#86: Impact of 15% VAT in Saudi Arabia

When KSA along with some members of the wider GCC introduced VAT in Jan 2018, there was already a lot of hoopla regarding compliance, repricing of goods and consumer sentiment. 

As with anything new, take for example the introduction of the toll gates in Dubai, there was a lot of resistance and many spoke of eroding consumer sentiment, less market attractiveness as the Middle East was generally considered a tax free haven etc...

In reality, what happened was that Sales in most of the Stores that I managed across the GCC hit record numbers that we had never seen and probably never will, with the last week of Dec '17 attributing to the biggest uplift ever! 

In following Jan & Feb '18, we saw the adjustments with DSF + Jeddah Festival taking a negative hit of approx 30-40%. By the time we hit March, the storm subsided and Sales somewhat normalised. The worst industry to be impacted by VAT at that time was the Gold & Jewellery industry which was further compounded with the high prevailing gold prices at the time.

Right at the VAT introduction stage, any business savvy person would know that it was very much to stay and one where the %age could easily be tweaked upwards in the future, now that mechanisms were in place at the govt and organisational level.

When I managed 4 American Brands namely Timberland, The North Face, Columba & Vans, much before the onset of VAT, we had done an experiment around price increases. We increased the RSP by approx 10% across the board for all our 4 Brands as a part to our Margin building strategy with the hope that it would translate to increased departmental profitability.

From a brand positioning POV, Timberland & The North Face (approx ATV = AED 1,000) are considered more premium than Columbia & Vans (ASP = AED 400).

Once we actioned the Price increase, what we saw was that the Sales of Timberland & The North Face held steady while those of Columbia & Vans took a beating. 

The message was clear. 

1. Brands with a higher positioning are more immune to Price increases as a nominal 10% will not make a marked difference to their demographics shopping habits

2. Thus Timberland & The North Face which had their customer profiles comprising of mainly Arab & Europeans were not negatively impacted 

3. Columbia & Vans on the other hand which had their customer profiles comprising of mainly Asians (Filipino) were hugely impacted due to their USP which is entry level price points 

4. At that entry level Price point, a 10% increase is a big deal and can negatively influence buying decisions which we ended up learning the hard way!

From, the above it is easy to see that the Brands that will be more affected by VAT are the ones who cater to the mass communities and those that are entry level in positioning.

Extrapolating this data to the context of KSA, who is in the process of tripling VAT from the current 5% to 15%, we will surely see a flurry of shopping happen in Jun '20 where many consumers will be forced to stock up before the imminent VAT increase. We can expect to see a big boost to food sales, FMCG sales, everyday essentials and even luxury items. Post July however, we can expect a big shutdown of retail spending for the period of Jul - Sep '20. 

So although you can expect Sales in some categories to increase in Jun '20, do not expect to see the record Sales of Dec '17 as we have the unique situation of:

1. Covid -19 

2. Salary reductions for most expats 

3. Job losses across multiple sectors 

4. Cutbacks in the support from govt to KSA nationals 

5. Weaker oil prices

If this is not a recipe for disaster, then what is? Do let me know your thoughts in the comments below