Eating out and shopping are the main entertainment activities in Saudi Arabia, making the region a hotbed of potential for restaurant operators and investors looking to get in to the F&B sector. High disposable incomes mean that consumers can trade up, eat out and order food more often; increased travel and the rising use of social media have exposed a significant proportion of Saudi society to Western culture. Technology and increasingly relaxed social norms are in turn leading to an emerging freedom of choice, benefiting foodservice by expanding the consumer base, boosting sales, and driving transaction volume growth. The Jeddah restaurant industry, in particular, offers a prime example of the region’s untapped opportunity.
Below, we examine the biggest factors contributing to the Saudi Arabian restaurant industry, and examine the largest fast-food players in the region.
You can’t mention Saudi Arabia without noting the massive impact the fall of oil has had on the Middle East as of late. The full effect of slumping oil prices remains to be seen in the KSA but, for now at least, restaurant operators have been largely spared.
Saudi Arabia’s foreign currency reserves allow it to run deficits for several years, which has enabled the country to buffer the oil price shock. Though consumers haven’t considerably reduced their spend, GDP is expected to slow which, in turn, could lead to some consumers trading down. Still, this is expected to have a greater impact on consumer goods and services than it will on foodservice, largely because eating out is still one of the Kingdom’s primary leisure activities.
The goal of Saudi Arabia’s Nitaqat (Saudization) system is to temper unemployment among nationals by encouraging KSA companies to maintain specific national-to-expat employment ratios. It’s an especially challenging policy for restaurant operators, considering 85% of employees in F&B service activities in 2015 were non-Saudi. In April, the KSA’s Ministry of Labor and Social Development announced that jobs in shopping malls (where many restaurants are located) would be limited to Saudis – marking yet another hurdle for operators. More than 68% of sales staff in Saudi companies and shops were foreigners in 2016, according to data released in July 2017 by the Ministry. Foreigners comprised 521,609 sales employees, compared with 239,952 Saudis.
The challenges associated with Saudization are plentiful, though there are solutions for restaurant operators. Those who can shift focus from nationality and instead center it on a unified company culture of shared, measurable objectives and a merit-based rewards system can demonstrate their desire to build a staff of capable, coachable and committed associates, regardless of nationality. Additionally, Saudization regulations will require operators to analyze their organizational charts through the lens of positions requiring a higher level of education, thereby instituting hiring and staffing plans designed to place Saudi nationals in areas where they will be most effective.
Saudi Arabia’s restaurant industry has historically been dominated by independent players, which still account for 75% of sales in the region. But chained foodservice companies — particularly international ones as well as important local players — account for the lion’s share of growth, recording 6% transactions volume growth and 9% current value growth in 2015, compared with the 4% transactions volume growth and 5% current value growth recorded in independent consumer foodservice over the course of the year.
Between 2010 and 2020, fast food sales are expected to grow at a Compound Annual Growth Rate (CAGR) of 7.1%, doubling in value from $4 billion in 2010 to an estimated $7.9 billion in 2020. That’s a nominal growth rate nearly double that of the region’s overall GDP growth by country — while GDP is expected to grow 49% in that same period (2010 – 2020), fast food sales will grow 98%.
The top 30 brands in chained fast food touted 66.3% of the market in 2015. Among these, McDonald’s is the lead player, with a share of 28.8% among the top 30, followed by Herfy (12%) and Al Baik (5.7%).
In recent years, McDonald’s has been cannibalizing the competition, increasing its market share in chained fast food by 4.4 percentage points between 2012 and 2015. Herfy — the country’s only publicly-traded foodservice brand — has had a hard time keeping up, only increasing its market share by 0.3 percentage points in the same time period. Al Baik, on the other hand, has lost market share in the same period of time (it lost 0.7 percentage points of share in chained fast food between 2012 and 2015, though it still ranks third). Herfy’s market cap sat around $962.2 million in July 2017.
Among fast food chains, the competition is set to remain steady over the next few years. While in 2016 there were about 2,099 people per fast food outlet, in 2020 that value is expected to decrease slightly (by 2%) to about 2,064 inhabitants per fast food outlet.
For those looking to open a homegrown concept, or expand an international concept to KSA, continued growth remains on the horizon. Sales in consumer foodservice are expected to grow 5% between 2013 and 2018 (in real value). In addition to restaurants, there are additional opportunities in the catering sector, estimated to be a $5 billion-and-growing industry, thanks to the more-than 7 million visitors to Saudi Arabia to perform Hajj and Umrah every year.
One area particularly ripe for development, which is home to at least 7% of the restaurants in the Kingdom, is Jeddah. Not only does Jeddah show a larger market when compared to other cities in the KSA, but it also reflects a higher level of spend, with average checks only second to Makkah and higher than Riyadh by almost 30%.
Growth is expected to accelerate in Saudi from 2018 on – which, of course, bodes well for the growth of the restaurant industry. As social behaviors shift, we’ll see a rise in chains who integrate technology into their brands (Baskin-Robbins, the fourth-largest QSR brand in the region, just announced it would be expanding delivery offerings, for instance).This creates opportunities for operators who take note of trends early, integrating change and creativity into their operations before it comes commonplace.
Franchising will become more prevalent as international brands continue to grow in the KSA. Many foreign investors prefer to enter the market with the help of a local player (someone well-experienced in the local behaviors and customs of the country) and the Saudi government has taken steps to encourage that growth, through incentives to franchisees and franchisers.
The affluent Saudi population will continue to crave new dining experiences and the local foodservice market will continue echoing the trends seen at international level, although at a much faster pace than historically.
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Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketing, branding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We work alongside senior executives of some of the world’s most successful foodservice and hospitality companies to visualize, plan and implement innovative ideas for leapfrogging the competition. Collectively, our clients post more than $100 billion, span all 6 inhabited continents and 100+ countries, with locations totaling tens of thousands.