Saudi consumers will prefer lower priced alternatives

January 2017

JEDDAH — Aggregate spending by Saudi households hasmaterially increased during 2007-2013, however, majority had been consumed byinflation; growth in real spending was weak, Al Rajhi Capital Research said inits recent strategic report analyzing consumer spending patterns in theKingdom.

In the report titled “What happens to consumer spendingnow?”, it noted that based on the past trends, it believes that consumers willprefer downtrading (choosing lower priced alternatives) rather than cuttingback on quantity in in the current environment given that the real growth inthe past was weak.

Similarly, retailers are likely to favordiscounting to maintain volumes. There have been evidence of these trends alsotaking shape in the last few quarters. The impact of decline in consumerspending is likely to be witnessed more in segments such as Transport,Recreation, Restaurants & Hotels as these sectors have seen the highestincrease in real spending in the past and hence, making it easy for consumersto pare back their spending.

Other segments such as Fabric & Apparel, Furniture maynot be impacted as much, as these segments did not witness material increase inreal spending in the first place. The Research team remains positive on theorganized retail sector, which benefited from market share gains in the past,and it believes that this this trend will continue due to their betterpositioning in terms of economies of scale, better supplier terms and balancesheet strength.

Conclusions based on the past dataanalysis disputes some of the widespread beliefs, as it highlights howinflation has consumed two thirds of the increase in household spending, mainlyrelated to food and housing . This also implies that the growth in real termswas mostly flat during this period. The analysis shows that the discretionaryand non-discretionary spending patterns should be evaluated based on the levelof household expenditure, whereas broader conclusions based only on the natureof segments could be misleading as the analysis shows that the line is blurredbetween these terms.

The report noted that majority of the increase inhousehold spending consumed by inflation: During 2007-2013, average Saudihousehold spending increased by 35% (from SR13,250 in 2007 to SR17,903 in 2013)as per CDSI data. However, Al Rajhi Capital analysis shows that 65% of theincrease in spending was consumed by inflation.

Likewise, housing & food, the main household expenses,witnessed higher inflation. Housing and Food together comprise 1/3rd of themonthly household expense, but account for 2/3rd of the total inflation.

Further, real spending maintained, but growth was weak:About 80% of the aggregate increase in household spending during 2007-2013 canbe accounted by inflation (65%) and rise in the number of households (15%).Consequently, only 20% of the increase in household spending was due to growthin real spending. Real spending per household grew by only 6.7% in absoluteterms, implying a weak 1.1% CAGR during this period.

Moreover, the research showed the thin line between‘discretionary’ and ‘non-discretionary’: The analysis suggests that the linebetween discretionary and non-discretionary spending was blurred based on pastspending patterns. For e.g., segments such as Fabric & Apparel, andFurniture (considered discretionary) witnessed lower real spending growth atjust 11%, implying a 1.8% CAGR over this period. This goes against the popularbelief that the discretionary spending should have grown at a faster paceduring periods of income growth as was the case during 2007 to 2013 due tohigher oil prices, Al Rajhi Capital Research report added.

© The Saudi Gazette 2016

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