Price rises may boost Al Othaim

Saudi Arabia's second-largest grocery retailer, which follows a low-price philosophy targeting the low and middle-income segments, could attract more customers.

High food prices are expected to hurt most grocery chains, but Saudi Arabia's Al Othaim could attract more customers thanks to its reputation for competitive pricing.

The company, the second-largest grocery retailer in the kingdom, follows a low-price philosophy targeting the low and middle-income segments. Its product mix is largely aimed at local consumers, making it popular among Saudi nationals.

"A business model focused on competitive pricing and no-frills stores … is likely to contribute to continued market share gains," said Zein Malas, a food, retail and logistics analyst at Deutsche Bank.

A booming Saudi population is expected to boost consumption in the long term as well.

Ms Malas has a "buy" recommendation on the company with a target price of 104 riyals.

The stock price has increased 17.8 per cent since July. It closed flat at 85.75 Saudi riyals yesterday.

Saudi Arabia has a population of more than 25 million, according to the IMF's latest figures.

But food consumption per capita is still about 45 per cent below the global average. That, coupled with a relatively informal retail market still dominated by independent grocers, means Al Othaim has the potential to greatly expand its market share.

Deutsche Bank forecasts Al Aothaim's net income to grow by an average of 18 per cent over the next five years.

The company aims to increase its number of stores to 125, up from 89 in 2009. It is looking to convince Saudi residents to look beyond the traditional "baqalas", or corner stores that deliver to nearby homes, in favour of supermarkets and hypermarkets.

Across the industry, food and beverage retailers are passing cost increases on to customer. That means margins should not be greatly affected at Al Othaim as long as consumers do not greatly cut back on spending. "We expect relatively stable margins for [Al] Othaim despite the higher cost of goods," Ms Malas said.

But she added that slower than planned store openings and higher rental costs for new stores could dent recent margin improvement.