Emerging Trends Shaping Saudi Arabia’s Supply Chain

Real estate insight by Laura Iskandar, Design Manager - Project & Development Services UAE, and Syed Hussain, Director - Project & Development Services, KSA

March 31, 2023

Of late, the COVID pandemic and global geopolitical unrest have resulted in major disruptions to established logistics and supply chains. The resulting shortages of everyday items on supermarket shelves worldwide brought media and public attention to supply chains – how products are shipped from manufacturers to consumers.

In short, logistics has become trendier than ever, with increased levels of interest from both developers and investors who anticipate it to be one of the strongest performing sectors of the real estate market in the Middle East region over the next five years.

Nowhere is this more apparent than in Saudi Arabia, where the logistics market has evolved rapidly over recent years and will likely continue as the Ministry of Transport has committed to significant changes in the industry to support its Vision 2030 – a social and economic reform programme. In addition, major global corporations are moving their logistics operations to bonded zones in the Kingdom of Saudi Arabia (KSA).

Logistics goes green

Logistics operators around the globe are facing increased pressure to reduce their carbon footprint. According to the Environmental Protection Agency (EPA), the transport sector accounted for approximately 27% of all US greenhouse gas emissions in 2020. 

To achieve net zero, logistics operators are making major investments in using alternative fuel sources for ships, trucks and aircraft, and also focusing more on reducing carbon emissions from their real estate in Saudi Arabia and elsewhere. This has led to greater adoption of energy modelling, green building guidelines and renewable sources such as solar power to operate warehouses or to sell it back to the national grid, according to a JLL report.

Another factor driving the push to reduce carbon emissions has been government regulations and incentives. The IKTVA (In-Kingdom Total Value Add) programme is a key component of Saudi’s Vision. The programme aims to localise manufacturing, diversify the economy and reduce the supply chain of products produced within the Kingdom.

To date, the most visible manifestation of the IKTVA programme is probably the King Salman Energy Park or SPARK, the massive new industrial city being built outside of Dammam. Upon maturity, SPARK is expected to contribute more than $6 billion annually to the Kingdom’s GDP and create up to 100,000 direct and indirect jobs. The initial focus of SPARK has been to co-locate supplies to Saudi Aramco in one location, drastically shortening supply chains in the energy sector.

SPARK is a sign that companies are seeking to make things locally in Saudi, with global businesses such as California-based Lucid and Australia’s EV Metals Group Plc announcing plans to manufacture electric vehicles that help reduce the carbon footprint in the Kingdom.

These plans have attracted major investments by global logistics businesses. Global logistics giants have plans to build an integrated logistics park in Port Jeddah, a strategic location that connects Africa, Asia and Europe. The project, developed on a site of 200,000 sqm, is to set the innovation standard for digital and technologically advanced logistics infrastructure. It will cover warehousing and distribution, cold chain logistics and e-commerce, serving as a hub for petrochemical, transshipment, air freight and Less-than-Container Load (LCL) cargo. The entire facility is powered by solar energy.

E-commerce growth

The growth of e-commerce requires more warehouses to be built locally in Saudi. One of the major implications of the pandemic was that it accelerated the growth of already well-established e-commerce as a percentage of total retail sales.

Online sales currently account for between 14% and 20% of total retail sales in the US (depending on how sales are measured), but at a far lower base in Saudi. However, BCG (Boston Consulting Group) data suggests they could increase from 6% of total sales in 2020 to 13% by 2025. This growth in online sales will inevitably increase the demand for more warehouses and logistics space across the Kingdom, reshaping the supply chain dynamics.

Technology advancements

Rapid technological changes are also shaping supply chains across Saudi, with digitisation impacting design, whereas automation, the size and location of logistics facilities. While advances in automation and robotics would allow for fully automated distribution centres, most operators choose to adopt semi-automation and retain a smaller on-site workforce. This strategy aligns advanced technology with human interactions, increases productivity and reduces errors.

Advances in digital delivery have resulted in the acceleration of net zero trajectories in high-emission industries. Artificial intelligence in design, additive manufacturing and digital twins are some of the powerful tools being implemented across the logistics sectors to increase sustainability while reducing greenhouse gas emissions.

Digital transformation is essential for the successful delivery of giga-projects within KSA, which will significantly transform the Saudi economy.

The digital transformation process involves integrating data analytics tools not only in the construction sector but also in the logistics industry, in which tools such as Building Information Modelling (BIM) can optimise processes, making construction more efficient and carbon neutral. These tools have created significant value for construction firms, with a swift ROI and increase in productivity.

Modular construction

Another area where new technologies have impacted the logistics real estate sector is the shift towards modular construction. Manufacturing standardised components of a building structure in factories elsewhere for final assembly on-site offers major speed and cost advantages, potentially reducing construction timelines by 50% for some projects. 

Developers are currently using modular construction for some aspects of their facilities. Developing the entire facility off-site will represent the next stage in the evolution of modularisation of the logistics sector. This will increase demand for factories to manufacture various construction modules in different locations across the Kingdom. The strategy has already been adopted to deliver some of the Kingdom’s giga projects.

Future trends

The combination of technological advancements, the greening of the logistics sector and the Saudi Government’s drive to localise manufacturing are shaping supply chain dynamics across the Kingdom.

A few key trends for 2023 and beyond include:

Pop-up or dark warehouses. Just as the demand for faster delivery has resulted in the growth of new brands such as 6th Street and the emergence of dark kitchens in the retail sector, the pressure for shorter delivery times looks set to continue to drive the shape of the logistics sector in Saudi. With customers now demanding delivery of their goods within minutes and hours rather than days or weeks, there will be increased demand for small urban warehouses in addition to large distribution centres on the periphery of cities. 

Further application of technologies. Investing in automation, artificial intelligence and robotics will remain the priority to improve supply chains in the future, with continued attention to the digitisation and digital delivery to address some of the recent disruptions to global supply chains. The increased use of Trukker (an Uber for trucks) – an AI-driven cloud platform for logistics delivery, is an example of new technologies that will likely be adopted more widely in the Saudi and MENA market over the next few years. 

Cold storage, a future hot spot. It has been one of the fastest-growing sectors of the logistics market globally over the past five years. The maximum demand originates from food and beverage producers looking to store products before distribution for retail sale and from the pharmaceuticals industry. Saudi is relatively under-provided with cold storage facilities but is expected to change over the next five years, with major players such as Prologis, Brookfield and Goodmans looking to invest in this sector globally.

Way forward

With Tabadul creating secure digital solutions for the logistics sector, Saudi Arabia is shifting from its traditional model to a more modernised and trendy state to compete with other countries due to its remarkable purchasing power and leading GDP across the GCC.

The government is promoting several initiatives, such as improving infrastructure and using various digitisation techniques to raise efficiency and transparency to enhance operational performance. These efforts show that the Kingdom is on the right path for improving the logistics sector and diversifying its economy, aligned with its Vision 2030.

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