Food on the table: The fast-moving consumer goods segment is a market staple

The past few years have seen ebbs and flows in investor sentiment towards emerging market, but one of the consistently bright performers has been the fast moving consumer goods (FMCG) sector, a catch-all segment that encompasses food, beverage, cosmetic, apparel and household products. FMCG sales are driven almost wholly by domestic household consumption. While growth in this area has slowed over the past five years in the US and the eurozone, it has continued to increase considerably in emerging markets. This is due in large part to a number of concurrent long-term trends that tend to be buffered from the broader exogenous environment, namely: strong population growth, a growing middle class and increasing urbanisation.

ON THE UP: Egypt embodies this in many ways, with a large, young population that is steadily growing in both size and purchasing power. Demand for products – while still very much price-sensitive in a country where the 2012 per capita GDP was just over $3100, lower than every other country in the Mashreq region and among the lowest in MENA – has been increasing by double-digits. Even during the height of Egypt’s 2011 revolution, and in spite of the ongoing turbulence that has followed, consumption has held fairly steady. Indeed, in 2013, global market research firm Nielsen expects the segment to grow in value by 11%, roughly in line with expansion seen in 2011 and 2012, powered in large part by increasing demand for edible products.

On the manufacturing side, things have been more challenging due to supply chain disruptions, including industrial action, roadblocks, factory closures and rising costs, but Egypt’s long-term comparative advantages, including a competitive workforce and cost environment, along with a large local market and attractive export profile, remain untarnished.

DEMAND & CONSUMPTION: A recent study by the global consulting firm McKinsey found that emerging market consumers make up less than one-third of global revenues for the 15 largest multinational FMCG manufacturers, but that over the next decade, consumer spending in emerging markets is due to grow roughly three times as quickly as consumer spending in developed economies. By 2020, spending is expected to reach roughly $6trn, accounting for nearly half of total consumer spending and more than two-thirds of the decade’s growth. The heady estimates are in part a reflection of the demographic trend of emerging markets in general. That is certainly the case in Egypt. With 85m people and a youth bulge in the under-25 range, demographics will define the market for years to come. Furthermore, while numbers vary, the rate of population growth in recent years has generally been put at roughly 2% a year, and the UN estimates that by 2050 the population will be between 110m and 140m.

Actually discerning the specific increase in household consumption is more of a challenge in Egypt, particularly given the opacity of data. However, the rate of marriages is frequently used as an indicator of growth in Egypt, although estimates of annual marriages vary wildly, from as low as 400,000 to as high as 850,000. The ageing youth can serve as a proxy for housing and FMCG demand in Egypt as this population segment grows older and begins marrying, which means more households and in turn more demand for soap, mops and other durable products, for example.

POWER OF THE PURSE: Spending power is also on the rise, as Egypt’s middle class balloons. A study in 2012 by global consultancy Booz & Company estimated the size of the country’s middle class – those within a 75% to 150% range of the median household income – sat at roughly 44%, a figure that is expected to increase significantly in the medium term.

Perhaps most importantly, even amidst the turbulence of the past two years in Egypt, the staying power of the FMCG segment has reflected a truism that has also contributed the optimistic forecasts for growth in demand over the next decade: regardless of other social developments, people will always need food to eat (and perhaps to a lesser extent, soap to wash and towels to clean). Larger purchases, such as vacations, automobiles or white goods, are often put on hold and while daily expenditures may be more efficient, consumption remains fairly constant.

PRICING: However, the encouraging outlook for growth does not mean the market displays the same consumption traits as wealthier emerging economies, like Turkey or Saudi Arabia. Research by the Central Agency for Public Mobilisation and Statistics showed that the food and beverages sub-sector sees a particularly large disparity in terms of purchasing power. The monthly allowance spent on edible goods in a household headed by a university graduate is equivalent to 30.8% of total spending, but that number increases to 45.5% in families headed by someone who is illiterate. In between – those with at least a secondary school education – the number is 40.5%. Nearly all of Egypt’s households earn less than $10,000 a year, which means that any price fluctuations significantly affect budgets. Indeed, the price of baladi bread, the round, unleavened loaves that are a daily staple for much of the population, and which have been subsidised by the government for decades, has remained unchanged since the assumption of power by former President Hosni Mubarak in 1981.

INFLATION: It does not help that Egypt had one of the highest inflation rates in the region, and rising inflation – in some cases well into double digits – has long been a problem for the country, with the average inflation rate hovering at 9.1% over the last decade. It peaked at 23.6% in August 2008 in the midst of the global financial crisis, but well ahead of revolutionary unrest, and stayed in the high teens for most of the year. In the wake of Mubarak’s departure, inflation hit 11.5% in March 2011. It has since begun to subside, dropping as low as 6.4% in summer of 2012 and is expected to stabilise around 8.2% for 2013. However, currency fluctuations do not appear to have a major impact on the segment. Wael Ghandour, the chairman of AWA Food Solutions, told OBG, “The fluctuation of the Egyptian pound is not a major problem for the food industry as the population of Egypt is big enough to provide a constant and growing demand despite any other factors.”

As the informal market dominates it is difficult to measure growth. Omar Mandour, the general manager of Coca-Cola Egypt, said, “In the FMCG market, some companies grew between 25% and 30%, which doesn’t match official numbers, so to explain that we have to assume that the growth came from the shadow economy.” And while Egypt’s consumers are price-sensitive – particularly since underemployment is high – recent case studies have shown that raising prices is not out of the realm of possibility. More than three quarters of total sales in Egypt’s confectionary market, for example, come from low-priced products – in some cases as low as LE0.50 ($0.07). However, a number of firms have been raising prices, with minimal effect on revenues. According to US-based Kraft, the FMCG manufacturer saw little change in buying patterns in Egypt after shifting some biscuit lines from six-piece servings to eight pieces even while doubling the price to LE1 ($0.14). Increased prices for larger beverage servings, including 355-ml cans (as opposed to the traditional 330-ml can) and packs of soft drinks that are three or four times larger, are also popular. Price increases are more manageable in some segments than in others. Nielsen found that price hikes in 2013 in Egypt for bathroom soaps and higher prices for liquid detergents have generally led to stagnation, but food and beverages have largely proven to be resilient.

FOOD: Combined, edible products – food and beverages, including everything from salty snacks to dairy products to water – represent the single largest sub-sector of the FMCG sector, as well as in the general consumer market, accounting for 38% of all consumption as recently as 2009, according to Rasmala, a Dubai-based investment bank. Some estimates go even higher, with the Spanish-headquartered advisory company IMAP pegging it as high as 48% of total household expenditures. Perhaps more impressive is the annual growth the segment has traditionally shown. Prior to the revolution, food retail sales grew at an average rate of 19.3% per year in 2006-10. It has since slowed to a still-robust 13% on average, a level that is expected to remain constant over the medium term.

As in other markets in the MENA region, food consumption shows some particular variations in demand based on the time of year. Khaled Akl, marketing director for the consumer staples manufacturer Unilever, told OBG in 2012 that on average, food consumption jumps 30% during Ramadan, and for certain food products, this can equate to nearly the entire year’s income.

MILK & SUGAR: Specific consumption of certain foods has also helped to underwrite growth in surprising areas. It would come as no surprise to those who have ever tasted the honeyed treats of iftar, the break fast meal at sundown during Ramadan, but Egyptians on a per-capita basis consume 33 kg of sugar per year. By comparison, that figure averages closer to 22 kg in Europe. High demand has led to strong profits for sugar producers and distributors to keep up. Delta Sugar, for example, established in 1978, is the only cane sugar producer in Egypt, and in 2011 it ranked among the top 50 firms in the country by revenue, and profits that have recently grown by as much as 30% annually.

Another growth segment in the food and beverage industry being targeted across the MENA region is dairy products. Dairy consumption has traditionally been fairly limited and per-capita milk consumption in Egypt is among the world’s lowest, standing at just over 20 kg in 2010. Demand for other dairy products also falls well below that seen in other North African countries. Egyptians consume between just 1 and 2 kg of yoghurt a year, for example, whereas Algerians and Moroccans consumed somewhere between 9 and 15 kg. The dairy market has grown at a relatively slow rate by world standards: 4.8% a year from 2005 to 2009 to a value of $2.5bn. Cheese accounted for some 38.5% of the total, and milk another 28.2%. However, there are prospects for growth. Hanee Alfi, the CEO of agro firm Gozour, told OBG, “Of the 25 % of the packaged milk, 95% is long-life milk and 5% is fresh pasteurised milk. The sector is now going through a migration from lose milk to packaged milk, with these statistics we can see the huge potential for long term and sustainable growth in the packaged milk industry.”

MANAGING SUPPLY: While demand for FMCGs has remained relatively robust in Egypt, manufacturers nonetheless have had to contend with a number of challenges that have tightened the operating environment. Egypt has traditionally been one of the more attractive locations for FMCG producers and a number of multinationals such as Kraft, Unilever, Danone and Nestlé have set up shop to manufacture locally. Beyond the country’s domestic attributes, Egypt also benefits from its positive trade profile, including low-cost labour and – good quality port infrastructure and trade agreements – easy access to a wide geographic area given its location in the Arab region without having to tweak the manufacturing of products for different export markets.

However, while the country’s underlying traits remain unchanged, and capital facilities and infrastructure have been largely untouched by instability, day-to-day activity for FMCG manufacturers has become more challenging. Initially, operations for most FMCG companies were only minimally affected by the political turbulence, despite losing some production time due to labour stoppages. However, in recent months, the sheer length of the uncertainty has become an issue.

In both January and July of 2012 firms reported that making deliveries became more of a challenge, most notably when rumours of possible fuel shortages twice led to hoarding and less reliable access to petrol. This scenario was repeated in the summer of 2013, when the military instituted a curfew and limited road usage to daylight hours, which resulted in many delayed shipments. According to media reports, Sunil Duggal, CEO of Indian manufacturer Dabur with operations in Egypt, noted in August 2013 that “in the last two and a half years there have been occasions when operations were curtailed in view of the law and order situation”.