Agribusiness to Saudi Arabia
Trends and opportunities
The Kingdom of Saudi Arabia, with a population of some 29 million, an area of 2.1 million km2, and a government spending budget of A$700 billion between 2013 and 2015, is the largest economy in the Middle East and accounts for 50 per cent of the gross domestic product (GDP) of the Gulf Cooperation Council (GCC).
Economic activity in Saudi Arabia has passed its peak, with the forces bolstering the expansion of the non-oil economy set to gradually tail off over the coming quarters. Both fiscal and monetary conditions are beginning to tighten over 2016, a shift that will intensify over the coming years.
The public sector wage bill is likely to be capped, although most of the country's large-scale welfare and subsidy network will remain intact. King Salman has already strengthened his control on the country's administrative apparatus and taken steps to tighten scrutiny on public infrastructure projects, ordering government bodies to return unspent money to the finance ministry and suspend new hiring and promotions for government jobs until the end of 2015.
According to BMI, public spending is predicted to fall by 10.9 per cent over 2016, recording the largest decline since 1998. While this partly reflects a return to the mean after the end of one-off factors such as the bonus wage payments, we also anticipate a large cut in capital expenditure (CAPEX). Lower government spending, diminishing government deposits in the banking system and tighter liquidity, and weaker consumer and business sentiment are bound to impact on private sector activity in the form of reduced contract awards, softer retail sales and downside risks to corporate profits.
Saudi Arabia's current economic turmoil will weigh on spending over the coming quarters as consumer confidence gradually weakens. By 2018 food spending is expected to return to stronger growth. The country's food sector will remain resilient despite the slight 2016/17 decline, with convenience and premium spending driving growth.
Saudi Arabia's large and growing Muslim population will be a key driver to the popularity and high demand of non-alcoholic beverages as the consumption of alcohol is fully prohibited. The soft drinks segment will be supported by the rising momentum for healthier foods, which will boost the sale of juice and bottled water.
Mass grocery retail
Saudi Arabia's grocery retail sector is expected to experience positive investment up to 2020. This is largely due to the government's decision to allow 100 per cent foreign ownership in the wholesale and retail sector. The country's retail sector outlook will further be boosted by the favourable consumer outlook, despite the current economic downturn, and an even brighter outlook from 2018.
The Saudi Arabian food-processing sector has developed at a considerable pace over the past decade. The government currently supports the industry by providing attractive financing and subsidies on selected equipment, and through the imposition of high tariffs on imports that compete with locally produced equivalents. These include meat and poultry, table eggs, infant nutritional foods, sugar and macaroni. However, the government did reduce customs tariffs on a number of basic food products in response to high rates of inflation.
Fuelled by the kingdom's economic boom, significant growth has taken place across a number of food segments. The meat-processing, dairy and confectionery segments have attracted particular attention. Increased investment by multinational food companies, the continued development of domestic food processing capabilities and the continued expansion of Saudi Arabia's mass grocery retail industry are contributing to the gradual shift towards more Western consumption habits (Source: Business Monitor International (BMI), SAUDI ARABIA Food and Drink Report - forecasts till 2020, Q4-2016).
Demand for milk and dairy products in Saudi Arabia is surpassing the current rate of production of the Saudi Arabian industry. Dairy farming now constitutes three per cent of Saudi Arabia's GDP with current production totalling 1.13 billion kilograms, at an annual compound growth rate of four per cent. However, even with large production capacity, it is not enough to meet the forecast demand for milk and milk products by 2018, where consumption is expected to be around 1.3 billion kilograms.
There are significant opportunities for Australia's involvement in the dairy sector across trade, investment and education. Demand for milk and dairy products in Saudi Arabia is steadily increasing and has surpassed the current rate of production of the domestic Saudi Arabian dairy industry. Dairy farming constitutes three per cent of Saudi Arabia's GDP with current production totalling 1.13 billion kg at an annual growth rate of four per cent. Yet despite this large production capacity, Saudi Arabia does not have the capability to meet growing demand for dairy products, which is forecasted to grow to 1.3 billion kilogram by 2018.
The overall forecasted value of the Saudi dairy market is expected to increase to US$6,121.20 in 2018 from US$4,859.60 in 2013, an annual compound growth rate of 4.7 per cent.
Recent years has seen an increase in demand for dairy products as the government promotes healthy eating accompanied by growing acceptance of western diets. The lack of arable land and the high cost of converting desert into productive farmland has ensured that Saudi Arabia has increasingly relied on dairy imports, including feed and fodder (Source: Austrade, Industry Overview: Dairy in Saudi Arabia, March 2015).
The Saudi Government is placing increasing importance on the country's agricultural sector. However, agriculture contributes very little to the local economy in comparison to the industry and service sectors.
The farming sector accounts for just 3.1 per cent of total GDP and employs less than 10 per cent of the total population, with an estimated one per cent of the country's land is suitable for farming. However, local processing capabilities are fairly developed, and value-added production is made possible once raw materials have been imported from abroad.In socioeconomic terms, the agricultural sector is crucial to the Saudi economy, as it provides employment for a significant segment of the population that has little formal education. The majority of agricultural production in Saudi Arabia is in the north of the country, in areas such as Qasim, Hail and Wadi. The leading crops include wheat, watermelon, dates and tomatoes.
Current government policy aims to replace low-value crops, such as hay, wheat and barley, with imported commodities, purchased on world markets. However, government policy is supportive of the domestic production of high-value crops, particularly fruit and vegetables (Source: Business Monitor International (BMI), SAUDI ARABIA Food and Drink Report - forecasts till 2020, Q4-2016).
The Saudi Grains Organization (SAGO) will take over the exclusive right to import and manage local distribution of feed barley on 2 October 2016. The organisation will import barley directly through public tenders open to registered international exporters; it does not buy through grain brokers. SAGO's takeover of the barley imports portfolio will make Saudi barley imports and distribution more transparent, as the organisation will release import data, prices and quantity to the public on its website. This level of transparency has not existed for the past five years. In marketing year (MY) 2015/16, which ended in June 2016, Saudi Arabia imported about 11 million MT of feed barley, an increase of about 36 per cent compared to the same period in MY 2014/15 (Source: USDA, Attaché Reports (GAIN), Sept 30,2016) (Source: USDA, Attaché Reports (GAIN), Sept 30,2016).
Based on the current geopolitical issues across the region, food security became a major concern for Gulf States and particularly Saudi Arabia. Accordingly, securing protein sources – through meat, dairy and aquaculture is a priority for Saudi Arabia. Moreover, we see that there are great opportunities in the food and agriculture sectors including:
- diverse range of food items for retail and Horeca (e.g. meats, dairy, processed foods and honey).
- exporting ingredients and bulk dairy products. Given the impressive growth rate of the Saudi diary industry there are growing opportunities for Australian companies to export ingredients and bulk dairy products (e.g. cheese, milk, infant formula) into the Saudi market.
- export feed and fodder. Industry experts are predicting that Saudi dairy will become completely dependent on feed and fodder imports. This provides an opportunity for Australian suppliers to export feed and fodder into Saudi Arabia, particularly feed supplements and high-protein alfalfa replacements, cottonseed, pellets and barley.
- wheat, pulses, grain for human consumption.
- food related engineering designing (slaughter houses) and farm equipment.
- protected agriculture such as products and services on greenhouse and hydroponics.
- saline agriculture and efficient irrigation and fertilisation.
- water conservation. This is a major consideration for Saudi Arabia, given its geography and lack of rainfall, therefore water-saving technologies for dry climate irrigation and dairy production is a key need within this market.
- new technology and production manufacturing.
- food quality, supply chain logistic.
- aquaculture expertise for wild catch and fish farming.
- development of investment propositions in Australia that allow Saudi Arabia to meet food security needs.
Saudi Arabia has a young population that requires education and training to fill jobs currently being held by expatriates and to reduce significant unemployment. Australia has good capabilities in the transfer of technology throughout vocational training and tertiary education to enhance the capability of the young Saudi population in the following areas:
- food quality and safety, logistics and Halal certification
- animal and aquaculture production
- improved food manufacturing and production techniques
- the development of educational packages from farm to fork in Saudi Arabia (particularly on-farm skills)
- usage of feed and fodder in KSA, particularly feed supplements and high-protein alfalfa replacements
- water-saving technologies for dry climate irrigation and dairy production
- the development of investment propositions in Australia that allow Saudi to meet food security needs.
(Source: Austrade report on Agriculture in Saudi Arabia, December 2014, and Australian state Food and fibre exports to MENA 2015-2016, October 2016).
The Saudi Arabian market is extensive where you can find a wide range of products from many countries competing aggressively against each other. Competitors are exporting large volumes of food and Agri products to Saudi Arabia including:
- beef products: Holland, Brazil, India, Ireland and United States (US)
- lamb meat products: New Zealand, Pakistan, Sudan and other African countries
- dairy products: New Zealand, Denmark, Holland, France, Romania, Cyprus and others
- animal feed: US, Brazil, Ukraine and Argentina
- horticulture: New Zealand, South Africa, Turkey, Europe, India, South East Asia, Egypt and some Middle Eastern countries
- grain: Russia, US, Brazil, Argentina and EU.
(Source: Austrade report on Agriculture in Saudi Arabia, www.austrade.gov.au/mena, December 2014).
Tariffs, regulations and customs
Tariffs are imposed on imported products at a rate ranging between zero, five, 12 or 20 per cent depending on the need of the product in the country and whether if it is considered to be in competition to any similar product manufactured locally. High tariff would be imposed on competitive products against locally manufactured similar products and vice versa.
Saudi Food and Drug Authority (SFDA) is an official government body that looks after the food and beverage sector, medical equipment, pharmaceuticals and cosmetics in Saudi Arabia. SFDA is responsible for:
- inspecting imported food coming through the KSA posts
- registration of foreign food establishments that export to the KSA
- registration of imported food items to the KSA
- registration of local importers
- licensing imported novel food
- inspecting food establishments wishing to export food to the KSA
- issuing circulars, instructions and bans on food products issued by the SFDA to the Council of Saudi Chambers of Commerce and Industry to inform stakeholders and importers to enforce them.
SFDA has launched a system of electronic services for the benefit of importers in order to facilitate and speed up the procedures at marine, land and airports regarding import of food in the Kingdom (Source: SFDA 2016).
Marketing your products and services
Using an agent or distributor
Saudi commercial regulations restrict importing for resale and direct commercial marketing within the Kingdom to Saudi nationals, wholly Saudi-owned companies, and Saudi-foreign partnerships where the foreign partner holds 25 per cent equity. Nationals from the Gulf Cooperation Council (GCC) countries, which include Saudi Arabia, Kuwait, Qatar, Oman, Bahrain, and the UAE, are also allowed to engage in trading and retail activities, including real estate. Agent/distributor relations are governed by the Commercial Agency Regulations of the Kingdom of Saudi Arabia that is administered by the Ministry of Commerce and Industry. Saudi business people cannot act as commercial agents unless their names are registered at the Ministry of Commerce and Industry.
Establishing an office
The procedures to establish an office in Saudi Arabia differ according to the type of business undertaken. The most common and direct method is simply to appoint an agent/distributor who can set up the office under its own commercial registry. The agent/distributor agreement should be registered with the Ministry of Commerce and Industry. The Commercial Agency regulations govern the agent/distributor agreement.
Franchising is an increasingly popular approach to establish consumer-oriented businesses in Saudi Arabia. Although the franchise market is small, it is rapidly expanding in a variety of business sectors. According to a local study, the Saudi franchise market is expected to grow an average of 10-12 per cent annually over the next three years. The same study projects the value of paid fees and royalties at more than SR 1.2 billion (A$323 million). The growth in this sector is based on Saudis’ desire to own their own business and a widely held appreciation for Western methods of conducting business.
To establish a franchise in Saudi Arabia, a foreign franchisor must select a franchisee and register the franchise. The franchisor must be the original one, and may not be a third-country franchisor. All franchise agreements follow the Saudi Commercial Law and must be approved by the Ministry of Commerce and Industry. A foreign company is strongly urged to consult with an attorney familiar with Saudi law before establishing, changing, or terminating a franchise agreement.
Selling to the government
There is no central tender board in Saudi Arabia. Every government agency has full contracting authority. Foreign companies interested in bidding on a government project must make themselves known to that specific government agency/ministry offering the project. When a project becomes available, the government agency/ministry selects bidders from a list of prequalified/known companies and invites them to bid for that particular project.
Expatriate managers have had a strong influence in introducing advanced selling techniques into a market that relied heavily on word-of-mouth and established buying patterns until a few years ago. Saudi consumers are increasingly becoming more discerning and sophisticated.
Although details of a transaction can be handled electronically, no serious commitment is likely to be made without a face-to-face introduction. Business cards are usually printed in English on one side and Arabic on the other.
Saudis are gracious hosts and will try to put a visitor at ease, even during arduous business dealings. A large portion of upper and middle class Saudis were educated in the United States or in Europe.
Financing and credit facilities may be offered as part of a sales proposal, usually after a solid relationship has been established.
Many Saudi companies handle numerous product lines (sometimes even competing product lines), making it difficult to promote all products effectively. Saudi agents typically expect the foreign supplier to assume some of the market development costs, such as hiring of dedicated sales staff (especially for high-tech or engineered products), setting up workshops and repair facilities, and funding local advertising. Foreign suppliers often detail a sales person to the Saudi distributor to provide marketing, training, and technical support. Without such an arrangement, Australian firms should expect to make frequent, periodic visits each year to support their Saudi distributor.
Trade Promotion and Advertising
Advertising, especially on satellite television, is rapidly expanding, but commercials have to conform to religious and ethical codes. With some minor exceptions, the female human form is not culturally or religiously acceptable in the media. The Saudi monopoly on television broadcasting was broken with the introduction of satellite television, which also forced TV advertising rates to come down.
Trade promotion events take place from September through June, with most of them held in the modern exhibit centres in Saudi Arabia's three major cities, Riyadh, Jeddah and Dammam. Smaller exhibition facilities are also located in regional centres, and often operate in cooperation with or under the sponsorship of a local chamber of commerce.
Most chambers have a proactive approach to promotion and trade, organising shows and presentations for individual companies or groups, and have been eager to attract Western suppliers.
Sales Service/Customer Support
Saudi Arabia is a relatively open market, which makes it highly competitive. Brand loyalty and established preferences are less developed than in some other countries. Consequently, sales service and customer support is indispensable to win and maintain new clients.
Saudis view a foreign firm's physical presence in the Kingdom as a tangible sign of a long-term commitment. Prompt delivery of goods from available stock and the presence of qualified support technicians have become more important, and they influence repeat business much more now than ten or even five years ago. Government agencies usually require equipment suppliers to commit to providing maintenance and spare parts for an average of three years (Source: Austrade, Doing Business with Saudi Arabia, February 2015).
Distribution and sales channels
There are three major distribution and sales regions in Saudi Arabia: the Western Region, with the commercial centre of Jeddah; the Central Region, where the capital city of Riyadh is located; and the Eastern Province, where the oil and gas industry is heavily concentrated. Dammam is the capital city of the Eastern Province, and its metropolitan area includes the contiguous cities of Dhahran and Al-Khobar. Each city has a distinct business community and cultural flavour, and there are only a few truly “national” companies dominant in more than one region.
Foreign exporters may find it advantageous to appoint different agents or distributors for each region having significant market potential. Multiple agencies and distributorships may also be appointed to handle diverse product lines or services. Multiple agencies and distributors can present logistical and management difficulties, so foreign firms, particularly in the franchise sector, often choose to appoint a master franchisor or distributor for states of the Gulf region, which includes Saudi Arabia, Kuwait, Qatar, Bahrain, Oman, and the UAE.
While there is no statutory requirement that distributorships be granted on an exclusive basis, it is clearly the policy of the Saudi Ministry of Commerce and Industry that all arrangements be exclusive with respect to either product line or geographic region.
In general a long-term food and beverage partner / distributor needs to have capabilities like cold stores, dry storage areas, and a fleet of refrigerated trucks to be able to distribute products across the country or probably a smaller geographical area within Saudi Arabia. This distributor may have his own retail stores and is able to distribute to the retail models shown below, on the other hand you may find some of the hypermarkets, supermarkets and wholesale stores import their own products directly from the country of origin.
Retail Models available in KSA:
- Wholesale stores
- Convenience Stores (Baqala).
Organised retail in Saudi Arabia would experience more expansion over our five-year forecast period to 2020 due to the growing demand for formal food retail and is driven by high consumer confidence and new store openings (Source: BMI Research, SAUDI ARABIA Food and Drink Report - forecasts till 2020, August 2016).
The geographical location of Saudi Arabia plays a good role for all means of transportation. Products can be shipped into Saudi Arabia by air from all countries of the world via Saudia Cargo company fleet of planes or other neighbouring countries airliners including Emirates, Etihad, Qatar Airways, Gulf Air and many others that travel to most destinations around the world.
Internally, Saudi Arabia is connected within a very large network of modern highways that allow you to travel from north to south and east to west, across most of the Saudi Arabian cities, seaports and airports. Saudi Arabia's roads offer links with neighbouring Yemen, Oman, the UAE, Qatar, Kuwait, Iraq and Jordan.
Most distributing companies and manufacturers own their fleet of small, medium and large refrigerated and normal trucks. Many of these companies use good technologies for vehicle tracking and communication.
In addition to the road network, Saudi Arabia is one of the few Arab states that have a railway. The railway network offer freight opportunities for the containers transport between the country's main container ports, Jeddah and Dammam, passing though dry port in Riyadh. Other network has been built for mining purposes connecting between the northern and other parts of the country. In addition to that a huge network of railway was built and ready to operate connecting the capital with the northern territories close to the Jordanian border.
Links and industry contacts
Government and industry
Council of Saudi Chambers
Ministry of Agriculture
Ministry of Trade and Investment
Riyadh Chamber of Commerce and Industry
Saudi Arabian Grain Organization
Saudi Food and Drugs Agency
Saudi Arabian Standards Organization
Saudi Arabian General Investment Authority
Alriyadh newspaper (Arabic)
Arab News newspaper (English)
Okaz Newspaper (Arabic)
Saudi Gazette newspaper (English)
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