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Franchising Market in Saudi Arabia

Written by : Saudi Franchise and Business Opportunities Show
2008-02-26

Summary:

Over the past ten years, the number of franchises has tremendously increased in Saudi Arabia. While empirical data is lacking, industry insiders credit several factors for the growth of the industry. The factors include: Saudi entrepreneurs generally have sufficient capital to invest in a business, they have the desire to own their own business, and they are hesitant to strike out on their own with a totally new concept or idea. These factors support the concept of franchising as an appealing introduction to business ownership.

Franchisers should realize, however, that the culture and religious background of the Saudi people might make it necessary to modify some franchise concepts before they can be successfully introduced and operated in Saudi Arabia. Some considerations include the separation of the sexes and a general prohibition on photos or advertising that would be considered only mildly suggestive in the West.

Market Data and Potential:

Saudi Arabia is the country with the largest consumer base in the Persian Gulf region. Its 21 million residents are mainly concentrated in a few cities that have widely available commercial retail facilities. While the franchise sector of the economy is relatively small, compared to the United States, it is growing rapidly. The sector really began to expand after the Gulf War with numerous American fast food companies entering the market. Some industry sources report that American fast food franchises alone currently account for nearly 20 percent of the fast food franchise market.

Even though there are no official figures available, industry sources indicate that franchising has expanded in the Saudi market at a phenomenal rate, more than 10 percent annually, outpacing other industry sectors. This is often attributed to the Saudis’ desire to own their own business and a widely held appreciation for Western methods of conducting business. Additionally, the large expatriate work force in Saudi Arabia patronizes franchises as a way of decreasing the “product unfamiliarity” factor, i.e., not knowing what you are going to end up with at the end of the transaction.

The government of Saudi Arabia encourages growth of the private sector as a means of lessening the kingdom's dependence on oil and as a means of increasing employment opportunities for the growing Saudi population. Worldwide, franchising has proven to be a stabilizing factor for countries that are trying to create jobs for growing populations. This is a very important consideration as (1) half of the Saudi population is under the age of fifteen, (2) many have traveled to the United States and Europe, and (3) many have acquired a taste for Western conveniences. Some studies have indicated that franchises contribute significantly to a country’s economy, stimulate business activity, introduce new business concepts, create entrepreneurship, increase export opportunities and support small business initiatives. These are all important benefits that the Saudi government does not ignore.

Competitive Environment:

American firms have the lion share of the market, with more than 70 percent of all franchised operations in Saudi Arabia, from fast food outlets and hotels, to car leasing, laundry services and printing. Saudi consumers have increasingly become more sophisticated in demanding quality, service and value for money. American products and services have established brand recognition and are able to attract and retain a large section of the Saudi population.

Notwithstanding, the competition is particularly fierce between U.S. franchisers and local and third country competitors in the following sectors: car rental agencies, laundry and dry cleaning services, fast food, and auto maintenance. Some local fast food outlets are already making inroads, by being more accommodating to Saudi tastes. Several Saudi-developed franchises have grown into successful regional businesses.

Market Trends:

Franchising is growing in popularity in Saudi Arabia. It has proven itself to be an effective method of growing successful businesses. While no official figures are available at this time, new franchises are regularly appearing on street corners and in shopping malls across the country. Franchising is a popular way for local firms to establish additional consumer-oriented businesses in Saudi Arabia. Although the franchise market is small, it is rapidly expanding in several business sectors. Franchising opportunities exist in most business sectors, including apparel, laundry and dry cleaning services, automotive parts and servicing, restaurants, mail and package services, printing, and convenience stores.

Market Entry:

To establish a franchise, the foreign franchiser must select a franchisee and register the franchise. The franchiser must be the original franchiser and may not be a third-country sub-franchiser. The parties may negotiate their own franchise agreement. The government provides a model franchise agreement, but the parties are not required to follow the government’s model. After the parties have signed the agreement, the Ministry of Commerce must approve it. Saudi commercial agency law applies to the franchise agreement. The franchise law has been effective since 1992. Because commercial agency law applies to franchises, many of the same concerns may arise regarding the potential wrongful termination of a franchisee. In order to avoid later difficulties, a foreign corporation should consult an attorney familiar with Saudi franchise law before entering into a franchise agreement or terminating a franchisee.

Saudi Arabia became the 149th member of the World Trade Organization (WTO) on December 11, 2005. Accession to the WTO will impact trade barriers and regulations as Saudi Arabia comes into compliance with WTO requirements.

Religious and Cultural Considerations:

Saudi Arabia is the heart of Islam and the two holiest cities of the faith, Mecca and Medina, are located in the country. As such, daily life in Saudi Arabia is deeply influenced by the five tenets of Islam: confession of faith, prayer five times a day, contributions to charity, fasting during the month of Ramadan, and pilgrimage to Mecca. Businesses are required to adapt and adjust to the local customs. For example, restaurants will have two entrances, a “family section” where women must enter and be served with or without their husband and children, in addition to a main entrance, where only men can enter and be served. Another example is that businesses will close during each prayer time. Some businesses require that all customers leave the premises and wait outside during the prayer time. Other businesses will allow the customers to remain inside, however no business can be conducted during the prayer time and all cash registers will be turned off.

Trade Events:

Participation in trade shows is a highly effective technique to make new contacts in the Saudi market in addition to the markets of the neighboring Arab Gulf states. Moreover, the U. S. Commercial Service in Saudi Arabia organizes Saudi business delegations to specific shows in the United States. One highly attended U. S. exhibition is

For U. S. companies seeking a Saudi business partner, the U. S. Department of Commerce Export Assistance Centers can be of great help through the International Partner Search (IPS) or the Gold Key Service (GKS) programs. Please contact the nearest U. S. Department of Commerce Export Assistance Center (listed in the government pages of your telephone directory) for further details on these services.

Finally, another promotional possibility for U. S. companies is participation in organized trade missions recruited by the U. S. Department of Commerce, local state authorities and chambers of commerce and supported by their trade association, city export council or local chamber of commerce.

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