Purchasing power: A growing population will provide the consumer base of the future

The fast growth in Egypt’s retail sector took a pause in 2011 and early 2012, as political uncertainty following regime change led many retailers to scale back expansion plans. However, the expectation is that once political stability returns, the increased purchasing power of Egypt’s rapidly-growing population is likely to drive expansion once more, and the shift from traditional markets to modern retail spaces will pick up pace, perhaps back to pre-revolution levels.

INFRASTRUCTURE NEEDS: Makers of consumer goods are unlikely to rely only on the shift to modern distribution channels, however, as outside Cairo and Alexandria the process of buying and selling consumer staples is largely undeveloped, save for select areas with exposure to the tourism industry. In fact, formal retailing by some estimates accounts for only around 2% of total retail sales in the country. The industry is heavily fragmented, and in many cases, there is a lack of intermediaries, with smaller stores buying goods from larger retailers as opposed to wholesalers. As such, manufacturers, particularly those in fast-moving consumer goods (FMCG), are experimenting with innovative ways to reach rural customers and the urban poor.

Retailers, especially in Cairo, have faced several challenges since former President Hosni Mubarak stepped down in February 2011. The revolution not only disrupted supply chains, but also froze bank transactions, complicating day-to-day business, and civil unrest led to store closures and looting for weeks. Consumers are holding off on large purchases, and a reduction in tourist arrivals has also had a negative impact. Revenue from tourism fell 30% in 2011, according to official figures.

POWER IN NUMBERS: However, for forecasters, the long-term is where the actionable evidence lies. Egypt’s population is expected to be anywhere from slightly below 110m to nearly 140m by 2050, according to forecasts from the UN Department of Economic and Social Affairs. Similarly, the middle class is large by regional standards. The average monthly spend of an Egyptian family, according to a 2010 household survey by the government’s Information and Decision Support Centre, was around $244.

According to the African Development Bank, roughly 85% of the population could be considered middle class, not far behind Tunisia and Morocco, although the definition used – the portion of the population above $2 income per day – is disputed. Regardless, while still lagging behind many Middle Eastern counterparts, the size of the population able to spend money on non-essential items over the course of a month has grown significantly in recent decades, a trend that is likely to continue.

Demand for consumer staples has not fallen in the post-revolution era, and in fact has increased, in part due to the phenomena often observed in period of upheaval: people put off big purchases, but make more small ones. Although precise data is not yet available, consumption appears to have grown.

FMCG sales in 2011 rose by 11%, according to data from Unilever. As economic and political tribulations settle, the country can be expected to once again display a growing demand for goods. Indeed, prior to the revolution, Egypt was one of the largest markets for consumer goods, and the segment grew from $49.1bn in 2006 to $103.2bn in 2010, according to a report on consumer markets by Emirati investment bank Rasmala.

DURABLE DEMAND: As purchasing power increases, so too will demand for durable goods. Indicators like low car ownership, at roughly 30 cars per 1000 people, demonstrate potential for market growth. Additionally, as young Egyptians marry and move out of their parents’ homes and into their own, they will stock those new dwellings with refrigerators, couches and other appliances.

The number of marriages expected on an annual basis is unclear, as figures range from 400,000 to 900,000 per year. The Central Agency for Public Mobilisation and Statistics found that there were 864,857 marriages in Egypt in 2010, up 13.9% from 2009’s 759,004. Although that number is widely considered to be too high, all agree that the current rate is certainly high enough to imply a healthy growth in demand for the foreseeable future.

PROSPECTS: Egypt is the 12th-most promising retail opportunity worldwide according to AT Kearney’s Global Retail Development Index, which seeks to measure long-term prospects. The firm expects retail growth of 10% over the next five years. Egypt is also in what the report considers to be one of the regions with the greatest potential for retailers. Eight of the top 20 countries in the index are in the Middle East and North Africa (MENA) region. In that context, Egypt displays strong prospects – it has the largest population by far, and the penetration rate of modern retail outlets is relatively low, Kearney found.

Thanks to real estate patterns in Cairo, it appears that modern retailers will have the space to grow. Trends in Egypt’s biggest city show an emptying out of the centre to newly built areas, like the suburbs of New Cairo and Sixth of October City, which are stand-alone cities themselves. These areas have plots big enough to accommodate malls and large-scale retailing, so developers will not be reliant on hunting for spots for infill development in the crowded core, making expansion easier. Other relevant social trends include the increasing presence of women in the workforce, which boosts demand for ready-made food in stores and for restaurants.

Though expansion rates had not approached pre-revolution levels as of early 2012, it appeared as if it were merely a question of when, not if, that would happen. Real estate consultancy Jones Lang LaSalle in the first quarter of 2012 reported demand was on the rise for office space from producers of FMCG, for example. Bank financing was being sought for a mall featuring a ski slope, in an attempt to mimic the iconic Mall of the Emirates in Dubai, to be managed by the same developer, Majid Al Futtaim of Dubai.

SIZE & SCOPE: The consumer retail sector more than doubled in value from 2006 to 2010, from $49.1bn to $103.2bn, according to Rasmala. The food and beverages market is the largest segment in retailing, accounting for 37% of consumer spending, growing at roughly 20% over the same period.

Although 2011 figures are unlikely to replicate the same growth patterns because of the political uncertainty, demographic trends and expanding purchasing power – even with higher inflation – will likely propel a return to strong growth in the long term.

Indeed, even with the unrest, 2011 was reportedly a year of mixed results. Manufacturers told OBG that whereas the purchase of durable goods appeared to decline, food and FMCG sales remained consistent or even inched slightly higher. During the first quarter of 2011, at the height of the social unrest, grocery retailers still registered marginal growth of around 5% – slower than preceding years, but an impressive rate of growth nonetheless.

The 2006-10 boom coincided with the spread of modern retail outlets such as hypermarkets and supermarkets, as well as changes in Egypt’s tariff regimes and Customs procedures designed to make it easier for distributors to import consumer goods. Calculations vary, but modern retail outlets – hypermarkets, supermarkets, malls and convenience stores – currently account for anywhere between 20% and 30% of all retail space in Egypt. The migration of market share from old stores to new is happening at about a 5% pace annually, said Khaled Akl, regional marketing director at Unilever. The shift was on hold in 2011, but is expected to pick up again in 2012, he told OBG. Most of the transition is happening in Cairo, Alexandria and the resort towns on the Red Sea, such as Sharm El Sheikh and Hurghada.

CONCRETE SPACE: Site selection has long been an obstacle for merchants seeking to break into Egypt’s urban retailing environments, with space at a premium in the two main cities. The sprawl outwards of Cairo’s mixed-use suburbs has gone a long ways in alleviating some of the concentration in the sector, with a spate of designated retail zones and complexes, but demand has consistently outstripped supply.

In Cairo retail supply reached 786,000 sq metres of gross leasable area (GLA) at the end of 2011, up from 610,000 sq metres in 2010, according to Jones Lang LaSalle. The total was expected to reach 2.2m sq metres by 2015, with growth largely driven by major malls. By the end of 2013, an additional 260,000 sq metres of supply is slated for completion, although delays may push some of this to 2014.

Majid Al Futtaim has been one of the main forces behind Egypt’s adoption of modern retailing. The company was responsible for bringing Carrefour into the country as part of a joint region-wide venture with the French hypermarket chain. It also owns two malls in Egypt, with a third expected to open in 2014, a $500m project with an indoor ski slope.

LIMITATIONS: Though they capture the majority of the public and media’s attention, these mega-projects do not represent physical expansion in the retail market in general. Of the more than 1m estimated enterprises currently operating in the retail sector, large-scale outlets account for just a handful. At this time, only a minority of Egyptians can afford to shop in the new malls and hypermarkets. Modern retailing remains limited to a few major cities, and most of the Egyptian population lives nowhere near a mall or a hypermarket. As such, while consumer goods producers look forward to the proliferation of hypermarkets, malls and similar facilities, they remain focused for the time being on traditional distribution methods, such as small-scale sellers.

Still, despite maintaining realistic expectations of the market, retailers have begun experimenting with new techniques to introduce modern retailing and goods. For example, Unilever is piloting projects in rural villages whereby the company finances the purchase of a motorbike for locals who agree to receive shipments of goods at their houses and then use the bike to sell to local retailers. Akl said the company plans to distribute 300 bikes in 2012.

MALLS: The first shopping mall in Egypt opened in 1986, attached to the Ramses Hilton hotel in downtown Cairo. However, the concept did not seriously catch on until 2005, when City Stars, the largest mall in the MENA region at 150,000 sq metres of GLA, opened. It includes a cinema and hotels, introducing Egypt to the concept of mall retailing.

In line with recent trends, in the coming three years Egypt should see one or two major new mall openings per year. The biggest additions in 2011 were the Sun City Mall, with 24,000 sq metres of GLA, and the first phase of Mall of Arabia at 70,000 sq metres, a project which will surpass City Stars in size upon completion. However, timing is important, as both Mall of Arabia and Sun City came on-line in the aftermath of the revolution, and the uncertainty that cast a pall over economic activity in 2011 made for a subdued opening, said Marwan Sery, research manager of Jones Lang LaSalle’s Egypt office. The mall segment of the retail market will get a better sense of demand with the opening of Cairo Festival City in 2013, another mega mall project.

MOVING IN: For retailers, this should translate into a buyer’s market, as new supply is coming fast and rents have dropped in response to the additional supply as well as the ongoing uncertainty. Mall rents dropped between 20% and 30% over the course of 2011, and in the first quarter of 2012 ranged between $450 and $900 per sq metre annually.

Brand consciousness is on the rise, and international names are filling up the malls – US clothing chain American Eagle and frozen yoghurt line Pinkberry opened up in December 2011 at the Sun City Mall, for example. Marks & Spencer and Debenhams are among other names in the market. Majid Al Futtaim, the local partner for Marks & Spencer, had said that its future plans include bringing Swedish home furnishings retailer Ikea to Egypt.

GROCERIES & STAPLES: Breaking into the Egyptian groceries sector has been frustrating for some foreign investors. In 1999 UK retailer Sainsbury’s paid $160m for an 80% stake in local outlet Egyptian Distribution Group. The firm announced plans to open more than 100 outlets and employ several thousand, but after suffering losses of over $16m in its first year, it eventually pulled out in 2001. South African retailing giant Shoprite had a similar fate after a five-year attempt to break into the market. The firm opened seven stores in 2001, with plans for up to 100 in total, but citing bureaucratic obstacles and a challenging environment, it withdrew in 2006.

Still, there have been an increasing number of success stories. Carrefour, for example, brought the hypermarket concept to Egypt, opening up in a Cairo suburb in 2002 in a joint venture with Majid Al Futtaim. Carrefour Egypt now has five hypermarkets and six supermarkets in Cairo, Alexandria and Sharm El Sheikh. Although it took a few years for the concept to truly take off, the number of hypermarkets doubled from five to 10 between 2007 and 2009, with arrivals including the Dubai-based chains Spinney’s and Lulu, and the German-owned Makro. The first domestic hypermarket, HyperOne, was opened in 2005 by Egyptian retailer El Hawary.

Market segmentation is already under way, with HyperOne focused on lower-income segments and foreign retailers catering to higher-income customers. Makro has introduced the self-service wholesale model in its first store in 2010, catering only to business customers. Product differentiation has higher-income customers gravitating to Western brands and the lowest spenders buying a greater proportion of Chinese goods. In the middle-income segment, local producers and regional ones, such as Turkish food-staples producer Ülker, are popular, said Dahlia Zayed, head of consumer insight and strategy in the MENA region for multinational food company Kraft.

Even within those consumer groups, only the elite is represented. Less than a quarter of Egyptians today can afford to shop at a hypermarket or a supermarket, according to research by the US Department of Agriculture (USDA). However, high prices have not prevented curious shoppers from investigating the new offerings. Often Egypt’s new grocery establishments are packed in with people who do not intend to buy anything, but see the trip as a novelty and a family outing. “It’s easy for people to go into the store and take a look while also keeping the kids entertained,’’ said May Hashad, marketing manager at BiscoMisr, Egypt’s largest domestic producer of biscuits. “Going to a hypermarket is seen as a nice outing on the weekend.”

Hashad explains that while in the store, these non-buying visitors are beginning to notice the pattern of timed promotions and discount incentives, and they seem certain to become revenue-generating customers as their purchasing power rises. Super- and hypermarket grocery sales are expected to grow by 23% annually in the short term, according to AT Kearney’s research. Carrefour alone doubled sales in Cairo and Alexandria between 2005 and 2010.

SETBACKS: Upon outbreak of the 2011 revolution, Carrefour and similar establishments had been devising expansions or first forays into the market, but plans have been on hold since the start of the unrest. Makro, for example, had been planning to open up to 12 stores in its own medium-term forecasts, foreseeing 23 additions over the long term. US global retail giant Walmart and UK’s Tesco were also sizing up the market. A 2009 report by the USDA on the Egyptian agriculture estimated that there was space in the domestic retail industry for up to 40 hypermarkets. While it is expected that at least a percentage of the new sites under consideration will be built, as of May 2012 there had been no indications from companies about the extent to which they were or reviewing or scaling back their plans.

There are a number of chains of significant size in Egypt, although only a handful of retailers have expanded beyond six or seven outlets. The single largest retail chain in terms of establishments in the country is Metro Markets, owned by Egypt’s Mansour Group, which, alongside its discount retail sister store, Keir Zaman, holds around 60 branches around the country. Alfa Market, a high-end grocery retailer, comes in second place, according to Rasmala, with nine outlets.

LOCAL OPTIONS: As of 2009, approximately 97% of items on sale in Carrefour shops in Egypt were sourced domestically, according to the USDA research, demonstrating the depth of goods from the domestic food industry. At Makro, 90% of wholesale offerings are of local origin, according to AT Kearney. The local options and the price sensitivity of potential customers from lower-income market segments have helped keep imports to a minimum. Reliance on imported goods has also been low thanks to historically high tariff regimes and a difficult process for clearing goods through Customs. However, since tariffs in multiple areas were dropped in 2007, it is expected that a higher proportion of imports will make it onto Egyptian shelves over time.

NEWCOMER: There were about 550 supermarkets in Egypt in 2009, and international interest in the segment continues to grow. The first new investment in the retail sector since the revolution came from Turkish discount retailer BIM Group, which in March 2012 said it would open 10 stores in 2013 and invest TL25m ($14m) by 2014. BIM, which has already opened stores in Morocco, plans to expand into several more Arab countries, capitalising on the lack of competition in the smaller discount supermarket segment. BIM is also aiming establish itself in Saudi Arabia, although concrete plans and progress on the move have not been definitive.

IN LIMBO: Somewhere between the retail segments of old and new is Omar Effendi, a venerable chain of department stores that was once as innovative a concept as the hypermarkets of today. The chain has 82 branches in Egypt, with the first having been opened in 1856 on Abdel Aziz Street in Cairo – the first retail megastore of its time. The chain grew from there and was nationalised in 1957.

The state decided to privatise the chain in the latter years of the Mubarak era, and in 2006 a deal was struck with Anwal United Trading of Saudi Arabia. By this time Omar Effendi had long lost its innovative reputation, and was considered an underperforming state asset in need of some private-sector energy and efficiency. Anwal paid LE589.5m ($98.7m) for a 90% stake, and the government retained 10%. Given the chain’s prominence and historical significance in Egypt, reactions were negative from the start, including criticism that the selling price was too cheap. Workforce retrenchments were also controversial, as Anwal sought to trim the employee count, but was accused of breaking promises on the size of compensation packages for dismissed workers. In early 2007 the International Finance Corporation (IFC), the private-equity and consultancy arm of the World Bank, bought a 5% stake from Anwal, and as part of that agreement pledged to act as a mediator between Anwal and government.

Three years later, Anwal exited the deal by selling Omar Effendi to a local holding company, Al Arabiyya Lel Estithmaraat, for LE320m ($53.6m). However, the second buyer backed out in December 2010, citing concerns that arose in due diligence research. Omar Effendi was taken back by the state in May 2011 in a ruling from an Egyptian court.

The decision was one of several nullifying Mubarakera sales of state assets, including land, alleging that sale prices were too low or that standard auction processes were not followed. The decision in Cairo was widely interpreted to be based on a sale price that was considered too low, but the court cited only “several legal violations”, and did not provide more specific details. At time of printing, Omar Effendi’s future has yet to be determined, with the outcome likely to be influenced by the policies of the newly elected president and government.

OUTLOOK: Few forecasters expect stagnation to last much longer than it already has in the first year of the post-Mubarak era. Though the pace of construction has not recovered, growth in demand and the resiliency of consumers’ purchasing power in the food and staples segments underpin the positive investment outlook for the Egyptian retail sector, and are expected to continued in this direction for the foreseeable future. Egyptians themselves have added fuel to that fire, as even those who cannot afford to shop in modern environments go anyways, just to check them out.

The weakening of the Egyptian pound and inflation concerns risk slowing down the sector’s growth over the medium term. Managing the downside of rising costs will thus be crucial for retailers that hope to expand in the market. With the industry starting to differentiate into higher- and lower-income segments, those on tighter budgets are more likely to adapt. As new brands and franchises move into the widening retail space, efficiency and service will be increasingly important to retain customer bases, particularly in the urban areas, where a lack of parking and stocking problems are a constant concern.