Saudi Arabia: The Middle East’s newly-regulated hotspot | Global Franchise
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Wednesday 19th January, 2022

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Saudi Arabia: The Middle East’s newly-regulated hotspot

Insight

Saudi Arabia: The Middle East’s newly-regulated hotspot

The introduction of the Saudi Franchise Law has shaken up this otherwise reliable franchising hotspot

Saudi Arabia is a prime consumer region in the Middle East, with the country commonly being regarded as the largest retail market in the G.C.C. An estimated 83 per cent of the country’s population live in urban areas – which is, conveniently, where many of Saudi Arabia’s franchise outlets are located.

This is due to shopping being a common pastime of Saudi consumers; malls are a frequent social gathering point (outside of COVID), and are often a hub where the biggest American brands can be found – often duplicated across every mall possible.

Regulatory overhaul

One of the biggest changes to the Saudi Arabian franchise market in recent years is the introduction of the Saudi Franchise Law, which is the first time that franchising has been legally recognized outside of common contract law and other familiar regulatory practices. The Law came into effect on April 22, 2020, and consists of 11 articles divided into 27 sections – all very important for franchisors to consider when embarking on growth into the country.

It may have been expected that the Saudi Franchise Law – which requires all documents to be translated into Arabic, among other stipulations – would curtail franchising deals and possibly harm the country’s previously active market. Instead, it seems to have formalized an industry that was previously populated by a few bad apples.

“Because there’s now a lot more compliance for franchisors, what we have found is that it has delayed certain deals going through. Documents have to be translated into Arabic, and the franchisees – and maybe this is a good thing – are forced to look at their deals a bit more closely. They’re being presented with a disclosure document which they weren’t in the past, and it’s in Arabic which it wasn’t in the past,” explains Melissa Murray, a partner at law firm Bird & Bird.

“It has also caused some franchisees to appoint lawyers where they may not have previously. There have been more negotiations that have come from that, which didn’t previously occur. It’s made all of the deals that bit more professional.”

And the evidence is certainly there to show that the introduction of this Law has done nothing to halt Saudi Arabia’s active market. Case in point: in April of this year, established American chicken franchisor Popeye’s entered into an exclusive master franchise agreement with developer Gulf First Fast Food Company to develop locations throughout Saudi Arabia.

“We are thrilled to announce the development agreement with Gulf First to increase the pace of growth for the Popeyes brand in the Kingdom of Saudi Arabia, as part of our broader global expansion strategy,” said David Shear, international president of Restaurant Brands International Inc., the parent company of Popeyes, at the time of this announcement. “Guests all over the world love our famous chicken and with its extensive experience in the market, Gulf First will accelerate our ability to reach guests across the Kingdom.”

Refining the market

Make no mistake, however: the Saudi Franchise Law has undoubtedly had an impact on the country’s franchise scene, despite big deals still taking place. Interestingly, it seems to have affected domestic brands more so than international giants – likely due to Western operations already being used to having to jump through legal hoops.

“With some of our clients who are based in Saudi Arabia, they’ve found it difficult to comply because it’s quite new for in-market entrepreneurs. Any international franchise lawyers would be familiar with it from other countries, but I think if you’re a franchisor focusing on the domestic market, this kind of law is a bit of a struggle,” says Murray. “But then that’s the point: to protect in-country franchisees and make sure that they know what they’re signing, and not wasting their money or time and effort. In that respect, it’s a modernization of the whole system in Saudi Arabia.”

As well as looking out for the best interests of franchisees, the Saudi Franchise Law has also refined the market in the sense that unlikely deals simply aren’t as prevalent anymore. This is due to the upfront costs that are now required for translation and legal counsel; costs which smaller brands simply can’t incur with the risk of an agreement falling through.

“Because you can’t get money upfront without signing a franchise agreement, there’s a bit of an upfront cost if you’re not 100 per cent sure that the deal is going to go ahead. In the past, people would sign an LOI, get a deposit, and that deposit would help the franchisor pay for their trademark registrations and hire a lawyer and continue on from there,” says Murray. “We’ve had clients in the past who have looked at the Saudi market, but haven’t been ready. Maybe they’re smaller brands themselves who don’t have a lot of spare cash to chase down the potential opportunity. If they don’t want to run the risk of having those upfront fees, it can be difficult.

“We’ve had clients in the past who have looked at the Saudi market, but haven’t been ready”

“In a way, that is clearing out the market a bit. You’re not seeing those deals that were never going to go ahead anyway. Some of our sophisticated franchisor clients, who are large brands from the States or U.K., are willing to pay that money because the deal will go ahead at some point.”

Opening up to the world

Similar to how Egypt’s Open-Door Policy in the 1970s led to considerable international investment in the country, Saud Arabia’s current government is looking to broaden its international tourism by opening the market and removing restrictions that previously stunted growth. While brands may have previously chosen markets like the U.A.E. over Saudi Arabia when looking toward the Middle East, this new direction for the country is opening doors across the board.

“Other countries like the U.A.E. and Qatar maybe got into franchising earlier and there’s maybe not quite as much room for growth,” explains Murray. “The Saudi government is really making a concerted push for international tourism to upgrade the country’s development, retail, and F&B. Now, there is a lot of opportunity there for franchisors.”

The U.A.E. by the numbers

Population: 35 million
GDP: $790bn
Size: 2.15m square kilometer
Primary language: Arabic

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