THERE is a mad rush in the restaurant industry of Saudi Arabia with hundreds of franchised and local restaurants opening every year. As far as international franchises are concerned it’s a perfect marriage since North American restaurant concepts are looking beyond US boundaries to escape the challenging domestic economic scenario and create a new trajectory of growth. The GCC region provides that golden opportunity because of quite a few reasons. Strong and stable economy with high disposable income presents a robust platform for international restaurant companies. Another interesting factor is that dining out is also considered to be a source of entertainment in this part of the world. Saudi Arabia is not only the largest economy of GCC but also has the largest population that is well-traveled and familiar with international trends in dining. Therefore the expectations are getting higher.

In KSA, the days of restaurants taking their customers for granted are over. Customers now have several choices in every segment of restaurant and they are now looking for better variety, taste, price, convenience and overall experience. Any restaurant chain that is falling short in any of these areas is bound to perish sooner than later. Let’s look category wise. Generally speaking there are four categories in the restaurant industry — fine dining, casual dining, fast casual and QSR (quick service restaurants)/fast food. We will briefly elucidate each of these four categories in Saudi Arabia.

Fine dining which is broadly defined as full service restaurants with elegant or fancy décor, good range of menu choice and high average check has a challenge of scalability due to prime real estate availability and soaring real estate prices. In this economic turbulence, there is also a cascading affect in the form of customers trading down from their respective favorite categories. Fine dining customers perhaps trading down to high end casual or casual dining whereas casual dining to fast casual or QSR’s and so on. There is not really much competition in the fine dining segment in Saudi Arabia but there aren’t even many companies willing to play in this segment anyway due to the reasons stated earlier.

Now to the most hot category — the casual dining. This segment of the industry is most attractive and lucrative for investors due to the opportunity of scalability if the right real estate model is implemented. Like Fine dining, restaurants in casual dining category also provide full table service but in a less formal manner and atmosphere. Menu variety is huge, atmosphere is relaxed and welcoming with moderate average check. In early 2000, casual dining restaurants in Saudi Arabia would be stand-alone building and that too in metropolitan cities only but in past few years, the quest for expansion has pushed these casual dining brands to smaller models often targeting malls and opening in remote cities. There has been a rapid increase in casual dining chains setting foot in the country in past few years. Most casual dining chains in Saudi Arabia are North American franchise concepts and are hugely popular amongst locals.

The challenges seems to be rising now as the market is getting saturated and the pie still remains almost the same. Moreover the millennials are more attracted towards fast casual concepts, somewhat similar pattern like in US. Casual dining in Saudi Arabia will continue to trade fairly but keeping the customer base intact, profit margins healthy and maintain manpower supply will be daunting task. Some casual dining chains have looked into their building size and re-engineered it to become more real estate smart. Satellite cities like Qaseem, Jazan, Hail, etc. are also getting on the radar of restaurant companies given the lack of quality dine-in restaurants but these cities are limited in terms of opportunities for expansion due to population size unlike metropolitan cities like Jeddah or Riyadh.

There is also a sort of price / value war going on with most restaurants offering fixed price meals which is somehow justified considering the shrinking pie share in this segment. For the leading casual dining players, the winning formula is to go back to the basics, offer the best food with great value, good variety and warm hospitality. Everything else will be secondary. Another issue rather comfort zone is the Tex-Mex style chains which are dominating the market. There still lies a sizable gap in other cuisine segments for casual dining like Indian, Chinese, European and few others. These segments can offer good investment opportunity. Casual dining chains in US are already witnessing enormous pressure to perform and they are fast losing their turf to the fast casual. Leading restaurant companies in Saudi Arabia can take cue from this trend and work hard to expand their portfolio.

Then comes the fast casual restaurant segment. This is a limited service restaurant concept with selected choice of menu but price may not be very low. There is this general misconception that fast casual restaurants have cheaper price tag. This is not true. The USP (unique selling point) for fast casual is their speed of service and less complicated menu options. Customers are rapidly adapting to this style because they can choose their pace of dining. Another catch in fast casual concepts is that their food is generally light and may not be that rich in calories unlike their counterparts in casual dining. Except few restaurant chains, there is a huge gap in this segment and market conditions are ripe to capitalize in this area.

Factors like young population, high disposable income, lack of time, trend to be in a very friendly, less complicated dining place are all positive signs for fast casual dining players planning to enter this country. Another strong opportunity for fast casual chains is the relative ease of expansion as these restaurants can open as stand-alone, in shopping arcades, malls or even colleges and universities. Since capex is usually lesser than casual dining therefore the risk factor is also less and growth could be fast pace.

QSR or popularly known as fast food chains are already under a lot of stress with ever increasing competition and diminishing profits. Almost all popular fast food brands are already present in most part of the country. The name of the game for QSR for a long time will unfortunately only be price, drive through and home delivery. In US, like casual dining, QSR’s are also facing stiff competition from fast casual dining chains.

To bring it all to a logical conclusion, there is still a lot of opportunity in the restaurant industry of Saudi Arabia but it’s about time for restaurant companies to make the right moves and invest in the right segment. Keep an eye on ever-increasing commodity prices, manpower challenges, real estate availability/prices and be capex smart. If you know how to engineer and navigate through these pillars then you are in the game, go for it.

— Mohammad Kamran Khan is vice president, marketing, TARFEEH | SEDCO Holding