Egyptian firms shift to local production to fulfil rising demand

Egypt’s large and growing urban middle class makes it an increasingly attractive market for producers of fast-moving consumer goods (FMCGs), from snacks to cosmetics, to household cleaning supplies. Despite budget constraints stemming from the economic reforms passed in 2017 (see Economy chapter), many companies are taking a longer-term view of the opportunities presented by Egypt as both a large consumer centre and a production hub for export.

Short-Term Challenges

The November 2016 float of the Egyptian pound and the resulting inflation, coupled with broad subsidy cuts for utilities, has been felt by consumers, making 2017 a challenging year for retail across the board. Inflation rates ranged between 30 and 35%, varying for specific commodities. The Central Agency for Public Mobilisation and Statistics announced that annual inflation rates measured 34.2% in July 2017, but ended the year at 23.3%. Meanwhile, electricity prices increased by up to 42%.

Most Egyptians did not see a corresponding rise in wages, though there were some increases. “2017 has been very challenging for Egyptian consumers, with the depreciation and resulting inflationary environment,” Bilal Sharabati, managing director for North Africa at Mondelez Egypt Foods, told OBG. “FMCGs, like many other industries, had to react promptly to address the impact on employee purchasing power by increasing prices as well as improving salary and benefits.”

Local Shift

However, economic reforms have also brought opportunities for both international and local operators to make inroads with Egypt’s large population. In April 2017 L’Oréal Egypt announced to local press that it may switch to local production and increase volumes of certain high-demand cosmetics. Its manufacturing facility in 10th of Ramadan City currently exports 90% of its production to the surrounding region. Additionally, in January 2017 Nestlé acquired Caravan Marketing Company, a leading local producer of instant coffee, noting in a press release that the move “reflects Nestlé’s ambition to invest in Egypt and foster the development of the rapidly growing, soluble coffee segment, which has been gaining popularity among Egyptians”.

Furthermore, budget tightening has opened the market up to discount goods from local producers. “Since the revolution, we have not seen a surge of new international players, but the investment law that was signed in June 2017 should attract more foreign investment to the country,” Sharabati told OBG. “We are also witnessing an escalated interest of new local players entering the market.”

Export Focus

A weaker pound has decreased operating costs for international players, incentivising a pivot towards local production and international export of FMCGs, particularly given Egypt’s strategic location. As reported in international press, global confectionery company Mars plans to invest LE750m ($49.4m) over the next 18 months to shift 80% of production towards export, up from the current 50%.

Similarly, Unilever, a global manufacturer of personal care products and other goods, is looking at Egypt as regional hub and aims to double its export volumes. “There are always two sides to the same story,” Sharabati told OBG. “The floatation of the Egyptian pound certainly hit us from a local perspective but helped us from an export perspective. We have long seen Egypt not only as a striving country with over 100m potential consumers, but also as a regional manufacturing hub for Africa, the Gulf, the Levant and Europe.”

Although it has been a bumpy road, many industry players are cautiously optimistic about the prospects of such a large consumer market. “Long term it is still a very lucrative opportunity,” Mohanad Adly, CEO of supermarket chain Spinneys Egypt, told OBG. “With 100m consumers, Egypt is the biggest market in MENA and the second-biggest market in Africa after Nigeria. Regardless of what’s going on with the economy, consumer goods make up a hugely attractive market.”