2. Risk Factors
2.2 Risks Related to the Sector in which the Company Operates .1 Risks Related to Competition
The Company operates in the retail sector, which is one of the most competitive sectors in the Kingdom in terms of product quality, pricing and after-sales services. The Company expects competition to intensify in the future, and it may not be able to continue to effectively compete with other market competitors including department stores, specialty retailers and discount stores, as well as other current or prospective competitors. The Company’s current and future performance depends on its ability to acquire, retain and grow market share while maintaining profitability. This is dependent on, among several other factors, the Company’s ability to maintain its advantage through innovative home utensil and appliance product offerings, high quality, competitive pricing of products and services, the reputation and quality of the brands and products it offers, the quality of customer service and after-sales services and its ability to understand and promptly address customer requests. Some of the Company’s competitors may have access to larger financial and administrative resources. The following are just a few examples of the several competitive factors that may have an adverse impact on the Company’s business, results of operations, financial position and prospects:
Current or potential competitors adopting aggressive pricing strategies.
Current or potential competitors offering a wider range of popular products.
Current or potential competitors providing innovative store concepts or using creative sales channels.
New competitors entering the existing markets where the Company operates and as well as increased competition from other domestic and global companies, including other chain stores.
Greater competition from the online retail and home delivery service sector.
Two or more competitors merging or forming alliances, and as a result of increased efficiency, offering high- quality services at a lower cost.
The launch of creative and effective marketing campaigns by the Company’s current or prospective competitors.
Given the foregoing, the Company may not be able to keep pace with the strategies adopted by its competitors while maintaining the volume of its revenues and levels of profitability, which may result in a decline in the Company’s profit margins and a loss or reduction in its market share, and which in turn will have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
2.2.2 Risks Related to the Home Appliances and Kitchenware Retail Sector and Consumer Spending Level
The Company’s income depends on the volume of sales of home appliances and Kitchenware products from its stores to customers. As a result, the Company’s business is susceptible to risks related to the home appliances and Kitchenwareretail sector, which is impacted by rapid and occasionally unexpected changes in consumer behavior, changes in their preferences and seasonal fluctuations in demand for the Company’s products. Besides the general economic circumstances outside of the Company’s control, which include disposable income levels, tax levels (including VAT, which was increased from 5%
to 15% as of 10/11/1441H (corresponding to 01/07/2020G)), consumer spending (including discretionary spending on home appliances and Kitchenware), demographics, cost of living (such as water and electricity consumption), consumer borrowing capacity, interest rates, unemployment rates and general confidence in the economy. If the Company makes inaccurate predictions regarding market changes or fails to respond to them appropriately, this would have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
Customer spending levels may be impacted by developments in the areas where the Company’s stores are situated, including changes in demographics or changes affecting consumers’ ease of access to stores. Since most customers arrive at the Company’s stores by car, road closures or diversions brought on by maintenance or construction work on the roads leading to the Company’s stores or within the surrounding areas are impediments beyond the Company’s control, and such works may adversely affect the number of consumers who shop in the Company’s stores. Additionally, any changes in the demographics of consumers who live close to or nearby the Company’s stores, including changes in per capita income and consumer preferences for specific brands, may adversely affect the level of consumer spending in Company stores.
Changes in consumer behavior or purchasing patterns, as well as any emerging trends in the retail sector may also have a detrimental impact on the Company’s business and results of operations. For instance, the Kingdom is currently experiencing a considerable increase in online commerce. The Company’s online sales rose, accounting for 9.5% of the Company’s sales in the three-month period ended 31 March 2022G and 7.4% of the Company’s sales in 2021G, compared to 4.7% in 2020G and 1.5% in 2019G. Therefore, customer spending on online shopping, mobile apps and other retail channels, such as the Company’s online store, may increase over time. The shift in spending toward online commerce and other retail channels may result in a decline in the movement of consumers and their spending in the Company’s stores compared to online shopping, particularly with the expansion of online shopping options and alternatives due to the absence of geographical restrictions that limit market competition. Consequently, income will be impacted by sales revenues. Although online home appliances and Kitchenware retailers still form a small part of the retail sector in the Kingdom, their number is on the rise, thus intensifying competition in the online home appliances and Kitchenware retail sector. Even though it is anticipated that more of the Company’s sales will be made online over the coming years, the online services offered by the Company may be of poorer quality than those of its competitors, which may adversely affect the Company’s results of operations and its competitive strength.
2.2.3 Risks Related to Changes in the Regulatory Environment
In carrying out its business, the Company is regulated by a number of Government agencies in the Kingdom, including, but not limited to, the Ministry of Commerce, the Saudi Standards, Metrology and Quality Organization (SASO) and ZATCA. The legal and regulatory environment is changing rapidly, in line with the Kingdom’s economic reform plans. As a result, the relevant regulators are likely to adopt changes in laws, regulations and policies in the future, which the Company cannot foresee, including changes in regulations and policies that pertain to import and export, taxes and customs duties, antitrust, boycott, pricing, corporate governance, the rent system, health and safety standards and working hours in the retail sector and other changes that may affect the Company’s business and operations. Failure to comply with the requirements of the applicable laws may result in fines or penalties imposed against the Company by the relevant regulators. If the Kingdom enacts new laws or amends existing laws that govern the Company’s business and operations, the Company may be required to expend significant costs or adjust its business practices, operations or products to comply with current or future laws and regulations. The occurrence of any of these factors will result in unforeseen or potentially even higher costs, which will have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
The Company and its business are governed by a number of laws and regulations that are still relatively new, the interpretation and application of which still contain certain ambiguities. As a result, there may be some confusion regarding the interpretation and application of some of these laws and regulations. For instance, on 29/06/1441H (corresponding to 23/02/2020G), the Minister of Commerce and the Minister of Municipal, Rural Affairs and Housing introduced the unified lease contract to the commercial real estate sector, thus becoming a mandatory contract, pursuant to Council of Ministers’
Resolution No. 405 dated 22/09/1437H (corresponding to 28/06/2016G), which mandates the registration of all residential and commercial leases with the Rental Services E-Network (Ejar), such that a lease serves as an executive instrument for both parties. As at the date of this Prospectus, the Company has not registered thirty-two (32) leases for its stores and fifteen (15) leases as a lessor with Ejar. It is important to note that, in accordance with Council of Ministers’ Resolution No. 292 dated 16/05/1438H (corresponding to 13/02/2017G), a circular was issued by His Excellency the Minister of Justice directed to all courts, pursuant to which leases that have not been registered with Ejar are not valid contracts that are judicially and administratively enforceable. Hence, the Company may not be able to bring legal action to claim the rights under the
unregistered leases with regard to the leases entered into after 04/05/1440H (corresponding to 10/01/2019G). It should be mentioned that the Ministry of Municipal, Rural Affairs and Housing plans to link the services of electronically registered leases to the ‘Balady’ service, where commercial municipality licenses are issued and renewed. Thus, the Company will not be able – upon implementation of such – to issue or renew municipal licenses for the Company’s stores for any of its leases that are not electronically registered, which may disrupt the Company’s business or expose it to violations and financial penalties due to non-compliance with the relevant laws. Furthermore, the unified leases may not give the Company absolute freedom to set all of its terms, given that either party may – through the real estate broker – modify or add certain clauses to a small extent such that the lease does not lose the feature of being an executive instrument. Therefore, failing to comply with some or all of the requirements of the laws and regulations by which the Company is governed, or being unable to effectively respond to changes in the regulatory environment will result in the imposition of fines or penalties against the Company or may affect the effectiveness of its contracts, which in turn will have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
2.2.4 Risks Related to the Competition Law and its Executive Regulations
If the Company gains a dominant position in the market or is identified by the General Authority for Competition as a company in a dominant position in the market, the Company will be subject to the conditions and controls set forth in the Competition Law and its Executive Regulations, which aim to protect fair competition through reasserting market principles and goods traded therein, as well as free and transparent pricing. In addition, the Company must obtain the approval of the General Authority for Competition in case of involvement in any future economic concentration process (such as any acquisition or merger that results in economic concentration). If the Company violates the provisions of the Competition Law, or if the General Authority for Competition issues any decision against it due to a violation, the Company may be subject to fines of up to 10% of its annual sales or up to SAR 10 million in case it is impossible to estimate the Company’s sales, or it may be subject to further measures that the General Authority for Competition may impose in relation to any violation, such as adjusting its status, remedying the violation, or requiring it to dispose of some assets, shares or equity.
The General Authority for Competition also has the right to request temporary or permanent suspension of the Company’s business (either partially or fully) if the Company repeats such violation, which will have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
2.2.5 Risks Related to Data Protection and Cybersecurity Systems
The Company collects and processes personal data and other data from its current and prospective customers through its physical stores and through its online store. The Company uses this information to provide services and products to its customers, administer billing and support, expand and improve its business and communicate and recommend products and services through its marketing and advertising channels. As a result, the Company is required to comply with local laws and regulations, such as data protection and cyber security requirements in the Kingdom, including the Personal Data Protection Law promulgated by Royal Decree No. M/19, dated 09/02/1443H (corresponding to 16/09/2021G). Globally, new and evolving regulations regarding data protection and cybersecurity and other standards governing the collection, processing, storage, transfer, export, disclosure and use of personal data impose additional burdens for the Company due to increasing compliance standards that could restrict the use of the Company’s online store and its online operations. Future laws, regulations, standards and other obligations, as well as changes in the interpretation of existing laws, regulations, standards and other obligations may require the Company to incur additional costs and restrict its business operations. If the Company is unable to comply with the applicable data privacy laws and regulations and cyber security controls and standards, the Company’s ability to successfully operate its business and pursue its business goals could be damaged.
The Company’s failure to comply with applicable laws and regulations, or to protect such data, could result in enforcement action against the Company, including fines, penalties, claims for damages by customers and other affected individuals and damage the Company’s reputation, which could harm the Company’s business, results of operations, financial position and prospects. The costs of compliance and other burdens imposed by laws, regulations and standards may limit the use and adoption of the Company’s online store or lead to substantial fines, penalties or liabilities for any noncompliance.
Thus, each of the above factors will have a material and adverse impact on the Company’s business, results of operations, financial position, and prospects.
2.2.6 Risks Related to the Economy of the Kingdom and the Global Economy
The Company’s assets and operations are located in the Kingdom, and, therefore, its performance, results of operations and growth prospects are affected by the general economic condition in the Kingdom and globally, in addition to the global economic circumstances which in turn affect the Kingdom’s economy. Any economic downturn in the Kingdom or in the oil and gas industry may adversely affect the Company, given it may affect customer behavior and spending levels, which may adversely affect the demand for the Company’s products, and which in turn will have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
Furthermore, the Kingdom’s economy is highly dependent on oil revenues, which play a significant role in the Kingdom’s economic plan and gross domestic product. Any decrease in oil prices will result in an economic slowdown and/or slowdown
in the Government’s spending plans, which would affect all segments of the Kingdom’s economy and would subsequently have a material and adverse impact on the Company’s business, financial position, results of operations and prospects. It is worth noting that the economy of the Kingdom, as with the economies of many other countries, is currently experiencing significant disruption as a result of the outbreak of COVID-19 (for further details regarding 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), with one such disruption being the steep decline of oil prices during the first quarter of 2020G. Economic conditions in the Kingdom could worsen in the future as a result of a decrease in oil prices or otherwise. All of these factors may adversely affect the Kingdom’s economy, which will in turn have a material and adverse impact on the Company’s business, results of operations, financial position and prospects.
2.2.7 Risks Related to Political Instability and Security Concerns in the Middle East
The Company’s primary operations and customer base are located in the Kingdom. The Kingdom and the broader Middle East region are subject to a number of geopolitical and security risks. Any geopolitical events or any developments in the geopolitical situation in the Kingdom may contribute to instability in the Middle East and surrounding regions (that may or may not directly involve the Kingdom). Therefore, investments in the Middle East region are characterized by a significant degree of uncertainty. Any unexpected changes in the political, social, economic or other conditions in countries within the Middle East region, or any terrorist attacks or acts of sabotage in the future targeting the Kingdom, may materially and adversely affect the markets in which the Company operates, the Company’s ability to retain and attract customers in these areas and investments that the Company has made or may make in the future, which, in turn, would have a material and adverse impact on the Company’s business, financial position, results of operations and prospects.
2.2.8 Risks Related to Compliance with Saudization Requirements
Compliance with the Saudization requirements is required by law in the Kingdom, whereby all companies operating in the Kingdom, including the Company, are obligated to employ and maintain a certain percentage of Saudi employees among their employees. Such percentage varies based on the activity of each entity as set out under the “Nitaqat” program. The Company is currently compliant with the Saudization requirements as of the date of this Prospectus and is classified under the High Green category according to “Nitaqat” program (for further details on the Company’s Saudization percentage, see Section 4.5 “Employees” of this Prospectus). However, the Company may not be able to continue to comply with the Saudization and “Nitaqat” program requirements. In such case, the Company will face penalties by Governmental authorities, such as suspension of work visa requests, suspension of requests for transfer of sponsorship for non-Saudi employees and exclusion from Governmental tenders and Governmental loans. The Company may not be able to recruit Saudi employees under favorable conditions or at all, or maintain its current Saudi employees, which in turn would affect its ability to meet the required Saudization percentage. There may be a significant increase in costs of salaries in the event that the Company hires a larger number of Saudi employees. The occurrence of any of the above would have a material and adverse impact on the Company’s business, financial position, results of operations and prospects.
2.2.9 Risks Related to Employee Costs
The Kingdom has implemented a number of reforms aimed at increasing Saudi employee participation in the labor market, including imposing fees on non-Saudi employees employed at Saudi institutions as well as fees on residency permits of family members of non-Saudi employees. The non-Saudi employees’ fee became effective on 14/04/1439H (corresponding to 01/01/2018G) while the residency permit fees became effective on 07/10/1438H (corresponding to 01/07/2017G), noting that such fees increased gradually up to SAR 9,600 annually per employee in 2020G. As of 31 March 2022G, non- Saudi employees constituted 83% of the Company’s total employees. Implementation of such fees and increases led to an increase in the Governmental fees paid by the Company for its non-Saudi employees, which amounted to SAR 1,649 million as at 31 March 2022G. In addition, an increase in fees payable by non-Saudi employees for their family members resulted in higher living costs, which may affect the attractiveness of the Kingdom for such employees who may look to relocate to other countries with lower living costs. Consequently, high Government fees and difficulty in maintaining non-Saudi employees would have a material and adverse impact on the Company’s business, financial position, results of operations and prospects.
The MHRSD has officially announced the launch of the “Improving Contractual Relationships” initiative, which encompasses a number of policies and controls, including the replacement of the Kafala (sponsorship) system with an employment contract system between the employer and expat worker, which became effective on 01/08/1442H (corresponding to 14/03/2021G). Under this initiative, the Kingdom strives to improve and promote the efficiency of the work environment, enhance the flexibility, effectiveness and competitiveness of the labor market and raise its attractiveness in line with international best practices, as well as activate contractual reference in the employment relationship between employers and employees based on a documented employment contract between them through the contract documentation program. The job mobility service also allows the expat worker to switch to another job upon the expiration of his/her employment contract without the employer’s consent. Furthermore, the initiative also defines the mechanisms of mobility during the term of the contract, provided that the notice period and applicable controls are adhered to. The exit and return service allows expat workers to travel outside the Kingdom upon submitting an application, while notifying their