13 November 2016

JEDDAH — Aggregate spending by Saudi households has materially increased during 2007-2013, however, majority had been consumed by inflation; growth in real spending was weak, Al Rajhi Capital Research said in its recent strategic report analyzing consumer spending patterns in the Kingdom.

In the report titled “What happens to consumer spending now?”, it noted that based on the past trends, it believes that consumers will prefer downtrading (choosing lower priced alternatives) rather than cutting back on quantity in in the current environment given that the real growth in the past was weak.

Similarly, retailers are likely to favor discounting to maintain volumes. There have been evidence of these trends also taking shape in the last few quarters. The impact of decline in consumer spending is likely to be witnessed more in segments such as Transport, Recreation, Restaurants & Hotels as these sectors have seen the highest increase in real spending in the past and hence, making it easy for consumers to pare back their spending.

Other segments such as Fabric & Apparel, Furniture may not be impacted as much, as these segments did not witness material increase in real spending in the first place. The Research team remains positive on the organized retail sector, which benefited from market share gains in the past, and it believes that this this trend will continue due to their better positioning in terms of economies of scale, better supplier terms and balance sheet strength.

Conclusions based on the past data analysis disputes some of the widespread beliefs, as it highlights how inflation has consumed two thirds of the increase in household spending, mainly related to food and housing . This also implies that the growth in real terms was mostly flat during this period. The analysis shows that the discretionary and non-discretionary spending patterns should be evaluated based on the level of household expenditure, whereas broader conclusions based only on the nature of segments could be misleading as the analysis shows that the line is blurred between these terms.

The report noted that majority of the increase in household spending consumed by inflation: During 2007-2013, average Saudi household spending increased by 35% (from SR13,250 in 2007 to SR17,903 in 2013) as per CDSI data. However, Al Rajhi Capital analysis shows that 65% of the increase in spending was consumed by inflation.

Likewise, housing & food, the main household expenses, witnessed higher inflation. Housing and Food together comprise 1/3rd of the monthly household expense, but account for 2/3rd of the total inflation.

Further, real spending maintained, but growth was weak: About 80% of the aggregate increase in household spending during 2007-2013 can be accounted by inflation (65%) and rise in the number of households (15%). Consequently, only 20% of the increase in household spending was due to growth in real spending. Real spending per household grew by only 6.7% in absolute terms, implying a weak 1.1% CAGR during this period.

Moreover, the research showed the thin line between ‘discretionary’ and ‘non-discretionary’: The analysis suggests that the line between discretionary and non-discretionary spending was blurred based on past spending patterns. For e.g., segments such as Fabric & Apparel, and Furniture (considered discretionary) witnessed lower real spending growth at just 11%, implying a 1.8% CAGR over this period. This goes against the popular belief that the discretionary spending should have grown at a faster pace during periods of income growth as was the case during 2007 to 2013 due to higher oil prices, Al Rajhi Capital Research report added.

© The Saudi Gazette 2016