Food Business and Government Role in Saudi Arabia

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Table of Contents

Executive Summary
Introduction
Business Environment Analysis
Industry Development
Conclusion
Bibliography
Footnotes

Executive Summary

Food business in Saudi Arabia is one of the most thriving sectors due to the high demand coming from the high population. The countries have a variety of businesses within the food sector that have been established by the private and foreign investors, as well as the government. These business firms that deal with food and food products include fisheries, sugar industry, edible oils and fats, groceries, and the dairy industry. However, concerns have been raised over Saudi’s commitment to fair trading practices and its adherence to the Islamic Laws. As such, the government in Saudi Arabia has a huge role to play in ensuring that the perception is changed and allow the success of the industry.

Introduction

Several businesses in the Kingdom of Saudi Arabia are conducted in an informal setup. Foreigners who intend to invest in the food business must understand and appreciate the types of food and the feeding habits of the local inhabitants of the Kingdom. As a result, individuals who want to establish a food business should take into account the Saudi culture. Some aspects of that culture include the sharing of meals as a means of getting to mingle with each other. Another aspect that the entrepreneur should consider is that in a group of Saudis, none is expected to turn down another’s offer to provide a meal. According to reputable sources, it is considered impolite to decline to take a meal upon invitation. Therefore, in purchasing or designing eating utensils, the entrepreneur should ensure that they purchase utensils suited for use by right-hand users since the left hand is considered for unclean purposes.¹

In connection, the food business in Saudi Arabia is one of the most thriving sectors as a result of the high demand coming from their mixed population. The countries have a variety of businesses within the food sector that have been established by the private and foreign investors, as well as the government. These business firms that deal with food and food products include fisheries, sugar industry, edible oils and fats, groceries, and the dairy industry. However, concerns have been raised over Saudi’s commitment to fair trading practices and its adherence to the Islamic Laws. As such, the government in Saudi Arabia has a huge role to play in ensuring that the perception is changed and allow the success of the industry.

Business Environment Analysis

Saudi Arabia is an independent monarch, uses the Islamic Law as a guide to doing business. Before establishing any business enterprise in the Kingdom, a foreigner is required to obtain a foreign capital investment license. The government imposes no taxes on exports, but customs duties are imposed on imported goods (at least 5% tariff). Imported goods that are similar to those produced locally are subjected to up to 12% duty so as to protect the local industries.

SWOT Analysis

One of the major factors that led to the development of businesses, in general, was the discovery of petroleum oil in 1953 which has seen it become the largest exporter of oil in the world.¹

The oil discovery paved the way for a major industrial revolution and empowered the locals economically, such that they had the economic power to purchase food products produced locally.¹ According to a World Bank Report dabbed “Ease of Doing Business,” Saudi Arabia was ranked the 23^rd, making it the most suitable destination to do business in the Middle East. According to the report, the country made great strides towards eliminating bureaucracy that previously existed.¹ The Saudi Arabian government is currently focusing its attention on the development of organic food.

The organic food sector is valued at SR 1billion. The organic produce, according to Khalid Daou, a Project Manager of Saudi Agro-Food, will be processed and packaged locally, thereby creating demand for equipment, technology, and other related services. Khalid further argues that the rising health consequences among citizens, coupled with rising income levels, will enhance flexibility on the choice of foods among citizens.

Industry experts have attributed the rapid growth of the food and beverage processing industry to the government support through the provision of attractive financing and subsidies on certain processing equipment and the imposition of higher tariffs on imports that compete with the locally produced goods.² Despite all these gains, the Saudi Arabians who have invested in the food industry face a major setback due to their religion. Islam requires a Muslim to rest for at least two days (Thursday and Friday), abandon their businesses in the process. This results in revenue that is lost on the resting days. Perishable goods may also perish during the resting days.

Business Forecasts

The Saudi Arabian population is expected to be over 105 million in 2025. This will provide a huge demand base for locally produced foods and beverages. Of the Middle East countries, Saudi Arabia provides at least 75% of its market share, and this is projected to rise in the future. It has a homogenous consumption of its products by the locals. Statistics indicate that in 2007, about 15.5 billion liters of beverages was consumed: 5.32 billion liters of packed water, 2.5 billion liters of carbonated soft drinks, 3.2 billion liters of hot tea, 1.86 billion liters of liquid milk, 1.367 billion liters of juice products, 1.183 billion liters of hot coffee, 0.54 billion liters of laban.² In the same year, the soft drinks registered a market share growth of 6%.² The popularity of soft drinks in Saudi Arabia can be attributed to the wide range of products and their availability.

Carbonated drinks and bottled water still enjoy the lion’s share of the market. Functional drinks registered the most dynamic growth in that year since the drinks are used as substitutes for alcohol in that country. Concentrates are gaining popularity, especially when the season of Ramadhan approaches.

The advent of health education and increased awareness has made the populace more concerned about their health. As a result, these health concerns have led to the escalating demand for bottled water, fruit juice, and other drinks that have the low-calorie content. An 8% growth in total volume was registered for bottled water and low-calorie cola carbonates in 2007.² The local beverage industry is facing stiffer competition from market giants like Coke and Pepsi.

This competition has compelled a majority of Saudi Arabian companies to diversify in terms of their operations and product range. These products include tomato paste, milk, nectars, and juices. Some of the key forecasts by the Saudi people are in the corn production sector, where it is predicted that by 2015, the production shall increase by 7.6% to reach 182,900 tones.³ However, the country will still remain a net importer since much of these projections will occur at the subsistence level. Milk consumption, on the other hand, is projected at an 18.7% increase to 1.9 million tones.³ The rise in demand in the dairy industry can be attributed to increasing disposable income and the rise in health-consciousness.

Chicken production, according to the projections will escalate by 12.7% to settle at a production level of 666,900 tons by 2015.³ This will however only be achieved through government support initiatives through which producers will receive subsidies to help them construct cold stores and enable them to purchase refrigerated trucks and farm packaging equipment. The real GDP growth is projected at 4.1% from 2011 to 2015.³

Industry Development

The storage capacity of Saudi Arabia for grains was increased from 550,000 to 2.5 million tones, a move that was aimed at restoring down the domestic grain prices. The government increased wheat stocks so as to cover the annual domestic grain consumption. This was as a consequence of a decision made earlier to phase out the local production of wheat to 2015, thus making the country rely heavily on imports. This has also led to a short term increase in domestic prices. Figures from USDA estimate the imports would be pegged at 2.0 million tons of wheat in 2012.³

The main dairy industry player in the Kingdom and the Middle East at large is the Almarai Dairy group. This firm has played a critical in bringing about food security in the region. However, it uses a risky approach of acquiring farmland abroad such that should a foreign country change its land policies; the firm risks losing its foreign investments. For instance, the firm recently purchased farmland in Argentina through farm operator Foodmonte.

On the other hand, poultry prices have been on the rise, and the trend is predicted to persist for a medium duration. This is due to the insufficient production growth in the Kingdom coupled with declining output from major producers such as Brazil and France, where the poultry imports of the Kingdom come from. There have also been complaining by farmers over high production costs due to high feed prices.

Saudi Arabia’s Ministry of Commerce and Industry has made a decision to put in place regulations of food supply for extraordinary conditions. Under this plan, the prices of fresh milk and milk products will be regulated. The government intends to monitor changes in dairy prices and put in place measures to avoid exorbitant prices by traders and industry players.

Market Overview

Saudi Arabia has hot, harsh weather, and water resources are limited. This makes it hard for agriculture to thrive. As such, the country has resorted to the importation of food products as well as buying land in foreign countries to cultivate crops on.

Consumer Market for Boneless and Frozen Bovine cuts

In 2007, the import value for boneless and frozen bovine cuts was US$144.9 million. Statistics, however, indicate an increasing trend over the period, with an increase of 42% being recorded between 2006 and 2007. The government imposes an import tariff of 5% on these products. The sales volume for baby foods has been on the rise at a 7% rate to exceed SR 3 billion by 2014. The main driving force behind the rising sales of milk is its formulation. The milk only exists in powder form. Other factors for its rising popularity include its convenience, affordability, and longer storage life. The customs department charges 5% tariff for import of these products.³

The consumer market for fruit and vegetable juices

Juice sales have risen by 6% to reach a value of SR 4.8 billion. The demand for juices is highest in summer.³ The juice prices have been stable since 2008, and the trend of price stability is forecasted to continue up to 2013. The orange flavor was ranked the top in both 100% juice and juice drinks in 2008, followed by the Mango flavor.³ However, mangoes were the leading flavour, a fact that is attributed to its popularity among people from the Far East.

Maize Consumer Market

Saudi Arabia imported maize valued at US$461.4 million in 2007. The main rivals in the maize import market are Argentina and the United States who command 51% and 41% respectively of the market share.³ The tariff for imported maize into Saudi Arabia was pegged at 0% in 2009. In the same year, the government revised the subsidies on animal feeds. The government promised to give tax rebates ranging from $26 for rice hulls to $101 for soybean meal per metric ton. The rebate was to be paid directly to the local importer. The total value of import of preparations of cereals, flour, and starch/milk for use by infants was US$232 million in 2007. Ireland commanded the largest share (58%), and the Kingdom never charged any duty on such products.⁴

Consumer Market for Baby Foods in Saudi Arabia

The sales volume for baby foods has been on the rise at a 7% rate to exceed SR 3 billion by 2014. The main driving force behind the rising sales of milk is its formulation. The milk only exists in powder form. Other factors for its rising popularity include its convenience, affordability, and longer storage life. The customs department charges 5% tariff for import of these products.³

Consumer Market for Chocolates

In 2007, the total imports of chocolate and other food preparations containing cocoa in Saudi Arabia were valued at US$ 66.8 million. The major players in this import market were Holland (46%), Poland (19%), and France (8%).³ The major exporter to Saudi Arabia in that period was the United Arab Emirates, which commanded a 72% market share; others were Ireland (13%), United States (6%). The imports duty charged on these products ranged from between 5-15%.³

Trade Barriers: Non-Tariff Barriers

The strict Islamic Laws that govern how Saudi Arabia conducts its businesses both locally and internationally become a trade barrier when such laws are not flexible to the current business needs of the world. For instance, it is prohibited for one to import pork. This is a major setback to the meat industry since pork plays a major role in the economy of many non-Islamic countries. This makes it difficult for one to invest in pork business in Saudi Arabia. Another industry that becomes a victim of strict Islamic Laws is the beverage industry.³ This is because alcohol is prohibited in that country. Certain products require special approval before they can be imported into Saudi Arabia e.g., live animals, horses, agricultural seeds, and products containing alcohol.

Saudi Arabian blacklisting of firms that support Israel is also a barrier.⁵ Such firms find it difficult to conduct their businesses across borders with Saudi Arabia freely. Agricultural products produced through biotechnology have to obtain a certificate from the country of origin to confirm that the product is safe for human consumption. This certificate needs to be authenticated by the chamber of commerce of the country of origin.

Competition Landscape and Profiles

Like most industrialized countries, Saudi Arabia has adopted a policy that enables it to impose protective customs duties on domestic products to enable their industries to survive amidst a growing competitive business environment. This approach is consultative being pursued jointly under the World Trade Organization. The Saudi Arabian government has consequently reduced its import taxes from 13 to 5% since the year 2002, a move that has piled up pressure on the local businesses who are already facing stiff competition from foreign companies.⁴

The quality standards of the goods and services are expected to improve when the country attracts additional high-quality products from global manufacturers.⁵ The prices will also be maintained at competitive levels. The food sector, according to 2003 statistics in the Saudi Factories Directory, forms 16% of the entire Saudi industrial sector though it relies majorly on processing and packaging of imported raw foods. The imports have been on a steady rise, indicating a significant drop in its share of the domestic market. The application of quality assurance principles will also make the products compete in the international market.

Quality Assurance Measures

The accreditation of quality efforts in any professional field is aimed at ensuring that quality standards are excellent. Most businesses use their quality award schemes to prove to clients that their quality levels are above average. Most Saudi businesses have found it pride to accomplish good quality. The quality-related accreditations that are popular among the businesses include The King’s Prize for the ideal factory, which covers quality assurance in any full-scale operating factory. It awards the company that has excellent technology and the largest volume of exports.

The Saudi Quality Sign is granted based on the conformity of domestic products to some pre-set standards. This sign is awarded by the Saudi-Arabian Standards Organization (SASO). As such, the main focus is on the technical part of the domestic product. Another quality-related accreditation is ISO 9000, which is a Quality Management System.⁵

Conclusion

Saudi Arabia, despite being a vast country in terms of area, still remains a net importer of food and food products. Its location in a desert region does not favor large scale agricultural activities. The government has not made it any easier to enhance agricultural production since it has neglected this crucial sector and instead focused mainly on oil mining. Its attempt to phase out wheat production by 2016 under the guise of being water-intensive has seen a sharp fall in agricultural production. The food products that have been given priority include fruits and vegetables like oranges, lemons, grapes, pears, and mandarins. The country’s way of conducting operations is based on Islamic Law, thus making it difficult for non-Muslim nations to conduct business.

Bibliography

Alsaleh, A, Application of Quality Tools by the Saudi Food Industry, Prentice hall, New Jersey, 2007.

Andrew, F, Fast Food, Junk Food: An Encyclopedia of What We Love to Eat, Greenwood publishers, California, 2012.

Mohammad, J, The Report: Saudi Arabia 2010, Oxford Business Group, Oxford, 2010.

Palkesh, S, Doing Business in Saudi Arabia, Price Waterhouse, Riyadh, 1991.

Shoult, A, Doing Business with Saudi Arabia, GMB Publishing Ltd, London, 2006.

Footnotes

J Mohammad, The Report: Saudi Arabia 2010, Oxford Business Group, Oxford, 2010, p.120-123.
A Should, Doing Business with Saudi Arabia, GMB Publishing Ltd, London, 2006, p.3-22.
F Andrew, Fast Food, Junk Food: An Encyclopedia of What We Love to Eat, Greenwood Publishers, California, 2012, p.84-89.
A Alsaleh, Application of Quality Tools by the Saudi Food Industry, Prentice-Hall, New Jersy, 2007, p.39.
S Palkesh, Doing Business in Saudi Arabia, Price Waterhouse, Riyadh, 1991, p.33-40.

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