2. Risk Factors
2.1 Risks Related to the Company’s Business
supplied by such suppliers in its stores, which will affect the Company’s revenues or its reputation with customers, and thus will have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
It should be noted that the Company contracts with certain foreign suppliers and manufacturers to manufacture and supply home utensil and appliance products made specifically for the Company based on purchase orders or short-term agreements (for further details on supply agreements entered into with foreign suppliers and manufacturers, see Section 12.4.1 “Supply Agreements” of this Prospectus). As a result, the Company depends heavily on placing purchase orders with foreign suppliers and manufacturers in a timely manner. The Company may not be able to satisfy consumer demand or be able to obtain the desired products at an appropriate price if it is unable to make purchase orders in a timely manner.
Thus, the Company’s ability to manufacture and supply its products would be impacted by its inability to renew any of the agreements or to conclude purchase orders with foreign suppliers and manufacturers or renew them on favorable terms, or if foreign suppliers and manufacturers terminate purchase orders or supply agreements entered into with the Company or change the terms in a way that is unsuitable for the Company, this will in turn adversely and materially affect the Company’s revenues and its reputation with customers. In addition, the Company may also be unable to find alternative suppliers or manufacturers on favorable terms or at all if it loses of any of its key suppliers and manufacturers. Accordingly, any of these factors would have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
On the other hand, the Company’s certified suppliers or manufacturers may fail to provide the Company’s stores with adequate quantities of products within the allotted time frame and agreed-upon standards due to a shortage or defect in their factories or because of any other circumstances that may cause a disruption or delay in delivering the products required by the Company’s stores. Even if there are enough alternative suppliers and manufacturers for the products and other essential supplies required by the Company’s stores, there may be shortages or other disruptions in the supply chain at the sector level, as was the case with COVID-19, which affected supply chains across the world. For instance, COVID-19 affected global supply chains and shipping, leading to a decline in the number of cargo ships from China during such period. As a result, shipping costs increased from SAR 8.4 million (representing 2.8% of total purchases) in the financial year ended 31 December 2020G to SAR 37.1 million (representing 9.2% of total purchases) in the financial year ended 31 December 2021G and further from SAR eleven million (representing 8% of the total purchases) in the three months period ending 31 March, 2021G to SAR 15.3 million (representing 11% of the total purchases) in the three-month period ended 31 March 2022G (for further details on the risks related to COVID-19, see Section 2.2.12 “Risks Related to the Outbreak of COVID-19 or any other Infectious Disease” of this Prospectus). The Company may not be able to obtain replacement products of adequate quality or sufficient quantity on commercially acceptable terms and on time, which could require the Company to incur additional costs and, consequently, would have an adverse effect on the Company’s business, results of operations, financial position and prospects.
The Company may not be able to directly guarantee the effectiveness and quality of suppliers and service providers, including manufacturers, when executing contracts. The Company may be indirectly liable if such suppliers and service providers are not able to successfully perform their contractual obligations and deliver products or services within the specified timeframe and to the agreed standards. If the Company is unable to recover losses (in whole or in part) as a result of a default by suppliers or service providers, such losses will have to be borne by the Company. In addition, three (3) agreements entered into with foreign manufacturers, pursuant to which they manufacture and supply home utensil and appliance products made specifically for the Company, include terms and conditions requiring the Company to purchase a certain quantity of products during the term of the agreement or within a specified period of time. If the Company fails to purchase the specified number of products within the given timeframe, foreign manufacturers may terminate the relevant agreement or impose penalties on the Company, as determined by the relevant agreement (for further details on agreements entered into with foreign manufacturers, see Section 12.4.1 “Supply Agreements” of this Prospectus), which in turn will have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
In certain operations, the Company also relies on external service providers, such as providers of operational maintenance services, security services and internal transportation services for merchandise. As a result, the Company’s operations may be impacted by changes to the policies or practices of external service providers such as pricing, payment terms, programming of such services, frequency or cost of services and other factors outside of the Company’s control. Moreover, external service providers may not always deliver services that meet the Company’s standards or may not perform their contractual obligations as required. On the other hand, if contracts with external service providers are terminated, expire, or are not renewed, if the Company is unable to negotiate replacement contracts on favorable terms, or if one of the external service providers discontinues its business without being replaced by another external service provider in a timely manner at comparable pricing, this will have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
2.1.2 Risks related to the Continued Operation of the Business
The continued operation of the Company’s stores is essential to its success. The Company’s stores are subject to certain operational risks, including bad weather, physical damage to buildings, power outages, malfunctions, system failure or performance below the required standard, potential business interruption, riots, natural disasters or fires, as well as other
types of risks related to store operation. Furthermore, products may not be delivered to the Company’s warehouses and stores for a variety of reasons, such as poor handling or traffic jams caused by congestion, which could cause delays or non-receipt of merchandise, disrupt the supply of such products and lead to supply chain confusion. Therefore, this would have a material and adverse impact on the Company’s business, results of operations, financial condition and prospects.
Any losses or cancellation of significant orders as a result of a shortage or unavailability of specific products demanded by consumers could result in a decline in the Company’s revenues. These events could cause unavailability of products, which would reduce sales or increase costs, and thus have a material and adverse impact on the Company’s business, results of operations, financial condition and prospects. The Company’s revenues and profitability may be impacted if the stores are subject to any operational risks or if the supply chain is adversely impacted, which in turn will have a material and adverse impact on the Company’s business, results of operations, financial condition and prospects.
2.1.3 Risks Related to Reputation and Quality of the Products
The Company’s success depends on its market reputation. The Company’s reputation may also be significantly damaged due to several events, such as poor quality of its services and products, disputes with customers, deficiencies in internal control, or the Company’s stores facing negative publicity regarding the quality or safety of the products sold by the Company, or being subject to penalties as a result of its non-compliance with the applicable laws. Similarly, the Company’s reputation may also be damaged by the actions or statements of current or former customers, employees, competitors, suppliers, and adversaries or the media. Negative information and statements about the Company, even if they are based on rumors or are a misunderstanding, could have an adverse effect on its business. Damage to the Company’s reputation may be severe and costly and take a long time to be remedied, which in turn may affect choices of potential or existing customers and lead to their refusal to opt for the Company’s stores. This would lead to the Company losing customers, which would have an adverse effect on its business. Damage to the reputation of the Company may also reduce the value and effectiveness of the Company’s brand name and stores and may reduce customers’ and investors’ confidence in them, which would have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
In addition, the Company’s reputation depends on its ability to maintain the quality of its products, which is crucial to the Company and its ability to retain existing customers and attract new customers. The Company’s reputation with its customers will suffer if the Company is unable to maintain the quality of its products at an acceptable level. Damage to the Company’s reputation may be severe and costly and take a long time to be remedied, which in turn may affect choices of potential or existing customers and lead to their refusal to choose the Company’s stores for their home utensil and appliance needs, which will lead to a decline in the Company’s revenues. Damages to the reputation of the Company may also reduce the value and effectiveness of the Company’s brand and may reduce investors’ confidence in it, which would have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
2.1.4 Risks Related to Product Liability and Defects
The home utensil and appliance products offered by the Company may contain manufacturing defects that the Company was unable to discover, especially when products are introduced for the first time, which may have an adverse impact on the performance of the products and consequently on demand for them, the Company’s reputation and customers’ trust in the Company and its products. Although the Company and customers have tested the products offered, defects may occur in the Company’s products from time to time, and some of these defects may not be apparent until such products are tried. Liability claims may also be filed against the Company regarding the quality of the products, their guarantees and their compliance with specifications and regulations, which may be time consuming and require lengthy procedures resulting in the Company incurring significant litigation expenses. The defects in the products offered by, or the claims that may be filed against the Company in this regard may have an adverse impact on the Company’s reputation and demand for the Company’s products. Any defects in the Company’s products may require recalling products and spending significant resources to remedy such defects, which may damage the Company’s reputation or lead to a loss in demand for the Company’s products, which in turn will affect the Company’s revenue or market share. In addition, the Company’s Management may be distracted from its main business in order to defend any liability claims regarding product quality, warranty and compliance with specifications and regulations. Any of these factors will have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
2.1.5 Risks Related to Retaining Existing Customers and Attracting New Customers
The growth of the Company’s business and revenues depends on its ability to continue to retain its existing customers and attract new customers at appropriate costs. If the Company is unable to increase the number of its stores at an adequate rate or at all, it may not be able to attract more customers. The Company may not be able to retain existing customers if they are not satisfied with the products, prices, variety of options or the quality and timeliness of products or services provided. In particular, the success of the Company’s business depends on its ability to continue to offer a comprehensive and integrated range of products and, at the same time, on its speed in anticipating and responding to changes in customer needs and choices. Customer needs and market trends in the Kingdom are subject to rapid changes, as customers’ acceptance of new products is subject to a number of factors, including prevailing lifestyles, price levels, use
cases, technology and many other factors (for further details on factors affecting consumer behavior, see Section 2.2.2 “Risks Related to the Home Appliances and Kitchenware Retail Sector and Consumer Spending Level” of this Prospectus). The success of the Company’s operations depends on its continued ability to select products that meet customer needs. In the event that the Company is unable to respond to market changes and customer needs, this will have an adverse impact on the Company’s business, results of operations, financial position and prospects.
In addition, the Company may not be able to retain existing customers or attract new customers if it is unable to maintain relevance with its customer base or if the identity or reputation of the Company’s brands is tarnished for any reason. Failure to retain existing customers or attract new customers would have an adverse impact on the Company’s business, results of operations, financial position and prospects. Additionally, the Company may incur significant costs in order to attract customers away from competitors, especially when entering into new geographical markets (for further detail on the risks related to competition, see Section 2.2.1 “Risks Related to Competition” of this Prospectus), and this will have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
2.1.6 Risks Related to Marketing and Sales
High awareness of the Company’s brands is essential to the Company’s continued growth and financial success, and the Company’s revenues are significantly affected by the marketing and advertising of its brands. Thus, the Company incurs significant costs in its marketing efforts. The Company’s marketing and advertising expenses accounted for 2.7%, 3.4%, 4.4% and 5.8% of its consolidated sales in the financial years ended 31 December 2019G, 2020G and 2021G, and the three- month period ended 31 March 2022G, respectively. However, such initiatives may not be successful in generating higher sales or increasing brand awareness. Additionally, many of the Company’s current or future competitors may be larger and may have greater financial, marketing, and other resources, devote greater resources to the marketing and sale of their products, gain international brand recognition or adopt more aggressive pricing strategies than the Company is able to.
Should the Company’s marketing and advertising initiatives and programs be less effective than those of its competitors, this would have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
In addition, the Company relies on marketing campaigns and special offers as part of its marketing efforts to increase sales.
Marketing and advertising campaigns are subject to the directives issued by the Ministry of Commerce and the licenses related to such campaigns. In the event that the Company conducts marketing or advertising campaigns that violate the directives of the Ministry of Commerce, or in the event of any errors that lead to such violations, the Company may be subject to penalties ranging from a financial fines to defamation, which will have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
2.1.7 Risks Related to Leased Real Estate
The Company relies on leased sites, whereby fifty-six (56) stores out of the Company’s total fifty-eight (58) stores are located on sites leased from third parties as of 31 March 2022G, including five (5) real estate properties leased under long-term investment lease agreements under which the Company may develop and sub-lease such real estate for investment (for further details on the leases entered into by the Company, see Section 12.6 “Real Estate” of this Prospectus). Since the Company’s leases have a fixed term and are renewed at the request of the parties to the contract, any increase in the lease amount imposed by the lessors on the Company upon renewal will cause the Company to incur additional unforeseen liabilities, which in turn will have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
The Company may not be able to renew all leases, or such leases may be renewed under different terms and conditions that may not be commensurate with the Company’s plan and strategic objectives. It is worth noting that the Company has two leases for its stores that have expired and are being renewed as of the date of this Prospectus. If the Company decides to vacate any of its leased sites due to the termination or non-renewal of the leases in accordance with their terms, or because the renewal terms are not in line with the Company’s plan, the Company will incur additional costs in connection with relocation to a new site, which may include an increase in the lease amount and/or costs related to necessary renovations of the new site. In addition, as it relocates to a new site, the Company may temporarily lose revenues that would have otherwise been generated by the relevant store. Consequently, any costs associated with the relocation, coupled with any temporary loss of revenues, would have an adverse impact on the Company’s business, results of operations, financial position and prospects.
In addition, the Company leases the five (5) real estate properties it is entitled to sub-lease for investment purposes, and has entered into nineteen (19) leases with sub-lessors (for further details on the leases entered into by the Company as a lessor, see Section 12.6 “Real Estate” of this Prospectus). The Company’s revenues from leases entered into as a lessor accounted for 0.677%, 0.635%, 0.544% and 0.426% of the Company’s total revenues in the financial years ended 31 December 2019G, 2020G and 2021G and the three-month period ended 31 March 2022G. Any of the existing lessees may terminate their leases before the expiration of their term, and may not extend the leases upon the expiration of their current leases with the Company. It is worth noting that three (3) leases related to the Company’s stores, administrative offices and staff residences have expired in the normal course of business and have not yet been renewed as of the date of this Prospectus.
Also, a lease related to the real estate that the Company is entitled to sub-lease has expired in the normal course of business and has not been renewed as of the date of the Prospectus. Moreover, a lease related to the real estate that the Company is entitled to sub-lease is registered in the name of Muhammad bin Suleiman Alsaif and has not been transferred to be in the name of the Company as of the date of this Prospectus. The Company may not be able to renew the leases entered into with the lessees on terms similar to the existing leases or on better terms. In the event that any of the leases are not renewed, the lessees may delay vacating the leased commercial showrooms and handing them over to the Company or to the new lessees. If the Company is unable to maintain or renew leases with its current lessees or conclude leases with new lessees, or if the Company is unable to renew existing leases on favorable terms, this may lead to a decrease in the Company’s revenues, which would have an adverse impact on the Company’s business, results of operations, financial position and prospects.
2.1.8 Risks Related to Identification of Suitable Sites for New Stores
The Company’s performance depends, to a significant extent, on the sites of its stores. When selecting a site for a new store, the Company’s Management takes into account various factors, including, but not limited to:
Population density and customer traffic.
The proximity and performance of competitors in the surrounding area.
Customer accessibility, including parking areas.
The advantages of sites and their suitability to the Company’s store specifications.
The ability to negotiate and reach acceptable commercial terms with lessors.
The number of Company stores located in the same area.
The Company’s existing distribution and supply chain capabilities.
The Company secures its new store sites through leases, as determined in each case. In the future, the Company will need to secure new sites for its stores in order to support its planned growth and strategy (for further details on the Company’s strategy, see Section 4.2.5 “Strategy” of this Prospectus). The sites available for new stores may not be commensurate with the objectives of the Company. If the Company encounters difficulties in securing suitable sites for its new stores in line with its expansion strategy, its growth opportunities will be adversely affected, which in turn will have a material adverse impact on the Company’s business, results of operations, financial position and prospects.
On the other hand, when securing new store sites to support strategic growth objectives, the Company must consider avoiding cannibalization factors. For example, although the Company’s total revenues grew by SAR 28.1 million in the financial year ended 31 December 2021G due to the opening of eight (8) new stores across the Kingdom and an increase in the Company’s online store revenue, it witnessed a decrease in the total revenue of the Company’s Existing Branches (i.e., branches of “Alsaif Gallery” stores that were opened and operational before 1 January 2019G) by SAR 51.7 million in the financial year ended 31 December 2021G compared to the previous year (where the revenues of the Existing Branches decreased from SAR 539.3 million in the financial year ended 31 December 2020G to SAR 487.6 million in the financial year ended 31 December 2021G), including a decrease in the revenues of eleven (11) Existing Branches in the central region, amounting to SAR 20.1 million. The decline in the revenues of the Existing Branches is partly attributed to the Company’s opening of a number of stores in the central and eastern regions in close proximity to each other, which led to cannibalization as a result of customers moving to new stores which led to a decline in sales in the old stores. In addition, the Company witnessed a decrease in its revenues by 7.3% from SAR 272.8 million for the three-month period ended 31 March 2021G, reaching SAR 252.9 million for the three-month period ended 31 March 2022G. This is due to a decrease in demand from the Company’s customers, which in turn led to a decrease in its revenues in the Existing Branches (which decreased by SAR 30.7 million) and the branches that were opened and operated in 2019G and 2020G (which decreased by SAR 15.5 million), which was partially offset by the increase in revenues realized from the branches that were opened in 2021G (by an increase of SAR 16.1 million), in addition to the increase in the revenues of the online store (by SAR 8.9 million) and the revenues that were achieved from the two stores that opened during the first quarter of 2022G (by SAR 2.1 million).
If the Company is not able to successfully manage cannibalization factors by securing suitable sites for its new planned stores within its expansion strategy, this may lead to a decrease in the Company’s revenue, which will have an adverse impact on the Company’s business, results of operations, financial position and prospects.
2.1.9 Risks Related to the Company’s Online Store
In order to sell its products to customers online, the Company offers an online store via a mobile application and an e-commerce platform, which the Company has developed in-house through its technical team. The Company achieved 1.5%, 4.7%, 7.4% and 9.5% of its total revenues through sales via the mobile application and the e-commerce platform in the financial years ended 31 December 2019G, 2020G and 2021G and the three-month period ended 31 March 2022G, respectively. The online commerce sector is witnessing rapid growth in the Kingdom. Accordingly, the Company is exposed to a number of risks in relation to its online store, including the possibility of the imposition of new regulatory restrictions in relation to online business activities through the E-Commerce Law and its Implementing Regulations, especially with