The Kingdom’s retail giants have begun consolidating their positions to face their new neighbor and competitor. Better economy, abundant capital, more jobs and rising salaries are boons for shop and mall landlords, and hence retail outlets are expanding to take advantage of these factors. But, there is a growing confusion about the fate of retail sector following the mushroom growth of the hypermarkets and stores amid stiff price competition all across the country.

No one can say, as of now, whether retail market is performing very well or under-performing or even making losses. But one thing is certain -- despite the rosy economy and confident consumers, retail is not experiencing a building spree like the other sectors. Hypermarkets, malls, small groceries and stores in the Kingdom now face fierce competition from one another and from cut-price hypermarkets such as Geant, Carrefour, Sadhan, Othaim, Danube and many others.

Most of the strategic locations in the major three cities of Saudi Arabia -- Riyadh, Jeddah and Dammam -- have been captured by these hypermarkets. Hence, now the developers are looking at small cities of Saudi Arabia. Biding their time, Saudi Arabia’s big retail developers are focusing on two competing yet complementary intersection-centered shopping districts that sit side by side in the heart of the city. Both are looking to sharpen their definition and appearance to lure more retail pilgrims.

Many shopping centers and hypermarkets are spending millions of riyals on their ambience, decoration and linking them by aerial walkways. Other properties are renovating. Major renovations are taking place all around the Kingdom, especially in shopping and hotel industries. While downtown Riyadh, Jeddah and Dammam malls are busy squaring off, the rapid spread of neighborhood shopping centers slotted into small sites over the past few years indicates that the market is maturing and segmenting more than it requires.

No study has suggested so far that there is still a lot of potential in the retail sector. Despite this, most of the hypermarket chains have planned to open new outlets during the next two years. According to an estimate, more than 100 hypermarkets and stores will be opened within next two year.

In fact, construction in several cities and towns in the Kingdom is proceeding apace. There are already more than 125 hypermarkets and large-size supermarkets countrywide, against none a few years back.

Hypermarkets, which already carry food, clothing and just about every other household need, are snapping at the heels of lower-end malls by adding entertainment centers for children, small shops, sports and bowling alleys. Their rapid spread has provoked controversy, with small retailers complaining of unfair competition. There is a price war, but the Saudi government agencies have not come forward like it did in the case of dairy industry.

Hence, it seems likely that many small and medium independent Saudi retailers will face a difficult future, squeezed between slick, cheap hypermarkets and a modern, air-conditioned 24-hour convenience store on every corner. Many of them may close shop because of this competition.

Neighborhood malls add more pressure, making room for international-brand stores and food outlets but leaving little for independent niche Saudi competitors.

”With the Saudi economy set to continue growing, and with consumer credit remaining affordable and available as never before, the outlook for mall developers and hypermarket owners in Saudi Arabia is at least OK for the time being,” said a report published recently. These markets have also now the option to source their merchandise locally, although they largely depend on cheap Chinese products.

In fact, import-substitution drive has received a big boost in the aftermath of Sept. 11, 2001, with products manufactured either locally or elsewhere in the Middle East replacing those from the US and other Western countries. Lots of changes have taken place in the Saudi import market after 9/11, which has changed the stacks’ compositions of the markets. Earlier, the market here was depending a lot on Europe and America, especially for the supply of consumer goods.

It used to be a multibillion dollar market for those countries. After 9/11, more than 80 percent of the items are manufactured in the Middle East, including the Kingdom, with foreign collaboration, if necessary, according to a report published recently. And, most of the hypermarkets, supermarkets and stores, whose numbers are multiplying day by day, have stacks full of Saudi-made or Gulf-made products.

A large number of hypermarkets and stores have opened during the last five years in the Kingdom.

The question is now being debated as how and how long these markets will survive. The consumers, definitely, would be the beneficiaries of this trend that has seen a proliferation of hypermarkets all over the Kingdom. Some major players will enter the Saudi market -- one this year and the other next. Now we have sharper prices and better offers than before.

Referring to the changes in the post-9/11 period, another report said: “The Kingdom used to import a lot of frozen products from Europe and America. Now Egypt has entered this market. Similarly, cheese and dairy products, which used to come from Denmark and other European countries, have been replaced by those from Syria, Lebanon and Egypt. In fact, 9/11 has also given a big boost to the manufacturing sector.”

The surge in local production has in turn dictated the need for free trade zones in the region to facilitate free movement of goods and also bring down the cost of production. Chocolates, once the domain of European countries, are now being produced in Syria, Jordan, Lebanon and the UAE and truck-loads of these chocolates and sweets are arriving in the Kingdom. These countries have entered into strategic alliance with multinational companies from the West.

A side-effect of this development is that it has brought down the cost of production of these items. Powder milk that used to come mostly from Europe in the past is now being repacked locally and resold as a local brand in Oman, Dubai and Saudi Arabia. So also tuna coming from China and spices as well as food products from India are being repacked here. This in turn has created new opportunities for the printing and packaging industry and for many other vendors and suppliers.

A new dimension to the growth of the dairy industry came about a couple of years before as a result of the cartoon controversy surrounding the Danish newspaper Jylland-Posten which published a series of cartoons insulting Prophet Muhammad (pbuh). This led to the boycott of Danish products by all hypermarkets at that time. The impact was minimal on the market, which responded to the challenge by tapping a new outlet from the Arab countries.

“When Lurpac was taken off the market shelves, we found that there were at least a dozen high quality manufacturers in Saudi Arabia itself. This gave a new impetus to the import substitution drive. It also gave a shot in the arm to the market for tissue papers which also used to be imported. We found that there are five or six tissue paper factories, besides those from the UAE and other Gulf states,” according to the report.

Aside from the food products, a noticeable impact was also felt on the market for nonconsumables, such as electronic items, hardware and accessories. Electronics is one huge sector that is now dominated by China. More than 90 percent of electronic products sold in hypermarkets in the Kingdom are coming from China. Of course, there are also some international brands from Europe and Japan, like Philips, Sony, etc.

And, the Kingdom has not got to that stage in replacing those brands. Now a factory for the production of TV sets has opened in Saudi Arabia, while another one became operational in Jordan. But, the Middle East has still not reached that stage when they can manufacture houseware products. But light manufacturing industry has taken off in the Kingdom, where a number of factories are producing melamine kitchenware.

At another level, the proliferation of the retail sector has led to the downsizing of the wholesale market. At one time in the early ‘90s wholesalers used to meet 60 percent of the total consumers’ market and 70 percent in the mid ‘80s. Now their market is shrinking. Of course, the wholesalers’ market will not disappear completely, but it will probably represent 20 percent of the total consumer market in the long term.

The reason is that the consumer can now go to a nice mall and shop in a pleasant atmosphere at the same price or even cheaper. Although commodity prices are rising, retail prices are maintained at more or less the same level for the last several years, especially in Saudi Arabia. The price hike on the freight charges, which have doubled following the increase in oil prices, have also not affected the retail prices.