Complex Made Simple

Say Cheese! Who bet the farm to save the Saudi consumer?

Saudi dairy giant Al-Marai is planning to invest $2.8 billion over the next five years. This might come as a shock to some given the spending troubles Saudis and businesses are facing in the country.

Is this the right time? 

Al-Marai’s announcement follows a somewhat tumultuous phase in the current economic atmosphere in Saudi Arabia. As the Financial Times (FT) reports, the government had implemented a 5% VAT right at the beginning of the year, and the repercussions of this are being felt across the country by both businesses and consumers. This move is part of the country’s plan to become less oil-reliant, a plan appropriately named Vision 2030.

Yet, at least for now, the introduction of VAT has only brought economic unrest and a slowdown in consumer spending, with financial services company Al Rajhi Capital estimating consumption to remain relatively flat until 2020, increasing just 3.8%. Moreover, the dairy company itself has taken somewhat of a hit, with its 2017 fourth quarter net profit having fallen by 4.3% according to Forbes ME.

Yet, there is a silver lining.

Read: More Saudi spending born out of rising oil prices would be a major slip-IMF

Why the bold move? 

Al-Marai’s decision might have been deemed pretty daring had it not been for an event that had transpired in 2017. Back in October of last year, the Saudi Public Investment Fund had poured $2.4 billion into the dairy giant, tallying up to a 16.32% slice of company shares. It had thus become the third largest stakeholder in the company. The PIF has also staked shares in real estate investments, education institutions, sports facilities, and others, all in the hope of improving life in the country and for bringing Saudi into the future.

Furthermore to Al-Marai’s decision, Mordor Intelligence reports that the dairy industry in the Kingdom is in fact set to maintain a steady growth rate of 11.62% all the way up to 2023. Al-Marai own 2017 financial report shows that they singlehandedly own the largest share of the fresh milk market, at 69.2% in 2017.

But Al-Marai’s newfound confidence seems to stem from this government support, in hopes of increasing efficiency and decreasing costs following recent losses.

Related: Saudi VAT App helps consumers avoid price traps set up by retailers

How will you be affected?

With Reuters reporting a 3.9% inflation in Saudi prices back in January, Saudi consumer’s purchasing power took a hit, with the prices of everything from housing to fuel on the rise. Yet, with such a massive investment, Al-Marai is certain to streamline their production processes and in turn cut prices in the long run. That’s what large factories with numerous production lines do.

The investment will also bring life to several industries, which should lead to the creation of more jobs. However, the purchase and implementation of new and advanced machinery will no doubt lead to some layoffs as manual jobs are assigned to automatons.

Al-Marai’s position as a major power in the dairy market lends even more weight to their decision, and whatever the outcome, it will be thoroughly felt throughout the Kingdom.

Milk, an essential consumable for people young and old, will be a reason to smile, as Almarai becomes so efficiently streamlined, prices of carton and bottled products will surely drop.

You will be the first to know as Almarai  has some 4.8 million Facebook followers to break the good news to.

Read: Desperate moves: Qatar fires blanks aimed at Saudi, UAE products