First, we have oil prices. Since Saudi Arabia leads in the production and exportation of oil, the Saudi economy can easily be affected by any fluctuations in oil prices. Apart from affecting the nation’s economic growth, the effect will also be experienced at the Stock market. The stock prices will rise and fall when oil prices increase and decline respectively. What may result to these fluctuations in price are basically two aspects. First is because the Saudi Stock Market has a bi-directional causal or mutual predictive relationship with daily changes in the oil prices. Second, there is global demand. The oil prices are greatly affected by the worldwide economic activity. The oil prices in Saudi Arabia determine the Saudi Kingdom’s GDP growth as well as its financial and external positions.
Second, there are political and environmental concerns in the region and the world at large. Due to the sensitivity of oil prices, any change either politically or environmentally can easily affect them. For instance, there was an impact on oil prices due to the conflict in Iraq and the conflict between the Yemen rebels and Saudi Arabia.
The third key issue that affects the retail industry in Saudi Arabia is the economic concern at both the local and global level. Any major shock or incident in the world wide market will have a great impact on the price of oil. Any global recession or any other unexpected event can also affect the demand of oil. How the global market perms and grows greatly affects and relates to the growth of the Saudi Stock market. Studies indicate that as the global economic recession intensified, there was a decline in the performance of the Saudi Stock market besides the oil prices declining. After some time, there was an improvement in the economic conditions in most parts of the world. This was a clear indicator that there was stability in most financial markets and that real economy was around the corner. Oil prices began to shoot, a condition that saw most retail oil industries in Saudi record positive fiscal growth.
Another aspect is when there is a higher demand from customers due to domestic economic growth. The fact there is an increase in consumers’ demand at the local level shows that their confidence has been redeemed and this is likely to improve the outlook of domestic sectors including retail services.
Sentiments from investors can also affect the stock market performance. Therefore, it is important for the investors in the Saudi economy to exercise caution with regard to the stock market. The market value can easily be propelled above our fair value estimate due to an investor’s sudden shift in sentiments. However, this is less likely to be the case. Even though TASI is showing positive growth, it is still well below its peak and numerous investors have experienced crashes twice within the previous four years. The implication of this is that the investor sentiment should take time to build up but will still be susceptible to limitations in the face of adverse political and economic developments or any other corporate defaults.
Fourth is the influence of the US dollar. Related to this is the US short term interest rate, the strength of the dollar, the global capital market and their impact to the domestic interest rate. Both local liquidity conditions and global prices of products are greatly affected by the US interest rates. Most local retail industries have raised the prices of the products. This is also the case with the prices of most of the global products. The implication of this is that Saudi price fuels are likely to be affected in similar by the effects of changes in the US dollar. For example, the trade-weighted US dollar index can be used as a measure for the weighted average of the foreign exchange value of the Saudi riyal against the currencies of a broad group of major Saudi Arabia trading partners.
The fifth key aspect has to do with the new rules and regulations. Three years ago, foreign investors could utilize the Saudi Stock through the swap agreement. However, the inflows that foreign investors brought were below the expectations. Within a period of about one year, foreign investors had purchased approximately 2.3 % of the total market capitalization. This was partly caused by improper timing following the crash of most global markets in 2008 as a result of a global economic depression. Another reason is due to lack of interest by foreign investors in the market access method. This is because it does not guarantee them the rights to profits or losses due to their own transactions.
The sixth key aspect is the effect of the Ramadan. Saudi Arabia’s economic performance is greatly changed during the month of Ramadan. The Saudi people’s expenditure tend to rise during this month. This is due to the fact that most people tend to spend a lot on food. Compared to other times of the year, families and friends come together during this period and consume food in high quantity. Given the high demand for food, food prices increase during this time. Thus, retail food industry in Saudi performs well. Spending on food by most customers increases double during the Ramadan month than any other time. This results to family budget deficits after this month. Consequently, their spending habits are affected for the remaining part of the year.
Moreover, research has revealed that it is during this month that there is a decline in the stock market particularly in the Islamic world. In addition, during the month of Ramadan, the commodities imported by Saudi show some degree of growth. Therefore the holy month of Ramadan marks a great religious event that leaves a great mark in the economy of Saudi Arabia and its retail industry.
Industrial Macro-analysis
Macro-analysis of industry is carried out using the five forces in the Porter’s model. They determine not only the attractiveness, but also the profitability of a given industry. They are therefore very important to an aspiring entrepreneur. The five forces include: the supplier power, buyer power, threat of entry, threat of substitutes and competitive rivalry.
First, with respect to the buyer power, food retail industry in Saudi Arabia has a favorable buyer power during the month of Ramadan when most friends and families meet to share and celebrate this religious event. The nation also has a large population hence a higher demand for products in the retail industry. Secondly, with respect to the competitive rivalry, there is high competition in Saudi for provision of various commodities such as electricity, footwear and clothes. Moreover, regional separation has encouraged competition of in different businesses in various regions. The increased use of Internet in Saudi Arabia has led to the introduction of most online products. Most products are therefore supplied online through a website – www.souq.com. Most of the products retailed here are mobile phones, cars, computers and other property. Most customers are able to pay for them through credit cards. Hence there’s a greater supplier power.
On the other hand, there threat of entry is high. It is possible to penetrate into the Saudi market because monopolistic tendencies are not encouraged. Besides, the differences between conventional and Islamic fiscal practices continue to become slim and as such, barriers to new entries into the retail business are reducing.
Concerning the threat of the substitutes, importation of various substitute goods have a way of reducing the prices for the local products especially when they come at low costs making consumers to prefer them. The domestic retailers will thus be forced to adjust their prices so as to compete effectively.
Differential impact of the Business Cycle on the Industry
Business cycle is a terminology that is used to refer to fluctuations in both economic activity and production over a given time period. It is a known fact that the Middle East, Saudi Arabia included is the richest producer of oil in the world. The region is enjoying inflow of liquidity and since September 11, it has been receiving a lot of financial support from the US. Thus, there is a greater opportunity in the region arising from revenue from oil and an enormous internal investment. Dubai and Qatar have been on the forefront in getting the investment. However, others are following suit too.
In the recent past, oil prices have been fluctuating across the globe following conflicts in the Middle East and Libya. “The truth is oil that supplies are supplies are looking stretched worldwide.” (Cooper, 2011). Russian oil exports have declined. Exhaustion of the North Sea oil may cause the UK to begin importing oil and some geologists are calling oil with low production costs in Saudi Arabia to question.
Meanwhile, most developed nations are experiencing an economic slowdown as a result of high oil prices. Therefore, while supplies are fluctuating, the demand for oil is rising signaling high oil prices. Studies from economic experts show that the cost of oil per barrel may not stop climbing. The world may need to be prepared for a third oil shock. The economy in most industrialized economies seems to be weakening though there is not yet an outright recession. It may therefore be worth drawing the conclusion that unless the industrialized nations run into trouble, Saudi Arabia and the rest of the Middle East will continue experiencing good economic times including in the retail industry that deals with oil and other products.
Understanding Industry Lifecycle
Just like a normal human being who is born, grows into maturity and meets their demise, industries go through similar lifecycles through respective stages. The stages are Introduction, growth, maturity and decline.
In its introduction stage, the industrial could be at a level where perhaps a new product has been introduced into the market. The industry may be the only one offering it. Through focus strategy, the firm will endeavor to enlighten a small group of customers about the product. Since at this point creation and marketing of the product uses money, the business may not register positive gains at this stage. Any realized profits are invested back into it so as to prepare it for the following life cycle stage.
The second stage is growth. Similar to the introduction stage, growth can occur when there is a substantial amount of capital for the business. This stage requires funds for marketing and investing in the firm to meet the expectations of the consumers. Due to product standardization, there can be economies of scale. Furthermore, funds for research and development are required to make the product reflect the needs of the customer. Whereas some products may take a short time in this stage such as fad-clothing, others may take slightly longer such as computer business because of the upgrades in its features and services.
The third stage is the maturity stage. At this point, the rate of sales expansion is at the same level as the economic growth rate. The firm’s products must be unique enough to survive competition that may arise from late entrants. A firm may adopt various techniques to increase sales. At this point, the firm generates excess profit and does not make major changes like in the growth stage. Example of a mature product is a detergent.
Finally, there’s the decline stage. This arises due to failure to do enough research, development and innovation to ensure that the products are not overtaken by the latest technology. Although profits continue to be generated, sales may decline drastically. To continue surviving, mergers and consolidations may occur.
This are the stages that any retail business in Saudi Arabia and anywhere else has gone through.
Evaluating an Industry’s Competitive Environment (SWOT Analysis)
SWOT analysis is an important tool used in making decisions and understanding any business organization. SWOT stands for Strengths, Weaknesses, Opportunities and Threats (Marketing Teacher, 2011). The strength and weaknesses show the organization’s internal environment. This will entail factors relating to pricing, performance, skills, services, profitability, people, costs, quality and reputation.
On the other hand, opportunities and threats show the factors outside the organization (external environment). Such factors include politics, culture, markets, competition, fashion and audience.
For instance, in the case of the Saudi retail industry, the strength has been invested into the expansion of the crude oil production in the region. The opportunity is that its high population provides ready market for the retail industry’s products. Also, there is a high consumer demand for most of the products such as oil. However, the main threat to the retail industry is the uncertainty in the global economy that may affect the market for its products such as change in oil prices.
Micro-analysis of Retail Industry
Cash Flow Model
Determination of the relationship between the price of banking industry and the price of Saudi market is important to decide whether to overweight or underweight. As price of the market is available online, the price of the industry is calculated via the coming formula:
PI = D1/K-g
D1= D0 (1+g)
- g: based on the assumption, g would be equal to 0.80
- k: based on the regression analysis attached in the appendix, k=0.45.
The beta of the industry is = 2.79% – 6.19%
Given that the market beta = 1, the calculated beta is less risky than the market beta
- D1: based on the formula (D1= D0(1+g)), D1= SR 2,908,948
By taking the average of the dividends of prior year for all the firms within the industry, D0= 1,616,082
D0 (1+g)= 1,616,082(1+0.8)= 2,908,948
- Pi: based on the formula (PI = D1/K-g), P=
PI = 2,908,948/ 0.45-0.8= 8311280 which is equal to 155 after the division of number of shares (5370.49).
The price of the market is 30 which is less than the industry price (Tadawul, 2011)
Recommendations
According to the price of the retail industry and the market, the industry price is greater than the market price:
Pi=155> Pm=30 As a result, the banking industry is underpriced. Thus, our recommendations for the industry are:
- Since the industry is underpriced, we should overweight by investing more in the retail industry
- As the market index relative to the industry is undervalued, investing in the retail industry can generate more money.
References
Cooper, P.J. (2011). Just where is the Middle East Business Cycle? Web.
Marketing Teacher. (2011). SWOT Analysis. Web.
Tadawul. Stock Market. 2011. Web.