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					                                                                                MORGAN                STANLEY                 RESEARCH
                                                                                MIDDLE              EAST          &    NORTH              AFRICA

                                                                                Morgan Stanley & Co International         Saul A Rans
                                                                                plc (DIFC Branch)+
                                                                                                                          Saul.Rans@morganstanley.com
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                September 19, 2013


Industry View   Saudi Consumer
In-Line
                What we learned from two
                days exploring the provinces
                We recently spent two days visiting three of Saudi
                Arabia’s second tier cities (0.4-0.6m inhabitants
                each) to investigate the local consumer economy at
                first hand. This note summarises what we found.

                In the fashion segment, traditional styles dominate:
                Arabic brands dominate the retail space in these cities.
                Demographic/ social change may benefit global brands
                in the long term as younger Saudis follow global trends.

                So do value brands: Brands like H&M were present,
                while Zara, Gap etc were not. This could theoretically be
                an opportunity for franchise retailers like Al Hokair, but it
                is not clear if incomes in these cities have risen enough
                to support mid market brands. Launching new value
                brands may be a lower-risk route to growth short term.

                In electronics, store formats need to evolve: Big box
                store density in the cities we visited was in line with the
                national average. But in downtown areas of these cities
                (and in third tier towns) independents still dominate – a
                potential opportunity for chains like eXtra, if they can
                adapt store formats to target these catchment areas.

                Fast food brands could move into third-tier cities:
                QSR densities in the cities we visited were also in line
                with the national avg. We would expect brands like Herfy
                to move to smaller cities (150-200k pop) that are largely
                untouched by branded fast food to maintain their growth.

                Food retail fragmentation firmly in evidence:
                Numerous small grocery stores cling on in old downtown
                                                                                Morgan Stanley does and seeks to do business with
                locations. A convenience store format might enable big          companies covered in Morgan Stanley Research. As
                chains like Savola and Othaim to accelerate the pace at         a result, investors should be aware that the firm may
                which they gain market share from these small players.          have a conflict of interest that could affect the
                                                                                objectivity of Morgan Stanley Research. Investors
                More and better mall space needed: Local factors                should consider Morgan Stanley Research as only a
                                                                                single factor in making their investment decision.
                favour malls as the location for leisure shopping. But we
                visited seven (of eight) malls in the three cities and found    For analyst certification and other important
                                                                                disclosures, refer to the Disclosure Section,
                quantity and quality both lacking – a potential bottleneck      located at the end of this report.
                to growth for mall-based formats (notably fashion retail).      += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be
                                                                                associated persons of the member and may not be subject to NASD/NYSE restrictions on
                                                                                communications with a subject company, public appearances and trading securities held by a
                                                                                research analyst account.
                                                                     MORGAN          STANLEY           RESEARCH

                                                                     September 19, 2013
                                                                     Saudi Consumer




Key takeaways from our field trip
Why did we go?                                                       The present scarcity of mid market fashion outlets in such
                                                                     second tier cities could theoretically represent a growth
Leading consumer companies in Saudi Arabia have been
                                                                     opportunity for franchise retailers that operate internationally
saying for some time that they have now exploited much of the
                                                                     branded retail outlets in Saudi Arabia – the largest two being Al
growth potential for their businesses in the Kingdom’s three big
                                                                     Hokair and Alshaya.
metro areas of Riyadh, Jeddah and Dammam/ Khobar.
                                                                     On the other hand, this international brand penetration profile is
This is causing them to switch their focus to the larger and
                                                                     almost certainly due to historically lower per capita incomes in
mid-sized provincial cities as they look to maintain high rates of
                                                                     the provinces compared with Saudi Arabia’s big cities. It is not
growth.
                                                                     clear whether incomes in these cities have yet risen sufficiently
                                                                     to make the launch of a large number of mid market brands a
Against this backdrop, investors have been asking us for more
                                                                     viable strategy.
colour on the scope to generate growth from second tier city
markets in the Kingdom and for insights into the potential
                                                                     Key takeaway: For local franchisees of international brands,
bottlenecks and risks associated with such regional growth
                                                                     introducing new labels that offer more choice to customers in
strategies.
                                                                     the value segment may be the lowest-risk route to further
                                                                     growth in second tier city markets, at least in the short term.
Where did we go?
We visited three provincial cities with a total population of 1.4m   Key observations on the electronics segment
(5% of the total national population):
                                                                     We expect demand for electronics and household appliances
                                                                     in established second tier city markets like the three we visited
   The neighbouring cities of Abha (0.4m population) and
                                                                     to continue growing, driven by population 1 and income growth.
    Khamis Mushayt (0.6m) lie 15 miles apart in the far
    southwest of Saudi Arabia. Together they form a metro
                                                                     But the cities we visited do not appear under-served by big box
    area of 1.0m people – one of the larger second tier metro
                                                                     retailers of electronics and appliances – big box store density in
    areas in the Kingdom.
                                                                     these cities appears to be in line with the national average. The
   Jubail is an industrial city of 0.4m people and the home of      main chains, eXtra, Jarir, were both represented, as was
    the Saudi petrochemical industry. Jubail is a smaller            second rank player Emax.
    second tier city (the 14th city in the country by population).
                                                                     On the other hand, the downtown areas of these cities contain
Key observations on the fashion segment                              numerous small independent electronics retailers who do a
                                                                     strong trade in both new and reconditioned used goods. If the
Traditional styles remain dominant, with Arabic brands
                                                                     major retail chains like eXtra and Jarir were able to adapt their
occupying the large majority of the retail space in these cities,
                                                                     store formats and business models to tap into these catchment
both inside and outside the malls. In the longer term, we
                                                                     areas, they could potentially open up significant additional
assume that demographic and social change may enable
                                                                     growth opportunities.
international fashion brands to increase their market share as
more young Saudis follow global trends.
                                                                     The same could apply to the third tier provincial cities with
                                                                     populations of 150-200,000, most of which are presently
The presence of international brands was far lower than a
                                                                     served only by small independent shops or hypermarkets.
population based distribution would lead one to expect, i.e. the
penetration of international brands in these city markets was far
                                                                     Key takeaway: Electronics retail chains could have an
below their average on a Kingdom-wide basis.
                                                                     opportunity in downtown or smaller city catchment areas – but
                                                                     they may need to adapt their format and business model to
The international brands that we did see were overwhelmingly
value brands – for example, international brands like H&M and        1
                                                                       The IMF forecasts that the Saudi population will grow on average by +2.1% p.a.
F&F and regional brands like Splash and Citymax. Mid market          over the period 2012-17. Given that the population is young, we expect that the
brands like Zara and Gap were largely absent.                        number of teenagers and young adults will increase at an above average rate (we
                                                                     estimate at c3% p.a. over the same period).




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                                                                                                Saudi Consumer




offer adequate range breadth from an ever smaller store                                         On our trip we saw at first hand how many small grocery stores
footprint or successfully target specific product segments.                                     continue to trade from poorly maintained downtown locations.

Key observations on the fast food segment                                                       The scope for the big chains to capture market share from the
                                                                                                informal sector for many years to come is already well
We also expect consumption of fast food in established second
                                                                                                appreciated.
tier city markets like the three we visited to continue growing,
driven by population and income growth.
                                                                                                Key takeaway: The major chains like Savola and Othaim
                                                                                                could potentially accelerate the pace at which they gain market
But again, the cities we visited do not appear under-served by
                                                                                                share from the informal sector if they were able to more directly
the branded fast food sector – restaurant densities in these
                                                                                                target the customer groups that patronise these small outlets
cities also look to be in line with the national average. The main
                                                                                                and the downtown catchment areas in which they operate.
burger chains that are present in Saudi – Herfy, Kudu,
                                                                                                Development of a convenience store format might be a positive
McDonald’s, Hardee’s and Burger King – were all present to a
                                                                                                in this respect.
greater or lesser extent. So too were KFC, Pizza Hut and
Subway.
                                                                                                Key observations on existing retail infrastructure
Looking to the future, we see a lot of growth potential in the                                  Local factors (conservative social values and severe climate)
third tier provincial cities with populations of 150-200,000 that                               favour shopping as a leisure activity and malls as the location
are currently still largely untouched by branded fast food.                                     for such leisure shopping.
Customer acceptance of branded global fast food concepts is
clearly strong in the cities we visited and we see no reason why                                We visited seven malls in the three cities (out of eight in total).
the same should not hold true in smaller cities and towns.                                      The quantity of mall space available looked insufficient. The
                                                                                                better malls appeared fully occupied (a sign that more may be
Key takeaway: We think the major fast food brands could                                         needed) and a lot of retail outlets were trading from low quality
move on to target smaller third tier cities more aggressively                                   roadside strip malls that seemed unsuited to leisure shopping.
over the medium term.
                                                                                                Quality and imaginative design were also lacking – most of the
Key observations on the food and grocery segment                                                malls were old and dated, seemingly offering little more than an
                                                                                                air conditioned environment to shop in.
These cities are well covered by hypermarkets, especially
those carrying Savola’s Panda brand (the number one brand
                                                                                                Key takeaway: A lack of good quality mall space could be a
nationwide). Othaim Markets (Saudi Arabia’s number two
                                                                                                bottleneck to growth for retail formats that need to locate in
player) was the other brand significantly in evidence.
                                                                                                malls, notably fashion, accessories, beauty products and so
                                                                                                on.
Exhibit 1
Listed shares with exposure to the Saudi consumer economy
                                                             EPS              P/E (x)
                Rating    Currency        SP       2013e   2014e     2013e 2014e                                                                                Business description
                                                                                           Saudi Arabia's largest franchise retailer of international brands covering fashion,
Al Hokair *       N/R       SAR        132.75       6.99     8.37      19.0    15.9                                        accessories, beauty products, department stores.
                                                                                          Number two food retail chain in Saudi Arabia, mainly focused on the supermarket
Al Othaim *       N/R       SAR        133.50       8.09     9.52      16.5    14.0                                                                                    format.
                                                                                           A leading franchisee of international food and beverage brands in Saudi Arabia,
Americana *       N/R       KWD         2.30        0.16     0.19      14.4    12.1                                                  notably KFC, Hardee's and TGI Friday's
                                                                                         One of Saudi Arabia's two largest retailers of consumer electronics and its leading
eXtra             OW        SAR        118.25       6.36     7.21      18.6    16.4            retailer of household appliances through its 33 big box eXtra branded stores.
                                                                                            One of Saudi Arabia's two leading QSR brands, operating 207 of its own Herfy
Herfy             OW        SAR        120.00       6.25     7.20      19.2    16.7                                           branded restaurants throughout the Kingdom.
                                                                                          One of Saudi Arabia's two largest retailers of consumer electronics through its 28
Jarir *           N/R       SAR        218.50     11.08 12.71          19.7    17.2      Jarir Bookstore outlets, which also focus on books and office and school supplies.
                                                                                        Leading Saudi food manufacturing and food retail business. Owner of Panda, Saudi
Savola            EW        SAR         55.25       3.04     3.64      18.2    15.2              Arabia's number one food retail chain, focused on the hypermarket format.
Source: ThomsonOne, Morgan Stanley Research. * ThomsonOne consensus estimates, all other estimates are Morgan Stanley Research estimates. Prices at market close on September 17, 2013
N/R = not rated




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Where did we go?                                                      Until 1975 it was just a small fishing village, but in that year the
                                                                      Saudi government designated it as the site for the Kingdom’s
                                                                      first ‘industrial city’, focused on the Kingdom’s new flagship
Khamis Mushayt
                                                                      petrochemical producer SABIC. SABIC’s first major production
Khamis Mushayt is the largest population centre in the province       facilities entered service in the early 1980s and Jubail is now
of Asir, in the far south west of Saudi Arabia. According to          home to the largest petrochemical complex in Saudi Arabia.
official data, the city’s population stood at 630,000 in 2011. The    The city grew rapidly over this period and, according to official
total population of Asir province was 1.99m in 2011.                  data, had a population in 2011 of 379,000.

Khamis is a commercial city. The area also supports agriculture       Jubail and the much bigger Dammam Khobar/ Dhahran metro
– it lies at a significant elevation above sea level, making the      area have been significantly influenced by the presence of a
climate relatively mild compared with most of the rest of the         large number of western expatriates who live in the area and
Kingdom (a mild 30° or so on our visit, some 10-15° cooler than       work in the oil and gas and petrochemical industries. The city is
Riyadh during the summer). It actually rained during our visit.       socially less conservative than Khamis/ Abha.

Like the rest of Saudi Arabia, the overall participation of the       Male and female labour force participation in Eastern Province
national population in the labour force is still low, although this   is in line with the nationwide average. Male and female Saudis
has improved after two years of vigorous labour market reform         make up a higher than average share of the private sector
efforts. The labour force participation rate for Saudi nationals in   workforce (15% in Eastern Province vs 11% nationwide). 3
Asir province is currently 65% for men (vs 64% nationally) and
13% for women (vs 16% nationally). 2 Most Saudi nationals in          Exhibit 2

Asir work for the government, as is the case nationwide.              Top 20 cities in Saudi Arabia by population
                                                                      Rank         City                                                       Population(000)

Social values in Asir Province remain relatively conservative         1            Riyadh                                                                5,328
                                                                      2            Jeddah                                                                3,456
compared with Jubail in Eastern Province, which has been
                                                                      3            Mecca                                                                 1,675
more strongly impacted by western influences (see below).
                                                                      4            Medina                                                                1,181
                                                                      5            Al-Ahsa                                                               1,063
Abha                                                                  6            Ta'if                                                                   988
                                                                      7            Dammam                                                                  904
Abha is the capital of Asir province. The city is located some 15
                                                                      8            Khamis Mushayt                                                          630
miles from Khamis Mushayt. According to official data, the
                                                                      9            Buraidah                                                                614
city’s population stood at 367,000 in 2011. The two cities of         10           Khobar                                                                  579
Khamis and Abha together form a semi-continuous                       11           Tabuk                                                                   570
metropolitan area with a total population of 1.0m.                    12           Ha'il                                                                   413
                                                                      13           Hafar Al-Batin                                                          390
Thanks to the city’s benign climate and its position adjacent to      14           Jubail                                                                  379
Jabal Al Soda, the highest mountain in the Kingdom (elevation         15           Al-Kharj                                                                376
of around 3,000m), Abha is a tourist destination for Saudi            16           Qatif                                                                   371
nationals. The government promotes the city as a cultural             17           Abha                                                                    367
                                                                      18           Najran                                                                  329
destination and funds an annual calendar of events.
                                                                      19           Yanbu                                                                   299
                                                                      20           Al Qunfudhah                                                            272
Jubail                                                                             Top 20                                                              20,184
Jubail is located on Saudi Arabia’s eastern (Persian Gulf)
                                                                                   Other                                                                 8,186
coast, around 50 miles north of the major Dammam/ Khobar/
                                                                                   Total                                                               28,370
Dhahran conurbation.
                                                                      Source: Saudi Arabia Central Department of Statistics and Information (2011 data), Morgan
                                                                      Stanley Research
Jubail’s development has been driven by petrochemicals –
Eastern Province is the location of Saudi Arabia’s principal oil
and gas fields and its largest oil refinery at Ras Tanura.

2                                                                     3
    Saudi Arabia Central Department of Statistics and Information         Saudi Arabia Central Department of Statistics and Information




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Exhibit 3
We visited Abha and Khamis Mushayt (far south west of the country) and Jubail (east coast)




Source: © Google 2013, Mapa GISrael, ORION-ME




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Existing retail infrastructure in                                    saw no evidence of new mall space under construction in either
                                                                     Khamis Mushayt or Abha.
the cities we visited
                                                                     We visited two malls in Khamis Mushayt
Local factors favour shopping as a leisure activity
                                                                     Khamis Avenue Mall is the largest mall in the city. It is
and malls as a shopping location
                                                                     medium-sized – we estimate that it probably contains around
The conservative social values that prevail in Saudi Arabia          200 outlets (it was similar in size to the Aseer Mall in Abha,
mean that shopping has developed into a major social activity –      which we discuss below). The mall is anchored by a
Saudis do a lot of shopping-for-entertainment.                       hypermarket.

Local factors favour a mall-based environment for such leisure       A local contact told us that the mall opened two or three years
shopping:                                                            ago. Despite this the décor was rather plain and the mall was
                                                                     functional. The only entertainment option is a large children’s
   Summer temperatures rise to 40-45°C in most of the               play area adjacent to the food court (Middle Eastern malls
    country, although the climate in the Khamis Mushayt/             frequently contain a large centralised food court populated by
    Abha region is less severe.                                      fast food outlets).

   With its low population density and cheap petrol, Saudi          Oasis Mall is the second mall in the city; it is considerably
    Arabia is a car society. The downtown areas of cities are        smaller than Khamis Avenue. The mall appeared bright and
    invariably poorly suited to pedestrians.                         modern and was overall a welcoming venue that would
                                                                     encourage visitors to stay and browse (although it did not offer
The cities we visited seem under-served with malls                   any entertainment element or children’s play area),
and the quality of mall space was very mixed
                                                                     The mall was developed by the UAE-based Landmark Group,
The quantity of mall space in the cities that we visited appeared    which is active in both mall development (through its Oasis
to be inadequate for current needs. Khamis Mushayt and Abha          Centre brand) and fashion retail. Landmark Group is either the
both have one medium-sized mall anchored by a hypermarket            owner or the franchisee of most of the international retail
and the second mall in Khamis will soon benefit from a               brands in the mall.
hypermarket that is under construction on an adjacent plot.
However, the five other malls in the three cities we visited were    A hypermarket is under construction adjacent to the mall.
small and offered only a narrow range of outlets.
                                                                     Asdaf Mall is the third mall in Khamis and the smallest of the
In addition, the quality of the malls was very mixed. We were        three. We did not visit the mall, which, according to a local
not expecting malls in provincial Saudi Arabia to rival the          contact, has a broadly similar profile to the Abha Mall in Abha
destination malls that have sprung up in wealthier parts of the      (see below).
Gulf (Dubai’s mall-based aquarium and ski slope being the
extreme example of this trend). However, the ones that we            We visited three malls in Abha
visited are mostly tired and in need of upgrading. Most of them      Aseer Mall is by far the largest and best appointed mall in
also looked unimaginative in their design and seem to offer the      Abha. It opened in 2008 and retains a relatively bright and
customer little more than an air conditioned environment to          modern appearance. The mall is otherwise functional.
shop in.
                                                                     The mall was developed by a Saudi real estate development
The better quality malls that we visited appeared fully occupied
                                                                     company called Muhammad Al-Habib, which owns a number of
– a further indicator that more space may be needed. Jubail
                                                                     other mall projects throughout the Kingdom. According to
seems particularly under-served with retail space of any kind.
                                                                     Al-Habib’s website, Aseer Mall contains c200 retail outlets.
Local contacts tell us that the city’s inhabitants drive the 60-90
minutes to Dammam/ Khobar for their leisure shopping.
                                                                     Abha Mall is the second mall we visited in Abha. It is small and
                                                                     appeared old and rather dated. The brands in the mall are
We understand from a local contact that a significant sized new
                                                                     almost exclusively Arabic – the only exception is a Body Shop.
mall is currently under construction in Jubail, although we were
                                                                     There is a Herfy outlet in a small food court.
unfortunately unable to visit the site to see for ourselves. We




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Exhibit 4                                                           Exhibit 5
Aseer Mall was surprisingly quiet when we visited                   Jarir Bookstore in Huwaylat Mall was very busy
on a Monday evening                                                 when we visited on a Tuesday evening




Source: Morgan Stanley Research
                                                                    Source: Morgan Stanley Research

Rehana Mall is the third mall we visited in Abha. It was also
small and contains exclusively Arabic brands, with the              The Khamis/ Abha region has numerous strip malls
exception of a Splash fashion outlet. There is a hypermarket        alongside the main road
adjacent to the mall.
                                                                    More evidence of a deficit of modern mall space in the Abha/
                                                                    Khamis area comes from the prevalence of mostly low quality
We visited two malls in Jubail                                      strip malls alongside the main road that connects the two cities
Fanateer Mall is the largest mall in Jubail, although in absolute   (which is 10-15 miles long). These locations seem far from
terms the mall is very modest in size. We understand from a         adequate for leisure-oriented shopping and we assume that
local contact that the mall has been open for quite a number of     some retailers trading from these sites are doing so because of
years and, in our view, the mall is now showing its age. The        a lack of suitable space in malls.
mall contained a children’s play area/ games arcade, but
otherwise offered no entertainment options or food court.           Typically these buildings contain a row of 6-10 shops located
                                                                    on a service road parallel to the main highway, with some
The mall is situated in a pleasant location close to the beach      limited parking in front of the stores. Retail categories that we
and the surrounding area is occupied by numerous street level       saw in such strip malls included bathroom and kitchen
shops (general retail, food and beverage etc). It may be that the   showrooms, furniture shops and fashion outlets.
whole area formed a single development project, but this would
be an unusual approach for a Saudi retail development. More         These locations seem poorly suited to attract leisure shoppers
likely, we think, demand for space has grown to substantially       because of the lack of choice, the absence of food and
exceed supply since the mall was built.                             beverage outlets and the unattractive location (the journey from
                                                                    the car to the shop doorway sometimes involves negotiating
Al Huwaylat Mall is the only other mall in Jubail. It is a          potholes and piles of refuse).
mini-mall with just two anchor stores, a hypermarket and a Jarir
bookstore. We estimate that there are only around 20 other          Some of the roadside retail space in the Abha/ Khamis area is
shops in the mall, most of them Arabic brands. There is also a      in the form of larger stand alone stores, again with some
very small food court.                                              parking. We saw a number of hypermarkets situated on such
                                                                    sites as well as car showrooms and fast food restaurants (good
                                                                    for drive through service).

                                                                    We saw no strip mall space at all in Jubail.




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Exhibit 6                                                          Exhibit 7
One of the best strip mall developments, this one in               A jeans shop, a pharmacy and an electronics shop
Abha selling mainly Arabic women’s’ fashions                       in downtown Khamis




Source: Morgan Stanley Research                                    Source: Morgan Stanley Research


                                                                   We understand from local contacts that downtown shopping
Numerous small retailers are located downtown,                     areas are patronised not only by low wage expat workers, but
selling electronics, fashion, fast food etc                        also by Saudis – it simply depends on what the customer is
Each of the three cities we visited has a well defined downtown    looking to buy (or sell). For example, the small electronics
area representing the ‘old town’. All three downtown areas         shops in these downtown locations do not just sell new articles
comprise a warren of narrow streets in a disorganised layout.      – they also do a strong trade in used/ second hand items.
Buildings are old and street level shops are small.
                                                                   In particular, mobile handsets are purchased separately in the
The main retail categories we found here were the following:       Middle East, rather than being bundled with service contracts,
                                                                   so Saudis who wish to upgrade their handset commonly sell
     Consumer electronics. We saw numerous unbranded              their existing one to a small retailer, often in part exchange for
      shops selling mobile phones, laptop computers, cameras,      the new handset. The retailer then reconditions it and re-sells it
      MP3 players etc.                                             for typically less than half the original price even though it may
                                                                   be only year old. The same process goes on in other segments
     Fashion and shoes. To an even greater extent than in the     such as laptops, tablets and other consumer electronics goods.
      shopping malls, the fashions in these locations are mainly
      Arabic, but we did spot Giordano in Khamis Mushayt and
      Levis and Giordano (again) in Jubail.

     Watches and eyewear (of the inexpensive variety).

     Gold and jewelry.

     Mini supermarkets, unbranded.

     Fast food outlets. We saw the leading local brands Herfy
      and Kudu, plus local lookalikes of the main global brands.
      Indigenous foods are also well represented.




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Which international fashion                                           The specialist children’s fashion segment is essentially
                                                                      non-existent in the cities we visited. The major local and
brands did we see?                                                    international retailers operate almost 200 such outlets
                                                                      Kingdom-wide, but just one in the three cities that we visited.
Arabic tastes dominate the retail scene in the cities
we visited – but a number of international brands are                 International brands are present to only a limited
also present                                                          extent in shoes, accessories and beauty products
Everywhere we went, brands, tastes and fashions were mostly           We had expected to see more international brands in the
Arabic. Most of the space in the shopping malls we visited was        footwear and accessories segments. We also note that
Arabic themed. In roadside strip malls and in the old downtown        Accessorize – the most visible accessories brand – offers a
areas, we saw almost no international brands at all, with the         value proposition. The same comment applies to a lesser
exception of the fast food category.                                  extent with respect to the lingerie segment.

But while Arabic tastes dominate, the cities we visited are far       In the beauty and cosmetics segments, the dominant
from undiscovered territory for international brands. In Exhibit      international brand is Body Shop. Brands positioned at higher
8, we have listed all of the international brands that we saw in      price points are again almost totally absent.
the five larger malls that we visited (the small Abha and
Rehana malls were essentially devoid of international brands).        Brands specialising in children’s toys and baby
                                                                      products have been more successful
The international fashion segment is dominated by
                                                                      Saudi Arabia is a traditional society oriented around the family.
value brands
                                                                      It is perhaps not surprising that international brands that cater
The international fashion segment is dominated by brands at           to the children and baby market are well represented in the
the value end of the market. The brands that featured most            malls that we visited. Almost everywhere we went, we found
frequently in the malls we visited were Splash, Citymax,              Mothercare.
REDTAG, F&F, H&M and Giordano.
                                                                      International furniture and homeware brands seem
The first three are GCC-based brands offering cheap fashions          to have gained only limited traction
for all the family. Their product ranges are ‘international’ in the
                                                                      Two large regional retailers, Lifestyle and HomeCente, offer a
sense of not being traditional Arabic dress, but the styles are
                                                                      range of internationally branded furniture and homewares, but
influenced by regional tastes (e.g. use of strong colours) and
                                                                      they have only a limited presence in the cities we visited.
thus somewhat distinct from the styles offered by international
brands from outside the region.
                                                                      While young Saudi women have widely adopted international
                                                                      fashions, many families appear to retain traditional tastes when
F&F is Tesco’s own label brand; it also offers value fashions for
                                                                      furnishing their homes. The category is also relatively
all the family. H&M is a well known global brand offering
                                                                      discretionary and income levels may constrain wider take up.
affordable fashions for men, women and children. Giordano is
a Hong Kong based brand that offers a similar customer
                                                                      Local environment does not favour department
proposition to H&M.
                                                                      stores
Surprisingly, dedicated womenswear brands do not feature              We only came across one department store during our visit.
strongly – all of the above brands cover womenswear,                  We assume that a deficit of suitable space in shopping malls
menswear and childrenswear.                                           and the lack of downtown pedestrian shopping areas limits the
                                                                      scope for department store retailing to flourish.
We saw no dedicated menswear brands at all on our trip.
Whereas younger Saudi women have widely adopted
international fashions (although they wear a long black abaya
outside the home), Saudi men generally still wear traditional
national dress.




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                                                                             Saudi Consumer




Exhibit 8
The brands we found in the main malls that we visited
Brand                             Category                                 Brand                        Category


Khamis Mushayt                                                             Abha

Khamis Avenue Mall                                                         Aseer Mall
Splash                            Womenswear, Menswear, Childrenswear      REDTAG                       Womenswear, Menswear, Childrenswear
Giordano                          Womenswear, Menswear, Childrenswear      Citymax                      Womenswear, Menswear, Childrenswear
REDTAG                            Womenswear, Menswear, Childrenswear      F&F                          Womenswear, Menswear, Childrenswear
H&M                               Womenswear                               H&M (u/c)                    Womenswear, Menswear, Childrenswear
FG4                               Womenswear                               Terra nova                   Womenswear, Menswear, Childrenswear
La Senza                          Lingerie                                 Calliope Italia              Womenswear, Menswear
Accessorize                       Accessories                              Promod                       Womenswear
Aldo accessories                  Accessories                              FG4                          Womenswear
Body shop                         Beauty and Cosmetics                     Dorothy Perkins              Womenswear
The Children’s' Place             Childrenswear                            Rina                         Womenswear
Babyshop                          Childrenswear, Children’s toys, Babies   Wallis                       Womenswear
Early Learning Centre             Babies and Children’s Toys               Evans                        Womenswear
Mothercare                        Mother and Baby                          Monsoon Children             Childrenswear
McDonald's                        QSR                                      La Senza                     Lingerie
Baskin Robbins                    Ice Cream                                La Vie en Rose               Lingerie
Panda                             Hypermarket                              Women’s' Secret              Lingerie
                                                                           Charles and Keith            Shoes
Oasis Mall                                                                 Accessorize                  Accessories
Citymax                           Womenswear, Menswear, Childrenswear      Yves Rocher                  Beauty and Cosmetics
Iconic                            Womenswear, Menswear, Childrenswear      Early Learning Centre        Babies and Children’s Toys
Splash                            Womenswear, Menswear, Childrenswear      Toys ''R'' Us                Children’s toys
Koton                             Womenswear, Menswear, Childrenswear      Mothercare                   Mother and Baby
Giordano                          Womenswear, Menswear, Childrenswear      eXtra                        Electronics
New Look                          Womenswear                               Panda                        Food and Groceries
Shoe Mart                         Shoes                                    Herfy                        QSR
Claire's                          Accessories                              McDonald's                   QSR
Beautybay                         Beauty and Cosmetics                     Baskin Robbins               Ice Cream
MAC                               Beauty and Cosmetics
Body Shop                         Beauty and Cosmetics                     Jubail
Babyshop                          Childrenswear, Children’s toys, Babies
Lifestyle                         Homewares                                Fanateer Mall
Home Centre                       Furniture                                Giordano                     Womenswear, Menswear, Childrenswear
Emax                              Electronics                              F&F                          Womenswear, Menswear, Childrenswear
Carrefour (u/c)                   Hypermarket                              Next                         Womenswear, Menswear, Childrenswear
                                                                           Shoe Mart                    Shoes
                                                                           Accessorize                  Accessories
                                                                           Body Shop                    Beauty and Cosmetics
                                                                           Mothercare                   Mother and Baby
                                                                           BHS                          Department store
                                                                           McDonalds                    QSR

                                                                           Al Huwaylat Mall
                                                                           F&F                          Womenswear, Menswear, Childrenswear
                                                                           Bossini                      Womenswear, Menswear, Childrenswear
                                                                           Mothercare                   Mother and Baby
                                                                           Jarir                        Electronics
                                                                           Panda                        Hypermarket
Source: Morgan Stanley Research




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                                                                       September 19, 2013
                                                                       Saudi Consumer




Exhibit 9
Most of the international brands we saw are controlled locally by just three retail groups
Operator/ franchisee                     Brand                   Category                                 Number of outlets in three cities


Al Hokair                                F&F                     Womenswear, Menswear, Childrenswear                                     3
Al Hokair                                FG4                     Womenswear                                                              2
Al Hokair                                Promod                  Womenswear                                                              1
Al Hokair                                Wallis                  Womenswear                                                              1
Al Hokair                                Monsoon Children        Childrenswear                                                           1
Al Hokair                                The Children’s' Place   Childrenswear                                                           1
Al Hokair                                La Senza                Lingerie                                                                2
Al Hokair                                La Vie en Rose          Lingerie                                                                1
Al Hokair                                Women’s Secret          Lingerie                                                                1
Al Hokair                                Charles and Keith       Shoes                                                                   1
Al Hokair                                Accessorize             Accessories                                                             3
Al Hokair                                Aldo accessories        Accessories                                                             1

Alshaya                                  Next                    Womenswear, Menswear, Childrenswear                                     1
Alshaya                                  Dorothy Perkins         Womenswear                                                              1
Alshaya                                  Evans                   Womenswear                                                              1
Alshaya                                  H&M                     Womenswear                                                              2
Alshaya                                  Claire's                Accessories                                                             1
Alshaya                                  MAC                     Beauty and Cosmetics                                                    1
Alshaya                                  Mothercare              Mother and Baby                                                         4
Alshaya                                  BHS                     Department store                                                        1

Landmark                                 Citymax                 Womenswear, Menswear, Childrenswear                                     2
Landmark                                 Iconic                  Womenswear, Menswear, Childrenswear                                     1
Landmark                                 Splash                  Womenswear, Menswear, Childrenswear                                     3
Landmark                                 Koton                   Womenswear, Menswear, Childrenswear                                     1
Landmark                                 New Look                Womenswear                                                              1
Landmark                                 Babyshop                Childrenswear, Children’s toys, Babies                                  2
Landmark                                 Shoe Mart               Shoes                                                                   2
Landmark                                 Beautybay               Beauty and Cosmetics                                                    1
Landmark                                 Home Centre             Furniture                                                               1
Landmark                                 Lifestyle               Homewares                                                               1

REDTAG                                   REDTAG                  Womenswear, Menswear, Childrenswear                                     2
TAGS                                     Giordano                Womenswear, Menswear, Childrenswear                                     3
Unknown                                  Terra nova              Womenswear, Menswear, Childrenswear                                     1
Unknown                                  Bossini                 Womenswear, Menswear, Childrenswear                                     1
Unknown                                  Calliope Italia         Womenswear, Menswear                                                    1
Unknown                                  Rina                    Womenswear                                                              1
Al Thomad (E&C)                          Body Shop               Beauty and Cosmetics                                                    1
Kamal Osman Jamjoom (W)                  Body shop               Beauty and Cosmetics                                                    3
Unknown                                  Yves Rocher             Beauty and Cosmetics                                                    1
Unknown                                  Early Learning Centre   Babies and Children’s Toys                                              2
Unknown                                  Toys ''R'' Us           Children’s toys                                                         1
Source: Company Data, Morgan Stanley Research




                                                                                                                                       11
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                                                                                                  September 19, 2013
                                                                                                  Saudi Consumer




Three key players control the retail outlets of most                                              For example, Exhibit 10 shows that, if Al Hokair’s nationwide
of the international brands present in Saudi Arabia                                               total of 1,144 outlets were evenly distributed around the
                                                                                                  Kingdom according to population, we would expect to see 40 Al
Most international fashion brands operate in Saudi Arabia
                                                                                                  Hokair franchised stores in Abha/Khamis and 15 in Jubail.
through franchising agreements with local retail partners. The
                                                                                                  Actually there are only 16 and three respectively.
main exceptions are the GCC-based brands, which operate
their own stores (notably Landmark and REDTAG).
                                                                                                  Overall, Exhibit 10 shows clearly that the penetration of
                                                                                                  international fashion brands in the three provincial cities that
Due to this structure, international fashion retail in the Kingdom
                                                                                                  we visited is far lower than in Saudi Arabia as a whole. In
is dominated by just three key players:
                                                                                                  practice the presence of international fashion brands in Saudi
                                                                                                  Arabia is skewed towards the Kingdom’s three main metro
     Al Hokair is a Saudi company that distributes international
                                                                                                  areas of Riyadh, Jeddah and Dammam/ Khobar.
      brands under monobrand franchise retail agreements. The
      company operates more than 1,400 shops, mostly in the
                                                                                                  International value brands are well represented – it
      Middle East although it is now present in other regions.
                                                                                                  is mid-market brands that are almost totally absent
     Alshaya is a Kuwaiti company with a similar profile and                                     As highlighted above, value brands are well represented in the
      business model to Al Hokair. Alshaya operates more than                                     cities that we visited. Individually, the presence of brands like
      2,500 retail outlets in the Middle East and beyond.                                         Splash, F&F and H&M in the cities we visited is in line with what
                                                                                                  we would expect, based on the size of the local population.
     Landmark is a UAE company that develops retail malls
      and also operates multi-brand retail outlets distributing
                                                                                                  The Landmark Group, with its stable of value-oriented brands,
      in-house and international brands. Landmark operates
                                                                                                  has achieved a level of penetration of the Khamis / Abha
      more than 1,500 outlets, mostly in the Middle East.
                                                                                                  regional market that is proportionate with the area’s population.
In Exhibit 9 we have listed the international brands that are
present in the three cities we visited, organised according to                                    What are ‘missing’ in these locations are the major global
the company that controls distribution in the Kingdom.                                            brands that position themselves at mid market price points
                                                                                                  (Zara, Gap and so on). In the long term, the present scarcity of
The presence of international fashion brands in the                                               such brands in second tier cities like those we visited could
cities we visited is far lower than in Saudi Arabia’s                                             theoretically represent a growth opportunity for the Kingdom’s
largest metro areas                                                                               franchise retailers of international fashions (the two major ones
                                                                                                  being Alhokair and Alshaya).
In Exhibit 10, we have compared the total number of retail
outlets that Al Hokair, Alshaya and Landmark operate in the
three cities we visited with the total number of outlets that they
control nationwide.
Exhibit 10
International fashion brands are strongly under-represented in the cities we visited
                                                                                                                       Al Hokair        Alshaya          Landmark
Controlled retail outlets, Saudi Arabia total                                                                             1,144            576               455


Khamis Mushayt/ Abha
Population of Abha/ Khamis, % of national population                                                                      3.5%            3.5%              3.5%
Number of outlets, if distributed in line with national population                                                           40             20                 16
Actual number of outlets                                                                                                     16               8                14
Jubail
Population of Jubail, % of national population                                                                            1.3%            1.3%              1.3%
Number of outlets, if distributed in line with national population                                                           15               8                 6
Actual number of outlets                                                                                                      3               4                 1
Source: Company Data, Saudi Arabia Central Department of Statistics and Information, Morgan Stanley Research




                                                                                                                                                               12
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                                                                     Saudi Consumer




The absence of mid-market international fashion                      In the near term, the value segment may offer the
brands in these markets most likely reflects low                     lowest risk growth opportunity for local franchisees
disposable incomes in provincial Saudi cities                        of international fashion brands
Our field trip highlighted a number of signs that disposable         In the near term, we believe that the lowest risk way for local
incomes in the cities that we visited are most likely the main       franchisees of international fashion brands to expand their
obstacle to a major expansion of the retail space allocated to       business in cities like those we visited may be to introduce new
mid market international brands.                                     brands and more choice at the value end of the market.

First, the strong local acceptance of value oriented                 Over time, as disposable incomes increase, the potential to
international fashions strongly suggests that the absence of         distribute mid market international brands in larger cities like
mid market international brands cannot be attributed to factors      Khamis will presumably increase. However, it is not clear
of culture or taste.                                                 whether incomes have yet risen sufficiently to make the launch
                                                                     of a large number of mid market brands a viable strategy.
Second, the overall limited presence of international brands in
more discretionary product segments is, in our view, also a          Even when such a strategy does become viable, we note that
tell-tale sign of lack of spending power. For example, as noted      the availability of suitable mall space would also represent a
above we were surprised by the limited number of brands in the       potential obstacle that franchisees may need to overcome. As
footwear, accessories and beauty product segments (these are         highlighted above, current mall space in the cities we visited
normally very heavily represented in retail malls in wealthier       was of very mixed quality. More good quality space would likely
parts of the Gulf). The almost total absence of childrenswear        be needed in order to provide a suitable environment in which
brands (i.e. expensive clothes for kids) in a society that is so     to showcase major global mid market brands appropriately.
children/ family oriented is, in our view, another sign that
disposable income is lacking.                                        While Landmark Group is itself a mall developer, the two major
                                                                     franchise-based retailers in the Kingdom, Al Hokair and
Finally, while no official data are available on per capita          Alshaya, rely on renting from third party mall owners.
incomes in Saudi Arabia, it is widely acknowledged in Saudi
Arabia that the three major metropolitan centres of Riyadh,
Jeddah and Dammam/Khobar are by some distance the
wealthiest parts of the country.

Over time, we expect that international fashion
brands will gain further market share in these cities
Over time, as incomes rise in Saudi Arabia generally and as the
national population continues to grow, the potential market for
international fashion brands will most likely continue to grow in
the provinces, just as it will in more established big city
markets.

Importantly, we also note that the vast majority of the brands
that we saw on our trip were Arabic – indigenous tastes remain
dominant in provincial Saudi Arabia. In future, the continued
exposure of the population to a wider range of international
cultural influences is likely to broaden the adoption of
international fashions, in our view.

Demographics are also on the side of international brands – the
demographic profile of the population means that the number
of teenagers and young adults – those most likely to adopt
international styles – is rising over-proportionately (we estimate
by c3% each year).



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                                                                      September 19, 2013
                                                                      Saudi Consumer




                                                                      Exhibit 11
Which electronics/ household                                          Each city we visited had one big box store
appliance chains did we see?                                                                                            Khamis/ Abha          Jubail         Total
                                                                      eXtra                                                           1            1            2
The Saudi electronics and household appliances                        Emax                                                            1            0            1
                                                                      Big box consumer electronics /
segment remains fragmented                                            household appliances                                            2            1            3
The main big box retailers of consumer electronics and
household appliances in Saudi Arabia are eXtra (with 33 stores        Jarir                                                           0            1            1
nationwide), Emax (7) and Electro (4). In addition, Jarir             Total                                                           2            2            4
                                                                      Source: Morgan Stanley Research
Bookstore operates 28 large outlets dedicated to consumer
electronics, books and office and school supplies.
                                                                      The only other significant dedicated big box retailer in this
                                                                      category, UAE-based Electro, was not present in either city.
These organised retailers account for only a minority of the
market. Hypermarkets sweep up some of the remaining
                                                                      In addition, the hypermarkets in and around the three cities sell
business with their selections of electronics and appliances,
                                                                      a range of consumer electronics and household appliances. As
but most remains in the hands of small independent retailers.
                                                                      mentioned above, the downtown areas of all three cities
                                                                      contain numerous small independent electronics retailers.
We saw eXtra, Emax and Jarir stores on our visit
Each of the three cities that we visited contains a single big box    In the big box electronics/ household appliances
store offering a wide range of consumer electronics and               segment, the cities we visited are not under-served
household appliances:                                                 compared with the rest of the country
                                                                      In Exhibit 12, we present a rough and ready analysis of the
   Abha. eXtra operates a store adjacent to the city’s main
                                                                      density of big box consumer electronics/ household appliance
    mall, Aseer Mall. The store has a generous 3,100 sqm of
                                                                      retailing in the cities we visited, compared with the density
    selling space (we assume it would rank as a ‘B’ store). The
                                                                      nationally.
    store has been in place since 2006.

   Khamis Mushayt. There is an Emax store within Oasis               With a combined population of 1.0m in 2011 out of a national
    Mall. The store appeared to be slightly smaller than the          population of 29m, the Abha/ Khamis Mushayt area should
    eXtra store in Abha, but like the eXtra store it offered a full   have one or two outlets if they were distributed nationwide in
    range of consumer electronics and household appliances.           proportion to the size of the local population. There are actually
                                                                      two. For Jubail the same comparison would suggest scope for
   Jubail. eXtra operates a store in Jubail at a stand alone         up to one store, and there is one.
    location away from the main part of the city but adjacent to
    a large new housing development.                                  We have excluded Jarir from the analysis because the product
                                                                      mix is not totally comparable.
Jubail also has a Jarir Bookstore with around 4,000sqm of
selling space (the company’s standard size). We were                  Exhibit 12
surprised at the absence of a Jarir Bookstore in Abha/Khamis,         Three cities not under-served by big box stores
especially given that we saw an Obeikan bookstore in Abha                                                                                 Khamis /
                                                                                                                                             Abha        Jubail
(Obeikan is a key local competitor of Jarir in books, although        Total number of big box consumer electronics/
the company is not present in consumer electronics).                  household appliances outlets in Saudi Arabia                               44            44
                                                                      Local population, % of national population                              3.5%       1.3%
In some other cities, Jarir has successfully deployed its             Number of outlets, if distributed in line with national
                                                                      population                                                                1.5           0.6
customer pulling power to develop a mini-mall with a Bookstore
as an anchor tenant (e.g. in Jubail, where its store was very
                                                                      Actual number of outlets                                                     2            1
busy when we visited).
                                                                      Source: Company Data, Saudi Arabia Central Department of Statistics and Information,
                                                                      Morgan Stanley Research




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                                                                     September 19, 2013
                                                                     Saudi Consumer




Further expansion of retail networks would likely                    Exhibit 13

depend in part on adapting business models to                        A large independent electronics retailer in
address smaller catchment areas                                      downtown Jubail

Looking to the future, our field trip reinforces our impression
that there are three main avenues of growth for organised
consumer electronics/ household appliances retailers.

First, we expect that demand will continue to increase in
established city markets, driven by the steadily rising
population (notably the over-proportionate growth of the young
adult population) and rising incomes.

Second, our tours of the downtown areas of the three cities that
we visited emphasised that small independent stores continue
to play a large role in the retailing of consumer electronics. In
our view, the large, specialist retailers would need to adapt
their business models and store formats in order to better
address customers that are currently buying through this
channel, which should logically be inferior in price, choice and
                                                                     Source: Morgan Stanley Research
service.

Third, many smaller or more remote cities remain heavily
under-served. For example, until June 2013 there were no big
box retail outlets at all in the 50% of Asir Province that falls
outside the two main cities of Khamis Mushayt and Abha. So
the 1m people who live in the province outside the two main
cities needed to travel to Khamis/ Abha (potentially a drive of
more than 50 miles) or visit a local hypermarket or small retailer
in order to buy electronics products or appliances.

In June of this year, eXtra opened its second store in Asir
province in Bishah, some 70 miles from Khamis/ Abha. The
store has 1,600 sqm of selling space and the city has a
population of 200,000. We would expect that tapping into the
potential of such third tier cities (with populations of
150-200,000) would likely form part of the ongoing growth
plans of the Kingdom’s electronics and household appliances
chains.

A large retail chain seeking to tap growth opportunities in
smaller catchment areas would need, we think, to successfully
adapt their store format and business model to offer adequate
range breadth from an ever smaller store footprint and/or to
effectively target specific product segments.




                                                                                                                   15
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                                                                         September 19, 2013
                                                                         Saudi Consumer




Which fast food brands did we                                            For Jubail a similar picture of relatively advanced market
                                                                         penetration emerges – a proportionate distribution would imply
see?                                                                     11 restaurants, compared with the actual total of nine.

                                                                         Exhibit 14
Most of the biggest international QSR brands are
present in Saudi Arabia                                                  The cities we visited seemed adequately served with
                                                                         fast food outlets
On a nationwide basis, the two leading burger chains in Saudi                                                                                 Khamis /
Arabia are Herfy (207 outlets at 2Q13) and Kudu (‘more than                                                                                      Abha       Jubail
                                                                         Total number of outlets of six selected QSR brands in
200’ outlets). McDonald’s is in third place (146), followed by           Saudi Arabia                                                               825         825
Hardee’s (72) and Burger King (we believe BK’s restaurant
count is similar to Hardee’s).                                           Local population, % of national population                               3.5%      1.3%
                                                                         Number of branded fast food outlets, if distributed in
Other major international fast food brands active in Saudi               proportion to the national population                                       29          11
Arabia include KFC (117 restaurants), Pizza Hut (152) and
Domino’s Pizza (less than 100). Some international brands are            Actual number of outlets of six selected QSR brands                         28              9
                                                                         Source: Company Data, Saudi Arabia Central Department of Statistics and Information,
not present at all, such as Wendy’s and Taco Bell.                       Morgan Stanley Research


The main QSR brands are already well established
                                                                         We see two main avenues of future growth for the
in the cities we visited
                                                                         main QSR chains in Saudi Arabia
Herfy is the major fast food brand in Khamis Mushayt/ Abha.
                                                                         We expect that demand for fast food will continue to increase in
On our visit we saw nine restaurants – the restaurant locator on
                                                                         future in those city markets like Abha, Khamis and Jubail where
Herfy’s website lists 11 and we understand from the company
                                                                         the main brands are already well established. The main drivers
that it now has a total of around 14-15 outlets in the area.
                                                                         of this growth should be the familiar ones: population growth
                                                                         (especially the over-proportionate increase in the number of
The other main fast food brands in the area are Kudu (the other
                                                                         young adults) and rising incomes that tend to support
major local QSR chain) and McDonald’s.
                                                                         convenience and socialising outside the home.

Jubail is a smaller catchment area, but a broad range of brands
                                                                         On the other hand, our visit left us with the impression that
are also present here. Herfy seemed to be the only absentee –
                                                                         Khamis/ Abha and Jubail are now quite well served by the main
we passed no Herfy outlets and there are none listed on its
                                                                         chains. This is perhaps not surprising. Compared with the
website.
                                                                         fashion segment, where the penetration of the market by
                                                                         international tastes and international brands is clearly lower,
In Exhibit 14, we present a rough and ready evaluation of the
                                                                         fast food is a relatively staple, small ticket purchase.
density of fast food outlets in the cities we visited within a
national context, using the six major brands listed in Exhibit 15
                                                                         We therefore assume that the second leg of future growth will
as a proxy for the branded fast food industry.
                                                                         require the main brands to move on to the third tier of smaller
                                                                         cities and towns that appear currently to be mostly untouched
With a combined population of 1.0m in 2011 out of a national
                                                                         by branded fast food.
population of 29m, the Abha/ Khamis Mushayt area should
have 29 branded fast food outlets, if they were distributed
nationwide in proportion to the size of the local population. The
actual total is 28.

Exhibit 15
QSR outlets by brand in the three cities we visited
                                                        Herfy   McDonald's   Burger King          Hardee's             Kudu               KFC             Total
Khamis Mushayt / Abha                                     14            4                1                 0                4                1                  24
Jubail                                                     0            2                1                 2                2                2                   9
Source: Company data, Morgan Stanley Research




                                                                                                                                                                16
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                                                                       September 19, 2013
                                                                       Saudi Consumer




For example, the cities of Abha and Khamis account for only            Exhibit 17

1.0m of the 2.0m people who live in Asir Province. Following           A large Herfy outlet on the road to Khamis Mushayt
the same logic that we used above, if Saudi branded fast food
outlets were evenly distributed nationwide in proportion to
population, the 50% of Asir Province that lies outside Abha/
Khamis should have another 29 branded fast food restaurants.

However, based on information on the websites of our six
selected brands, we believe that the actual figure is just one
(although Herfy’s website lists only around half of its total
restaurants). This implies that the 1.0m people who live in Asir
Province but do not live in the main Abha/Khamis essentially
have access to no branded fast food options at all.

Coffee chains were notably absent
In the cities we visited, we noticed a very few locally branded
coffee shops – presumably local chains, although not ones we
had ever seen before on visits to Riyadh or Jeddah.
International coffee chains were totally absent – we did not see       Source: Morgan Stanley Research
a single outlet (whereas Riyadh is blanketed with them).
                                                                       Exhibit 18

Exhibit 16                                                             As an alternative to McDonald’s, why not try ‘Saudi
Starbucks outlets in Saudi Arabia                                      Restaurant’ (orange façade with smiling face and
                                                   Number       %
                                                                       thumbs up)?
Riyadh, Jeddah, Dammam/ Khobar/ Dhahran                51      81
Medina and Mecca                                        8      13
Everywhere else                                         4       6
                                                       63     100
Source: Company Data


Given that patronising coffee outlets represents a small ticket
social activity, we were surprised by the lack of branded coffee
chains. We can only assume that the franchisees are simply
picking the low hanging fruit first (from a logistical/ supply point
of view) and that coffee chains will be arriving in these locations
before too long.

The casual dining format is non-existent
While fast food outlets (burgers, pizza and so on) have gained
substantial traction in the cities that we visited, the casual
dining formats that are very prevalent in some other Gulf states       Source: Morgan Stanley Research
are wholly absent.

The lack of adequate infrastructure may provide part of the
explanation – again space in suitable malls may be lacking and
downtown areas are unsuitable. Disposable incomes may also
encourage diners to stick to lower priced fast food formats.




                                                                                                                        17
                                                                        MORGAN           STANLEY          RESEARCH

                                                                        September 19, 2013
                                                                        Saudi Consumer




Which grocery retail chains did                                         The absence of smaller convenience supermarkets that can
                                                                        target such downtown areas is in our view an obvious gap in
we see?                                                                 the arsenal of the main grocery retail chains in the Kingdom.

                                                                        Exhibit 19
Panda (Savola) is the dominant player in Saudi
grocery retail                                                          A supermarket and a fruit/veg shop in downtown
                                                                        Khamis – where’s the Carrefour Express?
Our trip re-confirmed that Savola’s Panda remains the
dominant chain in the food retail sector. This dominance was
particularly evident in the Khamis/Abha region. These two
cities in the west of the Kingdom are relatively close to Savola’s
home in Jeddah, which probably explains the particularly
strong presence of the chain in this area.

The other main chain that we saw on our trip was Othaim
Markets. This is consistent with Othaim’s position as the
second player in the sector nationwide.

The only other brands that we saw were Carrefour (one
hypermarket under construction in Khamis Mushayt) and
Ghoneim (one outlet in the centre of Abha).

Informal sector still plays a major role
Our visit to the downtown areas highlighted the well-know fact          Source: Morgan Stanley Research

that small independent stores still play a major role in the Saudi
food retail sector.




Morgan Stanley is acting as a financial advisor to China Resources Enterprise, Limited ("CRE") in relation to the possible
establishment of a retail joint venture in Greater China. CRE has agreed to pay fees to Morgan Stanley for its financial services,
including transaction fees that are subject to the consummation of any resulting transaction. Please refer to the notes at the end of the
report.




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                          Coverage Universe    Investment Banking Clients (IBC)
                                         % of                   % of % of Rating
Stock Rating Category        Count       Total     Count Total IBC Category
Overweight/Buy                978        34%         400         38%         41%
Equal-weight/Hold            1280        44%         491         46%         38%
Not-Rated/Hold                114         4%          28          3%         25%
Underweight/Sell              510        18%         137         13%         27%
Total                       2,882                   1056
Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual
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In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant
broad market benchmark, as indicated below.




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Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant
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Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index;
Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.
.
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                                                          MORGAN    STANLEY            RESEARCH




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Description: What we learned from two days exploring the provinces