Over
the past five years, franchising has tremendously grown in Saudi Arabia. The success
of American, European and local franchises continue to attract Saudi businessmen.
Many of the brand names are already well entrenched in the market, and the concept
has proven to have a low failure rate for Saudi business people.
Even
though there are no figures revealing the size of this lucrative market, industry
sources stated that fast food franchises account for more than 60 percent of the
total franchise market. American firms have the lion share with more than 70 percent
of all franchised operations in Saudi Arabia, from fast food outlets and hotels,
to car leasing, laundry services and printing. Saudi consumers have increasingly
become sophisticated demanding quality, service and value for money. American
products and services in this industry have established brand recognition and
were able to attract and retain a large section of the Saudi population. Notwithstanding,
many Saudis either traveled or studied in the United States.
44.4
percent of the Saudi population is under the age of 15, and franchises that appeal
to this age group will perform well and have been very popular among the younger
generation. Some of the franchises that are currently present in Saudi Arabia
include McDonalds, Hardee's, Burger King, Popeye, Chilies, TGI, Fuddruckers, Pizza
Hut, XOXO, Harvey Nichols, Debbenhams, Saks Fifth Avenue, Floresheim, Martinizing,
Sheraton, Hilton, Four Seasons, Avis, Hertz, Budget, Limited Too, Mail Boxes,
Alphagraphics, Ann Kleine and Guess among many others.
Franchising
in Saudi Arabia
Franchising,
distributorships and license agreements continue to be ever present phenomena
in Saudi Arabia and the Middle East. Many of the global brands have come to realize
the potential that this market holds. This line of thinking has recently also
grabbed the imagination of emerging brands from all parts of the globe, including
South Africa. To fully understand the influence of franchising in Saudi, one has
to continuously link it to economic and social trends and requirements in the
region. Saudi remains the largest market in the entire Gulf. Many view Dubai as
the showcase but Saudi proves to be the sales room and cash generator.
The
Middle East is on the verge of phenomenal growth in franchising – experts
peg the annual growth in franchising in this region at 27%. The Middle East is
perceived as being a gateway point between Europe and East Asia and is also developing
as an international centre of business and trade. With growing populations, growing
levels of urbanisation and growing economies this region is becoming very attractive
to international franchisors.
Growth
in the market
Many
still consider Saudi as predominantly a classic oil state. It is therefore interesting
to note that non-oil economic activity is flourishing. This year (2005) non-oil
activity has grown by 6%. This is higher than the oil industry and the highest
ever in two decades.
Recent
years have seen the government reduce its reliance on oil. The net effect has
been a boom in the real-estate and construction industry. Financial lending, thanks
to low interest rates and revised banking requirements, is driving the money supply
as much as the current oil revenues.
The
stock market is booming and thanks to aggressive privatization the general Saudi
stock shares have risen 520% over the past 5-6 years. The telecommunications,
construction and manufacturing sectors have all been major contributors, especially
in recent years.
Added
to all this, the Kingdom is experiencing accelerated growth due to recent oil
price spikes. The positive effect has been a rise in per capita GDP from approximately
$8100 (1999) to $9575, or 18%, by 2005. Combine this with the fact that the Kingdom
has one of the world's fastest growing populations (3.5% per year) and you are
faced with an expanding market with good disposable income levels.
AC
Nielsen research reports that the Saudi economy is expected to grow 8.7% this
year, mainly fuelled by the high oil prices as well as strong private sector growth.
Entry
of foreign franchises
Franchising
and licensing have become increasingly popular methods of participating in the
non-oil economic sectors. The concept of franchising, although relatively young,
has been firmly boosted by the introduction of most major brands associated with
the franchising industry. These are mainly focused on the fast food and service
sectors. Brands such as McDonald's, KFC, Pizza Hut, Hertz, Avis, DHL and many
more line major roads and cover many billboards.
As
can be expected, many of the early franchise entries were from the USA with France
leading the surge from European countries. Political events, especially 9/11,
have helped shaped the outlook in the Middle East and have contributed to the
fact that franchises from new markets are increasingly in demand.
Malaysia
is a country that has fully realized this potential and has been aggressive in
its approach to introduce the Gulf region to many of its new and emerging brands.
The Malaysians have been particularly successful in the area of introducing new
food and fashion brands to the Gulf. Malaysia's current drive, promoting itself
as a preferred holiday destination for people from the Gulf, is assisting the
drive to export Malaysian brands. Tourists experience the local brands abroad
and readily accept them in Saudi when they are introduced. The tourist drive further
enhances the concept of 'brand Malaysia'. South Africa could do well to study
this model.
With
the Kingdom wishing to join the WTO and the numerous meetings with US officials
in this regard, it has become evident that government wishes to comply with brand
protection and the facilitation of investment. This bodes well for the future
of franchising in Saudi.
Growing
franchise sectors in Saudi
The
growth of franchising continues to follow the traditional path of food and services,
which have been the first sectors to follow on the heels of the early introduction
of motor vehicle brands. The Kingdom continues to see the new introduction of
various fast food and restaurant concepts together with a wide range of service
related concepts. With the rapid expansion of telecommunications and the expansion
of a second mobile service provider, it is to be expected that the service industry
linked to telecommunications has seen a large expansion. This has also been true
for the IT industry.
The
import of food and foodstuffs are estimated to exceed $7 billion annually and
the Kingdom remains the leading market in the region. Most fast food chains are
showing positive growth and are ever present in all the new shopping malls. Disposable
income levels and an expanding shopping mall culture are assisting this growth.
Fashion
remains an extremely strong and growing market with the major brand labels from
the UK, USA and Europe all enjoying a strong presence. Although this industry
is mainly associated with license agreements, we are increasingly seeing franchise
agreements being put in place. Brand owners from across the globe have noted the
high disposable income levels coupled with a high population growth. The sectors
of children and ladies fashion are particularly strong and enjoying good growth.
It's
important to consider the expansion of shopping malls when one looks at franchising
in the Kingdom. Mall fever has hit the Middle East and Saudi is no exception.
The mall plays an even greater part of Saudi life in the sense that it becomes
'entertainment'. Malls are developing at an alarming rate and the days of the
traditional high street traders and various souqs (markets) seem to be limited.
The 'mall' is positioning itself as the 'place to be and to be seen'. As in any
country, one mall wants to be better than the next and this offers an opportunity
for new emerging brands that are unique and different from the 'run of the mill'
global brands. This mall development has fuelled the search for new brands –
both in fashion and food.
Expansion
and potential for franchising remains concentrated in the major cities of Riyadh,
Jeddah and Al Khobar. Riyadh, the capital, is experiencing a major boom with an
annual growth of approximately 8% making it one of the fastest growing capitals
in the world.
Legal
agreements
Most
agreements take the form of a master franchise or license holder. These deals
are often done on the basis of covering the entire Kingdom. However, some international
brands have settled on agreements which regionalize the Kingdom into East, West
and Central, thus dealing with 3 major parties rather than one. Another trend
is to conclude a deal with prominent local parties with the objective of covering
the whole Gulf rather than just Saudi.
It
is important to note that both the brand and the franchise agreement need to be
registered. Brand registration is an approximate 120 day exercise from the day
of publication in the Government Gazette. The period leading up to publication
depends on the quality of legal firm selected. The agreement registration follows
a route from the Saudi Embassy in the brand's country of origin to the Ministry
of Commerce in the Kingdom. Potential brands wishing to enter the market would
be well advised to judge potential local parties on their ability to assist with
and progress these procedures.
