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.