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Saudi consumer spending sees new pattern

Saudi consumer spending sees new pattern



Saudi consumer spend may see downtrading

01 December 2016

Consumer patterns in Saudi Arabia suggest that households could find it tough to cut spending with the ongoing austerity measures and move to lower priced items, while retailers may resort to discounting to protect market share, a report said.

In order to understand how consumer spending in Saudi Arabia could change going forward, in view of the on-going austerity measures, Al Rajhi Capital, a major financial services provider in Saudi Arabia, analysed household spending patterns over 2007-2013 based on consumer surveys published by CDSI and related data.

 

KEY FINDINGS

Outlined below are the key findings which shed more light on important aspects of household consumption, giving us a better understanding of possible future trends:

(a) Majority of the increase in household spending consumed by inflation: During 2007-2013, average Saudi household spending increased by 35 per cent (from SR13,250 ($3,530) in 2007 to SR17,903 in 2013). However, 65 per cent of increase in spending was consumed by inflation.

(b) Housing and food – main household expenses, witnessed high inflation: Housing and Food together comprise one-third of monthly household expense, but account for two-thirds of inflation.  

(c) Real spending maintained, but growth was weak: Only 20 per cent of increase in household spending was due to growth in real spending, which grew 6.7 per cent in absolute terms, implying a weak 1.1 per cent CAGR during this period.  

(d) Thin line between ‘discretionary’ and ‘non-discretionary’: Our analysis of the underlying data suggests that the line was blurred between discretionary and non-discretionary spending in the past. For example, segments such as Fabric & Apparel, Furniture (considered discretionary) witnessed lower real spending growth at just  11 per cent, implying 1.8 per cent CAGR over this period.

 

CHANGING PATTERNS

Based on the above analysis, Al Rajhi draws a few conclusions as to how the consumer spending might shape up going forward:

(a) Backward adjustment seems challenging; down-trading and discounting may be favoured: Since the volume growth (real spending) was lower for Saudi households in the first place, consumers will find it tough to cut volume in the current environment. Instead, down-trading (moving to lower priced items) is expected as a preferred response of consumers. On the other hand, retailers may resort to discounting to protect market share.

(b) Segments with significant increase in real spending likely to witness reversal: The segments with the highest increase in real spending (20 per cent+) during 2007-2013 such as transport, recreation, restaurants and hotels  may witness significant impact, as it is easy for consumers to pare back their spending on these segments. Other segments may witness moderate to minimal impact.

 

POSITIVE OUTLOOK

Since the growth in real spending was weak during 2007-2013, it could not have been a key drive for strong growth in organised retail. Hence, the other main plausible argument can be significant market share gains by organised retailers during this period, compared to unorganised retail.

“We remain positive on the organised retail sector, and we believe this trend to continue, due to their better positioning in terms of economies of scale, better supplier terms and balance sheet strength,” the Al Rajhi report said.




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