Discusses opportunities for U.S. franchisors and legal requirements in the market.
Saudi Arabia is about one-fifth the size of the United States by geographic area and has a total population of about 32 million (2017). The Saudi economy is expected to grow in 2018 at an average rate of 1.9 percent according to the IMF. Saudi Arabia is the largest retail market in the Gulf with an estimated 83 percent of the population living in urban areas, where most of franchise outlets are located. The franchise market in Saudi Arabia has witnessed remarkable growth in the past decade with many successful American, European and local franchise concepts taking root. Catching on the trend, many local Saudi franchise developers have managed to promote Saudi concepts with some of them having gone international. Franchising is perceived to be an ideal business model for small and medium-sized enterprises (SMEs) in Saudi Arabia.
Many of the American brand names (such as McDonalds, KFC, Burger King, Pizza Hut) are already well entrenched in the market, including many American and non-American franchises. Most of those franchises are held by several local and regional companies, including Al Hokair Fashion Retail, Olayan, Saudi Catering & Contracting Co., Shahia Food Ltd. Co., Kuwait Food Company (Americana), Naghi Group, Al Safwa Food Group, Arabian Entertainment Co. Ltd., M.H. Alshaya Co., Landmark Group, and Al Sawani, among others. Likewise, many Saudi entrepreneurs already established their local concepts in this sector, including, Herfy, Kudu, Shawarmer, Coffee Day, Dr. Café, Munch Bakery, Burgerizzr, Aani & Dani, and Maestro Pizza, among others.
The latest trade data indicate that U.S. exports of services to Saudi Arabia reached USD 9.2 billion in 2017. https://www.census.gov/foreign-trade/Press-Release/current_press_release/exh20b.pdf. From U.S. statistical figures, nearly a third is accounted for by charges for the use of Intellectual Property and Other Business Services, which include franchise fees and royalties.
Commercial company law is used as a baseline for the franchise business model and U.S. companies will need to address the conservative nature of Saudi society. Although there is no specific franchise legislation, a ministerial order was issued in March 22, 1992, allowing for the franchisee business to be treated under the Saudi commercial agency law.
The current investment regulations allow foreign investors to control 75 percent ownership in a wholesale and retail trade joint venture. We recommend that U.S. franchisors consult with an attorney familiar with Saudi law before establishing, changing, or terminating a franchise agreement.
Leading Sub-Sectors Retail
Saudi Arabia is the largest retail market in the Arabian Gulf with a huge domestic market, and the franchising sector will continue to draw more international companies and pave the way for more Saudi entrepreneurs to create local concepts, especially in the food sector.
Research by BMI indicates that total household spending in the retail sector is estimated to reach USD 286 billion in 2018. Expanding population and a substantial spending power dovetail for a positive impact on the Saudi retail sector, which is expected to grow to USD 304 billion in 2019. From a franchise perspective, food is estimated to continue to top the list of spending accounting for more than 15 percent in 2016, at about USD 44 billion, while clothing and footwear spending reached USD 14.6 billion in the same year.
Shopping tops the list of pastimes in Saudi Arabia. Saudis will usually visit a mall at least once a week, and growth in the construction of shopping malls is boosting the franchising sector; though, many of the franchises repeat themselves in almost every mall.
Per capita GDP reached USD 21,120 in 2017. More Saudis travel overseas and gain experience with new concepts and brands. Saudi Arabia’s expanding population, with nearly 38 percent of whom are 20-39-year-olds, provides a solid base for continued growth in this sector. The influx of more than 17 million religious tourists annually and internet penetration also have supported continued growth in the retail sector; the advent of online ordering and home delivery for both food and non-food items created a channel for local companies to promote their services over the Internet.
Franchising is a popular and successful approach to establish consumer-oriented businesses in Saudi Arabia. Franchising opportunities exist in many business categories, including apparel, laundry and dry-cleaning services, automotive parts and servicing, restaurants, mail and package services, printing, and convenience stores. There are no verified figures for the number of franchise outlets and brands in Saudi Arabia, however, industry sources project that there are more than 300 foreign companies that have franchisees in Saudi Arabia.
The following trade events in Saudi Arabia offer excellent opportunities for U.S. franchises:
World Franchise Exhibition
Date: January 15-17, 2019
Saudi Franchise Expo
Date: February 4-6, 2019
Saudi Ministry of Commerce & Industry: https://mci.gov.sa/en
Saudi Arabian General Investment Authority (SAGIA): https://sagia.gov.sa
Eastern Province (Asharqia) Chamber of Commerce & Industry: https://chamber.org.sa
For More Information contact the U.S. Commercial Service in Dhahran, Saudi Arabia at: Tareq.Ghazal@trade.gov; Phone: 966 13 330 3200 X 3065; Fax: 966 13 330 2190; or visit our website: https://www.trade.gov/saudi-arabia.