PART 1 – FINDING A SAUDI PARTNER

The Saudi hospitality sector is experiencing unprecedented growth. This presents a wealth of opportunities for European exporters looking to tap into this burgeoning market. However, navigating the complexities of exporting to Saudi Arabia requires careful planning and a thorough understanding of the local business landscape.

Preliminary Steps for Exporting to Saudi Arabia

A. Understanding Saudi regulations and standards

In recent years, Saudi Arabia has significantly strengthened its regulatory framework for imported goods, aiming to protect consumers and ensure product safety and quality. Its efforts are spearheaded by three key organizations:

1. SASO plays a crucial role in developing and enforcing standards for a wide range of products. In January 2018, SASO introduced the Saleem Saber system, an electronic certification and conformity assessment platform to reform the import process. The system processed over 1.5 million certification requests in 2022.
2. The SFDA oversees the regulation of food, drugs, medical devices, and cosmetics. In June 2023, it announced that it had implemented stricter controls on food imports, which resulted in the rejection of 15,000 tons of substandard food products at Saudi ports in the first quarter of 2023.
3. Saudi Customs works closely with SASO and SFDA to ensure compliance with import regulations. In 2022, Saudi Customs processed over 9 million import declarations, with a 20% increase in the detection of non-compliant shipments compared to the previous year.

As Saudi Arabia continues to diversify its economy under Vision 2030, the regulatory landscape is likely to evolve further.

B. Identifying target customers in the hospitality sector

At the forefront of the growth of the Saudi hospitality market are luxury hotels and resorts. Indeed, the number of five-star hotel rooms in the country has grown by 35% since 2019, reaching a total of 45,000 rooms by the end of 2023. Major international chains such as Marriott, Hilton, and Accor have been expanding their presence in the Kingdom.

While luxury accommodations are flourishing, mid-range and budget options are also seeing substantial growth, since the number of 3-star and 4-star hotel rooms increased by 22% in 2023 compared to 2022, totalling 110,000 rooms. Brands like Holiday Inn Express and Ibis have been rapidly expanding their footprint, with Holiday Inn Express aiming to open 10 new properties across the Kingdom by 2026.

Moreover, the restaurant and café sector has also been thriving, with a 15% increase in licensed food establishments in 2023, bringing the total to over 180,000 across the country. Finally, event venues and conference centres are another crucial component of the hospitality sector’s growth, with several exhibition and convention centres in Riyadh, and other major cities, hosting large international events and trade shows almost every week.

Finding a Local Partner

A. Importance of a local partner

Thanks to the reforms implemented to achieve the objectives of the Saudi Vision 2030, the number of foreign investment licenses issued in 2023 increased in the recent years, with a significant portion of these new ventures involving local partnerships.

Indeed, while it is now possible for foreign investors to run a 100% foreign-owned business in the retail/wholesale sector in Saudi Arabia under the Saudi Foreign Investment Law, there are significant requirements and conditions that must be met, including a minimum required capital of USD 8 million and a commitment to investing a minimum of USD 80 million (including the USD 8 million capital) over five years.

While requirements are more limited for other activities and in other sectors, many foreign investors still choose to set up a business with a Saudi partners, for a range of different strategic considerations.

Indeed, the responsibilities of local partners extend far beyond mere financial investment. They are expected to actively participate in the business operations, leveraging their networks and knowledge to navigate the complex regulatory environment. This includes assisting with obtaining necessary licenses and permits, a process that can be daunting for foreign entities unfamiliar with Saudi bureaucracy.

Local partners are also crucial in ensuring compliance with Saudization policies (Nitaqat), which require companies to employ a certain percentage of Saudi nationals. According to the Ministry of Human Resources and Social Development, companies with local partners have shown a higher success rate in meeting Saudization targets compared to those without local involvement.

Furthermore, local partners play a vital role in cultural integration and often assist in recruitment, helping to identify and hire talented Saudi professionals. They also facilitate connections with government entities, which is crucial given the significant role the public sector plays in the Saudi economy.

However, the role of local partners comes with significant responsibilities. They are legally accountable for the company’s compliance with Saudi laws and regulations. This includes ensuring adherence to labor laws, tax regulations, and industry-specific standards.

B. Types of partnerships

Saudi Arabia has introduced several partnership options for international businesses looking to enter the Kingdom’s retail market. They are designed to balance foreign expertise with local knowledge, thus reshaping the landscape of Saudi Arabia’s retail sector.

The three primary partnership models are the following:

1. Distributorship agreements have emerged as a popular choice for many international brands. Under this model, a local Saudi company purchases products from the foreign entity and resells them in the Kingdom. The local distributor not only handles import logistics and inventory management but also navigates the complex regulatory environment, including obtaining necessary permits from the Ministry of Commerce.
2. Agency agreements, on the other hand, involve a local representative promoting and selling products on a commission basis. This model has gained popularity in the luxury goods sector. Under Saudi law, specifically the Commercial Agencies Law issued by Royal Decree No. M/11 dated 20/2/1382H (1962), local agents have significant responsibilities. They must register the agency agreement with the Ministry of Commerce within three months of its execution. Furthermore, they are legally responsible for any defects in the products they represent and must provide after-sales services.
3. Joint ventures represent the most integrated form of partnership and have been particularly successful in the retail sector. Joint ventures in Saudi Arabia are governed by the Companies Law issued by Royal Decree No. M/3 dated 28/1/1437H (2015). This law stipulates that foreign partners can now own up to 100% of the joint venture in most sectors, a significant change from previous regulations. However, local partners still play a crucial role in navigating the business landscape.

C. How to find and vet potential partners

According to a recent report by the Saudi General Authority for Statistics, the number of registered businesses in the Kingdom grew by 15% in 2023, reaching a total of 1.4 million. This growth has created a diverse pool of potential partners for international companies.

One of the most effective ways to identify potential partners is by attending trade shows and industry events in Saudi Arabia. Local chambers of commerce, like the Saudi French Business Council (CAFS), have also stepped up their role in facilitating international partnerships.

Moreover, international companies are increasingly utilizing services provided by their home countries’ trade promotion organizations. For French companies, for example, contacting organisations of the Team France Export – Business France, service companies accredited by Business France, French Foreign Trade Advisors (CCEF), CCI France… – can help identifying Saudi companies of good reputation, already working in partnership with French companies or in capacity to do so.

However, finding potential partners is only the first step. Vetting them is a critical process that requires thorough due diligence. Under Saudi law, specifically the Anti-Commercial Fraud Law issued by Royal Decree No. M/19 dated 23/4/1429H (2008), local partners bear significant legal responsibilities. They are liable for any fraudulent activities or misrepresentations made on behalf of the international company they represent.

In addition, financial stability is a key consideration, and the Saudi Arabian Monetary Authority (SAMA) recommends that international companies review at least three years of audited financial statements from potential partners.

D. Negotiating and formalizing the partnership

The recent surge in foreign direct investment in Saudi Arabia has led to a corresponding rise in partnership negotiations.

One of the key considerations in these negotiations is the matter of exclusivity rights. Indeed, sales targets and performance metrics have become increasingly sophisticated in recent partnership agreements. The Saudi General Authority for Statistics reports that partnerships with clearly defined performance indicators showed a higher success rate compared to those without such metrics. These indicators often include not just sales volumes but also market penetration rates, customer satisfaction scores, and adherence to Saudization quotas.

In addition, marketing and promotional responsibilities form another crucial aspect of partnership negotiations. Under the Commercial Agencies Regulations issued by Royal Decree No. M/11 dated 20/2/1382H (1962) and its subsequent amendments, local partners bear significant responsibility for marketing and promoting the products or services of their foreign partners. This includes ensuring compliance with local advertising standards and cultural sensitivities.

Moreover, payment terms and financial arrangements have also evolved to reflect the changing business landscape in Saudi Arabia. The Saudi Arabian Monetary Authority (SAMA) reports that a majority of new international partnerships now include provisions for digital payments and e-commerce revenue sharing. This shift reflects the rapid growth of e-commerce in the Kingdom.

Now, local partners play a crucial role in these financial arrangements, often being responsible for managing local currency transactions and navigating the Kingdom’s tax system. Under the Zakat, Tax and Customs Authority (ZATCA) regulations, local partners must ensure compliance with VAT requirements, which were introduced in 2018 and increased to 15% in 2020.

The complexity of these negotiations underscores the importance of engaging legal counsel familiar with Saudi business law. Indeed, the enforceability of partnership agreements has become a key focus area. The Saudi Center for Commercial Arbitration (SCCA) reported an increase in arbitration cases related to international partnerships in 2023. To address this, many recent agreements have included detailed dispute resolution clauses that specify local arbitration mechanisms.

Local partners also bear significant responsibilities in ensuring regulatory compliance. For instance, under the new Foreign Investment Law implemented in 2019, local partners must assist their foreign counterparts in obtaining and maintaining the necessary licenses from the Ministry of Investment. Failure to do so can result in penalties for both parties, including fines of up to SAR 500,000 ($133,000) and potential revocation of business licenses.

In conclusion, the Saudi hospitality sector presents significant opportunities for European exporters, but success in this market requires careful navigation of complex regulations, cultural nuances, and business practices. Finding the right local partner is crucial, as they play a vital role in ensuring regulatory compliance, market penetration, and cultural integration. Whether through distributorships, agency agreements, or joint ventures, these partnerships are shaping the future of Saudi Arabia’s retail and hospitality landscape. As the Kingdom continues its economic transformation under Vision 2030, foreign businesses that invest time in understanding the market, building strong local partnerships, and adapting to the evolving regulatory environment will be best positioned to capitalize on the growing opportunities in Saudi Arabia’s dynamic hospitality sector.

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