Rising labour and tax costs in Saudi Arabia are putting pressure on profitability at Almarai Co, the country’s largest dairy producer. “We will be under pressure, there’s no question,” chief financial officer Paul-Louis Gay said on Tuesday during a conference call with investors. “Pressure will come from all angles of the cost of the value chain: input cost, labour cost, tax, you name it.” Costs to operate businesses in Saudi Arabia, the region’s biggest economy, have increased after the government cut back subsidies and imposed a value-add-tax on sales in a bid to raise non-oil revenue.
Companies also need to replace most of the less-costly foreign staff, who dominate the retail sector, with higher-paid Saudi nationals. Creating jobs for Saudis is a crucial goal of Crown Prince Mohammed bin Salman’s plan to transform the economy and prepare the world’s largest crude exporter for the post-oil era. This is impacting corporate earnings. Almarai’s third-quarter profit declined 5% to 634.5mn riyals ($173mn), compared with the year-earlier period, a drop driven by labour and feed stock costs. Still, profit is expected to climb 7% this year to 2.34bn riyals, according to the mean of nine analysts surveyed by Bloomberg.
Poultry products may help offset the impact from higher costs. Almarai reported profit of 51.5mn riyals from poultry in the third quarter after a loss a year ago. “If we were to reach this kind of profitability in poultry going forward, we would be very happy and satisfied,” Gay said during the call. “The issue is volume. We need to gain market share. We are still small in food service.”
Sources and photo-credits: Bloomberg, Gulf Times