Saudi retailers face margin squeeze as discount stores gain share

Saudi food retailers are under pressure from discount stores and quick commerce, forcing them to step up promotions and expand smaller-format stores to defend market share, according to a new report from Bloom Invest and analysts who spoke with Argaam.

The report, which examined the sector's competitive dynamics, found that consumers are shifting toward smaller stores and delivery apps, a structural change driven by price sensitivity and a preference for speed. That shift is squeezing margins at listed retailers and prompting them to intensify discounts and promotions.

Afnan Khan, Head of Research at Bloom Invest, said the competition is putting pressure on margins. Consumers have become more price-sensitive and increasingly value speed and convenience, he said. Jawaher Said, Senior Research Analyst at the same firm, expects quick commerce to keep growing and discount stores to keep gaining market share. The most likely response from listed retailers, she said, is stronger promotions and competitive pricing under existing brands, alongside expansion of express-format stores.

Valuation premium reflects market structure, not just fundamentals

The report noted that Saudi food retailers trade at higher valuations than Gulf and European peers. Khan said the premium primarily reflects the attractiveness of the Saudi market – strong consumer spending, population growth, high liquidity, and strong domestic demand for equities – rather than superior growth rates at the companies. Compared with Europe, the premium looks more justifiable because the European market is more saturated and has weaker population growth. But compared with other markets, the premium becomes less clear. Saudi companies deliver better margins, but their growth rates are not necessarily higher. Khan said part of the premium reflects liquidity and equity demand, not just operational outperformance.

Structural shift favors omnichannel, not a single format

The report sees the shift toward smaller stores and quick commerce as structural, not temporary. Purchasing patterns have evolved toward more frequent visits with smaller basket sizes. Retailers are adopting different strategies. BinDawood has reduced its reliance on hypermarkets while expanding supermarkets and express stores. Othaim has maintained its supermarket dominance with limited express expansion.

Khan said the report does not see a single format as the solution. The preferred approach, he said, is an omnichannel model with a flexible store mix: a strong supermarket network supported by neighborhood and express stores, plus an effective online channel. Traditional groceries still account for about 50% of the market, and the report expects them to remain dominant for years. The shift toward organized retail will be gradual, limited by traditional groceries' ability to retain share.

Margin pressure likely to persist

The impact on margins is clearly negative, the report says. Discount stores and quick commerce increase price sensitivity and force traditional retailers to intensify discounts. Price competition is expected to continue at a time when shipping, insurance, and supply-chain costs are also rising. Retailers must balance protecting sales with protecting margins. Passing higher costs to consumers will be gradual and selective, and margins are unlikely to return quickly to previous levels, the analysts said.

Smaller stores require less space and capital per branch and can increase visit frequency. But quick commerce introduces additional costs for technology, order fulfillment, distributed inventory, delivery, and promotions. Higher digital sales do not automatically translate into higher margins, the report notes.

Quick commerce market set to reach SAR 85 billion by 2030

The report, citing Redseer Strategy Consultants, expects the quick commerce market to grow from about SAR 30 billion in 2025 to SAR 85 billion in 2030. Most of the acceleration will come from Quick Retail, covering groceries and everyday goods, projected to grow more than tenfold and account for nearly half the Q-commerce market by 2030. Key drivers include greater reliance on digital shopping, high population density in cities, time constraints, and a shift toward more frequent smaller purchases.

The Quick Retail model in Saudi Arabia relies heavily on dark stores, which account for more than 80% of the segment, with more than 300 dark stores operating in the Kingdom. Their advantage is positioning inventory close to demand, reducing order preparation and delivery times. But profitability depends on sufficient order volumes and geographic density to cover costs. Growth in dark stores does not automatically translate into higher margins from day one, the analysts said.

Discount stores likely to keep gaining share

Discount stores are a key source of competitive pressure, with new players entering an already fragmented market. High price sensitivity, greater reliance on promotions, and lower average basket sizes all support the discount-store model. The report expects discount stores to continue gaining market share, particularly among price-sensitive consumers, at the expense of some traditional supermarket sales.

Khan said the report does not explicitly expect listed retailers to launch standalone discount-store formats. Current strategies focus on omnichannel operations, smaller stores, e-commerce, and improving operational efficiency, alongside promotions and competitive pricing. Launching a standalone discount brand could become more logical if discount stores continue to gain share, he said.

Traditional groceries still hold about 50% of the market. The main drivers of a gradual shift toward organized retail include expansion of organized convenience stores, investment in technology, improvements in the shopping experience, and government regulations restricting some products that small traditional groceries can sell. But the transition will be gradual and limited, the report says.