Opportunities in the GCC food landscape

Executive summary

After a long period of double-digit growth, per capita spending in the Gulf Cooperation Council (GCC)¹ food sector is leveling off. Regional players are seeking mergers and acquisitions (M&A) opportunities to expand their portfolios and sustain growth, but there is a lack of viable targets. Nevertheless, it is still possible for companies in the sector to grow by tapping into changes in the way people spend money on food. As in other countries at this point in their development, the consumption mix in the GCC is shifting away from staple products and toward value-added, convenient, and healthier alternatives. Moreover, some government policy initiatives, such as Saudi Arabia’s 50 percent tax on carbonated soft drinks and 100 percent tax on energy drinks, will make healthier options even more attractive to consumers. This represents a significant opportunity for established food players in the region, along with startups, entrepreneurs, and companies in related segments such as food distribution.

To better understand the opportunity, we analyzed the dynamics of the food and beverage sector in the region and compared the results to the same sector in several relevant countries. Based on that analysis, we identified the four most promising categories — snacks, spreads, prepared meals, and ready-to-drink (RTD) beverages — along with an overarching theme that cuts across categories: healthier diets. These areas and the theme offer attractive investment prospects in the GCC region regardless of the maturity and industry structure of the various categories.

To capitalize on this opportunity, regional players have several strategic options. They can build their offerings organically, although this approach is time-consuming and requires strong in-house innovation capabilities. Alternatively, companies can agree joint ventures with international players to localize some of the innovations in these categories, or they can invest in successful startups abroad and then help these firms expand in the GCC.

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Strategic options to seize the opportunity

Companies seeking to enter the promising categories discussed in the preceding section have several strategic options.

Building up offerings organically
In developed markets, a number of startups have entered these categories and succeeded. For example, Kind, a U.S. manufacturer of snack bars, launched in 2004. The company now controls 12 percent of the U.S. snack bar market, according to Euromonitor. Entrepreneurs in the GCC can follow a similar approach. Established food manufacturers can also use a greenfield strategy, or seek co-packing agreements to limit up-front manufacturing investments. However, building innovation capabilities within established organizations can be time-consuming and costly.

Establishing joint ventures with international players
Regional players can also strike joint ventures with international players to localize some of these innovations and get them onto store shelves in the region. For example, Al Safi, a leading dairy company in Saudi Arabia, partnered with Danone in 2001 to form Al Safi Danone. The new venture offers a wide range of dairy and juice products based on Danone’s expertise and tailored for local tastes. Today Al Safi Danone has a leading position in the value-added segment in dairy and is the market maker in a number of sub-categories, including drinking yogurt, ready-to-eat desserts, and beverages that combine fruit juice and milk.

Our analysis of product launches in relevant countries over the past 10 years shows that highly innovative companies (characterized by the number of new product launches) are not present in significant numbers in the GCC region yet and could be targets for joint ventures. For example, in the snacks category, 40 percent of the top 50 innovative companies in our analysis have no presence in Saudi Arabia. For RTD beverages, meals, and spreads, that number increases, to 74 percent, 80 percent and 84 percent, respectively.

In order to accelerate the formation of a joint venture, investors and regional players can also invest in emerging players or startups in other markets and help them get established in the GCC. This play was deployed in the fashion industry in late 2016, when Dubai-based Mohammed Alabbar, through his Symphony Investments, acquired a 4 percent stake in Milan-based online retailer Yoox Net-a-Porter and later announced that they would form a joint venture to create a new platform for online luxury retail in the Middle East.

Conclusion

The food and beverage industry in the GCC is at an inflection point. By looking at markets that are further along in their economic development and studying successful product launches in those markets, it is possible to identify the most promising growth opportunities for the region over the next five to 15 years. Companies that want to target these categories will need to understand consumer preferences in the region and quickly build up the necessary innovation capabilities, potentially by partnering with established players in other markets and leveraging their expertise. Those that do so will be able to capitalize on this unique opportunity.

¹ The GCC countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.