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Saudi Retailers | 1Q18e demand setback; Consolidation key driver

Quality of spending in consecutive decline. Despite the disbursement of the monthly cash allowances to nationals, under the Citizen Account programme and the royal decree issued in Jan-18 for public sector employees, we have not seen an improvement in the quality of spending on PoS data y-t-d. In fact, the average basket size of the Saudi consumer dropped c24% y-o-y, reaching a new all-time low of SAR227 (-c3% m-o-m), in Feb-18. This lower ticket size can be explained by the more cautious consumer behaviour in seeking discounts and value products, especially after VAT and energy subsidy cuts took place in Jan-18.

Our top picks to outperform despite higher overheads. We expect Al-Othaim and SACO to report more resilient results (compared to yearly earnings declines across the board for others, ranging from 2.8% in the case of Herfy and 38% in the case of Alhokair), with 1Q18 bottom lines rising by c7% (clean basis) and 7.3% y-o-y, respectively. Growth should be driven by the aggressive store roll-out strategies, displacing unorganised players, despite the slowdown in demand and higher overheads related to new stores and labour costs. Unorganised players, unable to comply with the sector’s stringent Saudisation requirements and adjust to the higher costs of the business, will be pushed out of the market, expediting the pace of displacement and shift towards modern retail (SACO, eXtra, and Al-Othaim).

Promotions stimulate demand. eXtra, was the first to report 1Q18 within our Saudi retail coverage, posting strong earnings growth (66% y-o-y), beating our forecast by 62%. eXtra’s 15th Anniversary promotions were successful in stimulating demand (revenue growth of 7.5% y-o-y), and expanding its market share, supported by its unique product and services. The pickup in Herfy’s restaurants should wane, as the affordable ‘Vintage Menu’ was only available in 4Q17.