smart phones & gadgets Facilitating the rising trend of e-commerce. Source: Industry sources & Aljazira Capital Research Although the factors we identified (in introduction section) are key growth areas for the sector; the most important thing for the existing and prospective market participants is to focus how to optimize the benefit of these factors? These favorable conditions will allow the existing players to increase their existing market shares; however, it will make the entry barriers low for new entrants which could cause more fragmentation in market shares. It is worthy to mention that the technological advancement over the period of time along with the other favorable economic & demographic indictors played vital role to transform the local retail market into its existing form. Interestingly, the existing technical services in (i.e. automated billing machines, ERPs 3 for supply chain, computers and so on) are now an integral part retail business. Hence, we can now refer this technological development as a basic technology and; believe, at present, the expansion with only basic technology even in remote areas will not be helpful for retailer to optimize their profitability. As it is a known fact that the technology is ever evolving and never mature; so we believe the quick adoption of continuous technology advancement i.e. smart technology in retail will continue to play as a growth accelerator. 3. Enterprise Resource Planning: a system facilitating information flow between all business functions inside the organization, and manage connections to outside stakeholders. 4

5 However, the smart technology will have different implications on each (predetermined) sub-segments of the sector i.e. food and non-food retail. Despite of high internet penetration and use of smart gadgets in Saudi Arabia; the utilization of e-shopping services is limited. Hence, this offers ample growth potential for e-shopping. A study conducted by Google 4 in Oct 2012 indicates the difference between online and offline shopping experience is getting squeezed; mainly because of increase in use of smart mobiles, laptops and other smart gadgets. Existing world shopping trend 44% Research online and buy products online 17% Visit a store first, and then purchase online 51% Research online and visit store to purchase 32% Research online visit store to view product, then return online to purchase Source: Google Pre-holiday 2012 consumer intentions It is necessary to understand that the existing smart technology is primarily promoting the virtual aspect of the retail business (where the physical involvement is limited at market places) as compared to technological developments witnessed in past. In other words, increase use of smart technology is virtual everywhere and will be the next big thing for retail industry; where, the intense focus will remain on the following areas; 1) Online shopping/order booking. 2) Social media. 3) Location on e-maps (i.e. Google maps). 4) Self-service. Online shopping/order booking Based on our understanding, the following are the implications of online shopping on the sector s sub-segments; Food retail - In our view e-shopping has limited impact on the food retail business; which is mainly because of the nature of the offering. It is worthy to mention that grocery retailing for most of the customers is a social experience; while, on the other hand, customers prefer to touch and check the freshness of certain grocery products that have short shelve life e.g. vegetables, fruits, meat, fish and so on. Moreover, besides these micro (personal) factors, the other key macro hurdles for online grocery shopping are the (i) lack of sophisticated portal to cater the mentioned micro factors and (ii) market potential and distribution cost 5 ; which will eventually affect the retailer margins. However, despite of the mentioned hurdles; we believe the smart technology with alternative approach will allow the grocery retailers to expedite their growth with the implication of smart technology are (i) focused market segment, (ii) focus on high margin products with long shelves life and (iii) effective publicity of implication of smart services. Implication on Saudi Market Considering the current opportunity, we believe the local grocery retail market has high potential and hence has moderately high distribution cost (as explained by an independent study conducted by RetailEconomic). But, based on the mentioned limitations and alternative approaches, we believe the local well-established grocery retailers with wide range of offering are in a better position to expedite their growth potential with the induction of e-services. It is worthy to mention that the current shopping habit of the local, at present, is a key challenge for the induction of e-services in the kingdom; since grocery shopping is considered more as an entertainment/social activity and people still prefer to check groceries themselves especially fruits & meat. However, the ongoing development in the Kingdom s professional job mix (where the female recruitment is rising) will make considerable impact on the current lifestyle. Eventually, this will lead locals to readjust their shopping & entertainment patterns i.e. reduce time allocated for retail shopping in favor of exploring real entertainments/social activities. Consequently, we believe the expected change in lifestyle will lead the local customers to prefer grocery shopping with minimum time i.e. through online shopping/order booking; especially grocery with long shelves life Google Pre-holiday 2012 consumer intentions 5. Market with high potential has moderately high distribution cost and market with low potential has extremely high potential cost; according to an independent study conducted by Mr. Joost W. van der Laan, RetailEconomic.

6 Non-food retail Unlike food retail, the online shopping trend in non-food retail is becoming popular around the globe; which is mainly due to changing lifestyles. Moreover, disposable income and growing number of youths are other primary reasons of increase in this trend. According to the survey conducted by Google 6, most of the customers intent to purchase apparels followed by toys, electronics, watches & jewelry, cosmetics and sporting goods online. On the other hand, the key limitations for online purchase are (i) few options of secure transactions portals, (ii) unattractive and confusing layout, (iii) prefer to touch and feel, (iv) insufficient know-how and (v) limited selection. Implication on Saudi Market With reference to the local non-food retail market; the usage of online purchase is rising but there is ample room for expansion. The key areas to focus in non-retail segment are (i) user friendly portals, (ii) secured transactions, (iii) ensured customers confidentiality, (iv) efficient customer s services and (v) timely delivery and good after- sale services. We expect the development in such areas will accelerate the sales of well-established non-food retailers; while, on the other hand, such activities will pave the way for new entrants (due to reduction in cost). In other words, the expansion in online non-retail shopping will lead to make structural changes; where the focus will be on the virtual presentation. In addition, (as explained earlier) the expected change in lifestyle will lead the local customers to prefer online shopping due to limited availability of timing. Expected transformation of shopping trend Existing retail stores; Outlay Professional job mix Higher disposable income and young population Change in life style Expected retail stores; Outlay On line shopping Source: Industry sources & Aljazira Capital Research 6. We used Google pre-holiday survey because most of the non-food retail sales are seasonal and occur during holiday seasons 6

7 Social media in retail Companies in the retail sector are faced with a challenge when it comes to advertising. Gone are the days of marketing only through advertisements on TV or billboards. With the advent of internet and social media portals (mainly Facebook & Twitter), not only marketing has become more cost-effective, but also an accelerator for retail. Some companies are already effectively using their social media presence to differentiate themselves from competition. Customers moving with social media tunes Source: Industry Source There was a study done by Oglivy 7 (an international marketing & advertising agency) that shows the impact of social media marketing on retail sales. The study used five Quick Service Restaurants (i.e., fast food chains) and analyzed the correlation between social media exposure and changes in purchase behavior before and after the social media interaction. The results clearly show how social media marketing have led to more spending and consumption. These results should encourage retailers to revisit their marketing mix to make sure their marketing channels are integrated and optimized to drive sales. At present, social media also is becoming better than the traditional word of mouth publicity, for example if a brand is liked on Facebook or re-tweeted on Twitter, then this information can spread to people without any effort from the retailer. Moreover, this also helps the customers to make their own analysis; while, on the other hand, it assists retailers to conduct informal market survey of their offering. It should be noted that this approach is contrary to the traditional word of mouth pattern when people sits in gathering and discuss about certain offering. Now we see the importance of social media for retail, the question arises, how can a retail company use social media to drive its sales? We believe a company has to listen to their customers feedback through social media, not only that, they can also work with their customers base to incorporate new ideas to suit their clients. As much as a company is interactive with its customers, the better chances are for getting ahead of their peers in the market. A company should not stick with just one social network but can stretch the time and budget out over a few platforms to reach a larger audience. And a company should not select social networking sites based on their own preferences, but look to the social networks the customer base is using most and target it. Leaders in this field will manage to increase profits by leveraging digital and social platforms that make it easier for customers to access relevant and timely information, connect with people they care about, and willingly engage in brand-building behavior. Customers use social media to provide both positive and negative feedback about products or customers service. If a customer posts this information online, it can affect the opinions of other consumers who are connected to the business s profile. Businesses in this sector can use social media to instantly inform consumers about sales, the arrival of new products and exclusive promotions. Consumers can connect with their favorite retailers online to stay informed about new developments. Thus, this indicates the importance of C2B (Customers to Business); contrary to previous approach of B2C (Business to Customers). Implication on Saudi Market: Based on the independent study conducted by the Social Clinic 8 (a social media agency & consultancy) on the presence on Facebook, Twitter, and Youtube in the Kingdom for 2012, we summarize as follows: Facebook is the 3rd most visited site in the Kingdom. Total number of Facebook users is about 6mn, out of which 2mn access it via mobile. 70% users are males, 30% users are females. 90% of the language usage is in Arabic. Twitter is the 6th most visited site in the Kingdom. Total number of users is more than 3mn. 55% users are male, 45% users are female. The Kingdom has the fastest growth rate of Twitter users with an increase of 3000% from 2011 to

8 Arabic is the largest growing language on twitter of all time (the Kingdom accounts to 30% of that growth). Riyadh was ranked 10th globally among the cities with most tweets. Some of the top local brands being followed on Facebook & Twitter are Rotana, STC, Mobily, Alarabiya, Almarai, Alhilal Football Club. More than 90mn videos are watched daily on Youtube in the Kingdom, that s more than any daily Youtube video viewership number worldwide. Youtube s growth rate was 109% from 2011 to From the above we can clearly see where the trend is heading. But we can also see that retailers are not among the top brands being followed by the general public, hence, they need to seize the opportunity. That is why we believe that social media usage with regards to retail is still in its growth stage and it will take time to reach the maturity level. If I don t see you, I don t know you E-Maps for navigation With the high penetration of smart gadgets into the Kingdom, for a retailer, locating his company/brand on a digital map has become a necessity rather than a choice. The presence on a digital map can also be used as a marketing tool because those days have gone; when customers have limited choices. A digital map is a way to increase footfall to stores, improve the online experience and get to know the customers even better. When it comes to food hypermarkets, locating it on a digital map is not of much importance because the end user will most likely go to a nearby store/outlet or market. But when it comes to restaurants/cafes, then having it located on an e-map is definitely the way to go. With the increase in customer s awareness, a customer would always like to have his/her favorite brand s locations available on a digital map, making it easily accessible even when traveling. The ever increasing plethora of choices with regards to fashion apparel stores makes it a must for a retailer to have the store located on a digital map otherwise there is a big chance they will miss out on a significant number of customers. Implication on Saudi Market As we stated above with regards to social media, the penetration of Google e-maps in the Kingdom is still in the growth stage and this is the time for the retailers to get more involved in it and locate their stores/brands on the digital map. In addition, the presence on e-maps will also help the outsiders to locate the place; where they want to make their required purchase. We believe in the coming 5-10 years, using Google maps or other digital maps will become the norm and eventually lose its existing competitive advantage. Therefore, at present, increasing the presence on e-map will enable the existing retailers to better capitalize on the existing opportunities; which will enable them to strengthen brand loyalty among customers. Self-service at outlets The retail industry is witnessing a rising trend of self service; which is mainly because of increase in the customers awareness. Consequently, this transforms the customers experience from guide me to let me serve and control ; where the rise in new trend emphasize more on proper placement of products. On the other hand, the rapid change in the lifestyle where, standing in queues (especially, in shopping malls/outlets) is considered as annoying due to limited availability of time and customers preferences to controlling their transactions by themselves also increased the requirement of the such technologies at market places. We believe the key success factor for such technologies will continue to become more popular on the back of increase in usage of smart devices and machines. Implication on Saudi Market The increase in use of smart devices and high penetration of internet in the Kingdom indicate that local customers are well prepared to adopt these technologies. On the other hand, the retailers are also willing to implement such modifications in their operational system. In addition, the expected change in the local life style (as mentioned earlier) will have an additional factor to increase the requirement of these time saving machines (self-checkout, e-selection and virtual dress selection). 8

9 Technologies at shopping centers Reduction in time to go for shopping Life is getting faster Time for shopping Induction of self-service technology will improve shopping experience Change in life style Shopping experience Source: Aljazira Capital Research We believe these technologies will help to improve the shopping experience primarily in food retail; where the queues are long and customers lose their time considerably. The virtual selection of clothing (while on store) will also enhance and improve the fashion apparel shopping experience; which is still below average. We believe the induction of such technologies will help the retailers (food & non-food) to attract the local customers; which are major clients of other regional countries. Conclusion: We concluded our study with a view that the induction of smart technology in the existing retail operation will further strengthen the ability to maximize the benefit of the existing opportunities. In addition, the increase in stimulation of e-services will lead the retailer to distinguish themselves from the competition; as the offerings in local retail market are becoming more identical. In the near future we expect the smart technology will also become the norm for retailers and whoever misses out on utilizing it will lag behind and fall short of catering rapid changes in the society. The implication of smart technology in retail operation will help the local retail to; 1. Improve local customers shopping experience; which is among the major factors that lead the local wealthy to fly outside for shopping in neighboring or western markets. 2. Cater for the expected change in the lifestyles (due to increase in recruitment of females); which will reduce the time allocated for shopping and other engagements. 3. Harness the benefits of increase in utilization of portable electronic and smart devices. 4. Utilize the evolution in e-media in the local market. 9

10 RESEARCH DIVISION AGM - Head of Research Abdullah Alawi a.alawi@aljaziracapital.com.sa Senior Analyst Talha Nazar t.nazar@aljaziracapital.com.sa Senior Analyst Syed Taimure Akhtar s.akhtar@aljaziracapital.com.sa Analyst Saleh Al-Quati s.alquati@aljaziracapital.com.sa Analyst Jassim Al-Jubran j.aljabran@aljaziracapital.com.sa BROKERAGE AND INVESTMENT CENTERS DIVISION General Manager - Brokerage Division Ala a Al-Yousef a.yousef@aljaziracapital.com.sa Sales And Investment Centers Central Region Manger Sultan Ibrahim AL-Mutawa s.almutawa@aljaziracapital.com.sa AGM-Head of international and institutional brokerage Luay Jawad Al-Motawa lalmutawa@aljaziracapital.com.sa Area Manager - Qassim & Eastern Province Abdullah Al-Rahit aalrahit@aljaziracapital.com.sa Regional Manager - West and South Regions Abdullah Al-Misbahi a.almisbahi@aljaziracapital.com.sa RESEARCH DIVISION AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. 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