Saudi Arabia's grocery retail sector: A market in transition

Saudi Arabia’s grocery retail sector has come a long way over the past years, but still has several steps to take in its evolution. Four major strategic developments will shape the industry’s landscape in the coming years, according to a new report from Oliver Wyman.

The latest Customer Perception Map study by Oliver Wyman, which tracks customer perceptions in the grocery sector in different countries around the world, has found that local KSA retailers can take several steps to advance their products, shopping experiences, channels, operations and services.

In doing so, they can “gain valuable insights and lessons from more mature grocery markets”, said the report’s authors.

Consolidation

One of the insights relates to market competition and concentration. The grocery retail sector in the Kingdom is still highly fragmented, meaning that there exist opportunities for beefing up scale and efficiency. Larger players can in addition channel more funds to innovation and digital investments, which benefits customers.

“Footprint expansion still is important given the size of the market and the current market share captured by the top 10 retailers, which remains relatively small in comparison to more developed markets,” said Joe Abi Akl, partner and the head of Oliver Wyman’s Retail and Consumer Practice for India, the Middle East, and Africa (IMEA).

Differentiation

The authors also see opportunities for more differentiation in the market, benefitting customers that seek different services and/or niches. This transition will see the emergence of more ‘offer specialists’ (focused on a premium customer experience, with unique assortments, high quality and service) and ‘value specialists’ (good value for money, but limited assortment and service) operating alongside incumbent players.

“There is a clear opportunity for retailers to differentiate their offerings, and – based on the trajectory of more developed markets – this will be an important strategy for Saudi Arabia’s retailers to observe and act upon,” said Abi Akl.

Developing a differentiated proposition will require retailers to undertake numerous changes to their strategy and operations. “In developing a differentiated proposition, many approaches are possible, although a deep understanding of customer preferences is key,” said Alexander Poehl, partner in Oliver Wyman’s Retail and Consumer practice.

For example, in Saudi Arabia, satisfaction is driven to 51% by value (price and promotions), 20% by assortment, 18% by quality and to 11% by service. “Given the relative importance of value, retailers might want to make sure to offer an attractive price entry range and own-label products, increase their pricing capabilities, or provide attractive promotions that drive customers to the store without destroying margin for the retailer.”

Offer specialists meanwhile might opt to take larger control of their supply chains and offer unique high-quality fresh products, satisfying the hunger of Saudi customers for local products, with 90% of customers deliberately looking for fruit and vegetables produced in the Kingdom.

“Getting the basics right by putting the customer at the center for all commercial decisions is key,” said Poehl. “Winners put the customer at the center of all decisions on assortment, space, price and promotions,” he said.

The rise of discounters

One grocery segment that is expected to see strong growth in KSA is the ‘discounter’ segment – supermarkets such as Lidl and Aldi that offer high value for money and scale nationwide. According to the Oliver Wyman study, 55% of Saudi customers said that they would be interested in shopping at a discount grocery retailer and 13% already shop at one.

Of the respondents familiar with European discounters Lidl and Aldi, 93% indicated that they would shop at these stores if they came to Saudi Arabia. Abi Akl: “We believe that it is only a question of time for the discounter concept to gain substantial traction in the region, eventually putting the margins of the entire value chain under increased pressure.”

Further reading: US grocery sector in store for further hard discounter expansion.

Personalization

The fourth trend uncovered is personalization, which is driven by the diverse customer preferences of people in Saudi Arabia (in part due to the Kingdom’s relatively diverse population).

“Through personalizing their offer based on the purchasing behavior of their customers, retailers can significantly enhance the shopping experience and thus increase traffic and sales with their customers. Approaches include fully individualized promotion programs and communications, unique omnichannel experiences and localized in-store experiences,” said Abi Akl and Poehl.

Over 6 in 10 local shoppers told Oliver Wyman that they would be interested in personalized promotional offers, and almost 60% would be interested in AI assisted services such as customer service chatbots and recipe recommendations.

Conclusion

“Saudi Arabia’s retail landscape is one of the most exciting market opportunities of the moment. Our study shows that grocery retailers must innovate, differentiate, and embrace technology to enable them to better understand and serve their customers,” Joe Abi Akl said.

“By developing and deploying the right strategy, based on sound research, retailers can improve their performance, find niche areas of the market for expansion, and tap into growth opportunities.”

In planning for their next strategic moves, the report emphasized that industry players should have a clear picture of what they want to stand for in the future to avoid costly mistakes.