VAT won't slow consumer spending, says Al Hokair CEO

In an exclusive interview with Argaam, Fawaz Al Hokair's new CEO Atul Singh said that the Tadawul-listed retailer is looking at ways to offset any impact of the upcoming value-added tax (VAT), which is likely to be implemented in January 2018. The CEO said the company might not pass the tax to its consumer for the first year of implementation. Singh also mentioned that Al Hokair has taken several measures to boost profitability in 2016-2017, such as shutting down non-performing stores and adding better brands.

Q) Saudi Arabia is planning to bring in VAT next year. Are you prepared to implement?

A: There are two main areas where preparation is taking place.

System: Our current operating platform doesn’t support VAT. We’re in the process of hiring a specialized provider to help define the technical implications and select the solution.

Impact of retail price: This is a two-step process. The plan is to hold discussion with the brand partners to see how we can offset the impact by sharing it, and perhaps not pass it to the final consumer at least for the first year of VAT implementation. This will apply to brands where price-point will be impacted significantly with the 5 percent increase on retail price.

For some brands the price-point doesn’t justify any action toward VAT, and perhaps we will just reflect it on retail price.

Q) Do you see consumer spending increasing ahead of VAT implementation?

A: Let’s remember that this a discretionary spending and it only follows the availability of the disposable income.

For sure there will be an impact; however, our average basket is SAR 200 and resulting VAT impact will not exceed SAR 10 per transaction – which is not significant enough to dissuade Saudi consumers from shopping habits.

Q) The royal decree rolling back pay-cuts is expected to improve consumer spending. What effect do you see on the group’s business?

A: After September 22nd – when wages decrease was announced – we’ve seen a decline in our daily sales. Our 2017-2018 planning was based on this new norm. Cancellation of such measure will have a positive impact on the business.

Q) Al Hokair’s Q4 2016-17 net profit saw a sharp year-on-year rise, which was attributed to better control of costs. What were the cost-control measures?

A: We took several actions from Q2 after the very low performance due to the change in the seasonality and the decline in disposable income of our customers. These measures led to very good results in Q4.

Our actions included: Rent rebate from all major landlords; marketing contribution from shopping center’s to help boost traffic and enable more full-price sales in Q4; and obtaining support from major brands to compensate for the lost margin in Q2 and Q3.

We also rationalized operating expenses such as travel, maintenance and financial charges. We undertook strict control on headcount.

These measures were combined with a strict adherence to the write-down policy and improved supply chain, which allowed new collection display and sales at the right time.

Q) In a recent interview CFO Mohammed Abbaoui said the company is taking measures to boost profitability in 2017. What are these measures?

A: A lot of clean-up took place in 2016-2017, which will lead to better profitability. For example, Blanco loss in 2016-2017 – this will not happen after the disposal of the brand.

We have also closed some non-performing stores and brands, while adding good brands such as Lefties. More additions will be disclosed in time.

Q) As the new CEO, what are the key areas that you would address?

A: The vision for the company in 2017 is to work towards becoming the best in class for all facets of the fashion retail business.

The key areas to address over the coming 12-18 months would be to enhance our IT systems, operating processes and policies.

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com