Strategy Note /

Saudi Equity Strategy: Extended business hours positive for retail sector

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    17 July 2019
    Published by

    The Ministry of Municipalities and Rural Areas (MoMRA) announced a new regulation to grant the private sector the flexibility to extend business hours to 24 hours. We believe the regulation will have a positive impact on the economy by creating employment, increasing disposal income and boosting SME and private sector contribution to GDP. For listed companies, we expect restaurants to be the key beneficiary while the impact on the retail segment profitability is expected to be limited.

    MoMRA introduced a flexible business hour regulation for the commercial sector. This will grant business owners the flexibility to decide the best operating hours, up to 24 hours, with limited approvals required. MoMRA has the option to impose fees or exempt related sectors.

    Previously, commercial sector business hours were 9am-2am with most shops closing by midnight. Moreover, operating for 24 hours was limited to certain segments (such as supermarkets, petrol stations and pharmacies) and required many different approvals from various government entities. 

    In line with Vision 2030 targets, we expect relaxing business hours regulation to have a positive impact on the overall economy, supporting GDP growth, reducing unemployment, potentially increasing consumer spending and meeting the needs of larger consumer base. Relaxing business hours regulation is also a global practice, implemented in several large economies such as USA, UK, Germany and France.

    Based on Q1 19 data, the Saudi economy grew 1.7% supported mainly by the non-oil sector, which increased by 2.1%. Saudi is targeting GDP growth of 2.6% and 2.7% in 2019 and 2020, respectively. According to MoMRA, this initiative will increase non-oil GDP by 0.25%-0.30%. It will also support the growth in entertainment and tourism sectors.

    Employment is expected to increase following the introduction of this regulation as business owners add more shifts, reducing the unemployment rate, which currently stands at 12.5%. As the retail sector is a key beneficiary, we expect an increase in the number of full-time and part-time jobs, especially among women.

    For listed companies, we believe the retail and consumer services sectors will be the key beneficiaries from the implementation of this regulation along with selected real estate names (mall operators), albeit the impact might be limited for most companies. Restaurants (such as Herfy and Raydan) would benefit the most, which are expected to adapt the 24-hour business plan and building on the exponential growth of delivery platforms. The impact on discretionary retailers is expected to be limited as only few branches might be shifted to 24 hours. Real estate companies which operate large malls might increase their lease for 24-hour operating malls. For food retailing, such as Othaim and Farm, no impact is expected as most supermarkets already operate for 24 hours.