Poised for growth: Large-scale retail and chain segments are exhibiting potential

Despite being home to the largest population in the Arab world, Egypt hosts comparatively few modern large-scale retail supermarkets, hypermarkets and malls – and almost none away from the major cities of Cairo and Alexandria or tourist areas – making for enormous potential for growth. Indeed, the modern retail segment is growing rapidly, and foreign investment in the discount section is set to raise the accessibility of chain stores for Egyptians, many of who are unable to afford most of what is sold in malls and hypermarkets.

PERFORMANCE & CONTEXT: The value of activity in the sector in current prices was LE166.3bn ($23.66bn) in 2011/12, when wholesale and retail trade accounted for 10.6% of GDP by factor cost, according to Ministry of Planning figures; the proportion was unchanged from the previous year. The sector grew by 1.6% and 2% in real terms in 2010/11 and 2011/12, respectively. Prior to the 2011 revolution, growth rates in the sector were much higher, averaging 6.8% in the previous four years. Retail growth in recent years has tended to track overall GDP trends, and the slowing of the sector’s expansion followed a slump in GDP growth after the revolution and ongoing political transition.

Economic growth is being driven to a significant extent by population increases; the IMF forecasts that GDP per capita in dollars will remain largely unchanged between 2012 and 2014 (at just over $3100). Meanwhile, consumer price inflation stood at 8.8% in April 2013 on an annual basis, and the IMF predicts annual inflation of 8.2% for 2013 as a whole. Against a backdrop of dwindling foreign currency reserves, 2013 has seen the depreciation of the pound, which in July hit a record low against the dollar at $1:LE7.02. Looking ahead, the falling value of the pound is likely to put pressure on retail sales of imported goods. “The currency problem is a big risk for industry since almost all of our raw materials are imported,” Mohey Razek, the CEO of paints manufacturing company, PACHIN, told OBG.

CONSUMER SPENDING PATTERNS: Food and drink accounted for the largest share of average annual household consumption in 2009/10, according to the latest available data from the Central Agency for Public Mobilisation and Statistics, at 35.4% of the total (40.1% in rural areas and 31% in urban areas). Beverages and tobacco accounted for 3% of household consumption; clothing, textiles and footwear for 6%; and furniture and domestic equipment for 4.1%. The bulk of the remainder went on non-retail items such as housing (19.4%) and services and health care (9.6%).

Unsurprisingly, given the ongoing uncertainty of the broader environment, data on consumer confidence suggests that the near-term outlook for growth in spending is poor; consumer confidence fell by the largest margin in the Arab world in the first quarter of 2013, according to Nielsen’s Global Survey of Consumer Confidence and Spending Intentions. Confidence had also fallen the previous quarter, according to the survey, when 64% of respondents predicted they would limit their purchases of discretionary and non-discretionary items over the coming 12 months.

SECTOR STRUCTURE & CHARACTERISTICS: The market is highly fragmented, informal and dominated by small independent outlets, though the trend is towards gradually increasing concentration. Khaled Abbas Fathalla, the CEO of local supermarket chain Gomla Markets, told OBG there are around 300,000 small retail outlets in Egypt and that only five or six of the country’s 27 governorates currently host supermarkets; large retailers are mainly focused on Cairo and Alexandria. Figures quoted in local media suggest that around 20% of retail sales in Egypt take place in modern chain stores, with large malls and hypermarkets targeting mostly the middle and upper segments of the market.

The largest department store chain in the country is Omar Efendi, which was founded in 1856 and has stores in most major cities. The firm was privatised in 2006 when a Saudi investor purchased a 90% stake; however, in 2011 a court overturned the sale and returned ownership to the public sector, as part of a wave of privatisation cancellations by the judicial authorities.

Trading hours in the country are long, with both small shops and chain stores staying open late; Metro supermarkets, for example, are open 24 hours a day. However, this may be set to change; in November 2012 Ahmed Zaki, the minister for local development, said the government was thinking about requiring retail outlets to close at 10pm to save energy. However, the move was unpopular and the then-minister of industry and foreign trade, Hatem Saleh, subsequently announced that shops and restaurants would be able to stay open until 12am and 2am, respectively.

MAJOR PLAYERS & SUPERMARKETS: Major players in the sector include Mansour Group and the UAE’s Majid Al Futtaim (MAF). Mansour Group owns the Metro supermarket chain and Kheir Zaman discount store chain, distributes GM vehicles in the country and holds the licence for McDonalds Egypt, along with distribution agreements with, for example, Philip Morris and Red Bull. Metro operates over 40 supermarkets across 10 cities, making it the largest supermarket chain in the country, while Kheir Zaman operates around 30 outlets. MAF is the franchisee of the French hypermarket and supermarket chain Carrefour in the Middle East and Central Asia and operates 13 Carrefour outlets in Egypt, including four hypermarkets in the Cairo area and two in Alexandria. It also owns two malls in the country and is in the process of building another.

Although the large-scale retail sector remains underdeveloped and dominated by a comparatively small number of players, consolidation may nonetheless be on the cards. In December 2012 Carrefour said it was in negotiations to acquire Metro Markets Trading and Distribution, the Mansour affiliate that operates Metro and Kheir Zaman. The acquisition of the firm would give MAF a market share of around 60% in the chain store retail segment, according to industry figures quoted in local media, who put the value of the transaction at anywhere from $200m-300m. In late April 2013 MAF said it had completed due diligence on the acquisition, the outcome of which it described as “reasonably positive”, though the firm said it could not give a date for the completion of the purchase.

Other major supermarket chains include the high-end Dubai-based Spinneys, as well as Alexandria-based food supermarket chain Gomla Markets and El Hawary.

IN & OUT: South African firm Shoprite entered the market in 2001 and opened seven stores, but subsequently withdrew in 2006, cancelling plans for 100 outlets in the country. The firm blamed what it described as restrictions on free trade for annual losses of around $50m it had incurred in the years prior to its withdrawal. The pull-out followed the withdrawal of UK supermarket chain Sainsbury’s from the market in 2001, just two years after its entry into the country.

As throughout the sector, observers say growth has slowed in the segment since the revolution. “Three or four years ago, the large-scale retailing segment was expanding very quickly, but now I don’t see a lot of growth given the current political and security situation,” said Ahmed El-Essawy, the business development officer for Speed, a logistics firm that distributes Procter & Gamble products in Egypt.

EXPANSION PLANS: Nevertheless, at least some supermarket chains appear to be doing well and are still expanding. For example, MAF’s revenue from Egypt stood at Dh2.32bn ($631.5m) in 2012, up strongly from Dh1.87bn ($509.01m) in 2011. Gomla Markets opened its 20th store in January 2013, and plans to open three more during the year and 10 over two years. Fathalla told OBG that Gomla Markets is also in negotiations with the Hakmar Group from Turkey to open a chain of corner shops in the country. BiscoMisr, a confectionery company established in 1957, has seen sales grow annually by 25% over the past five years. The firm reported a sales increase of 58% in the first quarter of 2013 over the same period last year and is expanding its export markets in 2013 to meet its growth targets.

Furthermore, new players are also continuing to enter the market, in particular in the discount segment. “The outlook for the sector as a whole is bright. However, international players may have a harder time than previously, as the old regime used to give them land at cheaper prices than it did to local firms,” said Fathalla.

The growth underpinning these prospects is being driven by the middle classes. “The Egyptian consumer market is quite deep and continues to grow. One reason is that incomes in the lower to middle group of society have risen significantly as a result of wage and benefits increases over the past two years,” Ahmed Elsayad, the CEO and VC of confectionary firm BiscoMisr, told OBG. “However, in our sector, biscuit products price points of 50 piastres ($0.07) and 1LE ($0.14) represent the high end of affordability levels for both Egyptian consumers and wholesalers, which represents a challenge for us given the forex volatility, and increased prices for raw materials and pack production.”

DISCOUNT SEGMENT: Several local budget and discount supermarkets are already well established, but the segment is now also attracting foreign investment from large international players; Turkish discounter BİM reportedly opened its first outlet in Egypt in April 2013. The company aims to open 30 branches in the country a year for five years, initially concentrating on the capital before expanding into Alexandria and the Delta region. BİM operates 3740 outlets in Turkey and in 2009 entered the Moroccan market where it has been expanding quickly, having opened its 100th store in the country in October 2012. BİM’s investment in Egypt will be closely watched by other international players in the segment that are keen to tap into the country’s large low-income market. Additionally, the fact that the company intends to source 80% of its products from local small and medium-sized businesses should boost the impact of the store’s entry on the Egyptian economy. BİM’s entry followed the launch in July 2012 by Egyptian businessman Saad El Shater of a new discount supermarket chain called Zad. The chain began business with the opening of 15 stores, all of them in Nasr City in eastern Cairo. The firm reportedly intends to open another 2500 stores across the country within five years, though as of September 2013 it did not appear to have expanded beyond its initial 15 outlets.

DISTRIBUTION: As with the retail sector as a whole, distribution is underdeveloped (see Transport chapter). “Some of the areas we work in are low-income regions and settlements are scattered over larger distances; the major obstacle in Upper Egypt in particular is distance,” El-Essawy said. Retail distribution is facing new challenges since the 2011 revolution, including security concerns on roads, (in the form of protestors blocking them and hijacking trucks) fuel shortages and price rises. “The distribution sector has faced tough times this past year; our distribution cost has increased by 25-30%, due to rising vehicle and spare parts prices and fuel unavailability,” said El-Essawy. Nevertheless, he sees firms in Egypt, such as fast-moving consumer goods producers, turning to distribution firms in rising numbers. “Firms are increasingly starting to look to distributors in order to minimise costs, as these are much lower for distributors than for principles due to their focus on the activity and higher efficiency,” El-Essawy added.

MALLS: Large malls are largely confined to Cairo, though Alexandria also hosts several medium-sized shopping centres. According to data from real estate services firm Jones Lang La Salle, total retail stock in the mall sector in Cairo stood at 773,000 sq metres of gross leasable area (GLA) in 2012, which it forecast would increase by 68% to 1.3m sq metres by 2014 as a result of new openings. Important players include Citystars Properties and Egyptian Centres. Citystars built the Citystars Heliopolis retail and leisure complex, comprising a mall known as the Stars Centre with 150,000 sq metres of GLA and three hotels. “Confidence is high among our current tenants in their operations and we have continually received new requests from new retailers, which shows the retail environment is healthy and progressive,” said Mohamed Abo El Yazid, the managing director of Citystars. Egyptian Centres owns the Mall of Arabia Cairo, located in 6th October City, which opened in 2011 and with 180,000 sq metres of GLA is the largest mall in the country. Egypt Centres is an affiliate of Arabian Centres, which is in turn owned by Fawaz Al Hokair, a Saudi Arabian firm that describes itself as the largest operator of malls in the Gulf kingdom.

NEW SPACE: A number of firms are planning on building new shopping centres. MAF, which already owns two shopping malls in Egypt, the Maadi City Centre Mall in Cairo and Alexandria City Centre, is in the process of building the Mall of Egypt. It will be located in 6th October City and is due to cost LE4.9bn ($697.2m). Construction on the project, which will include 162,500 sq metres of GLA and have space for around 380 retail outlets, began in February 2013. The mall will follow the example of the firm’s flagship Mall of the Emirates in Dubai, one of the biggest shopping centres in the world, by including an indoor ski slope.

Another UAE-based company, Al Futtaim Group, is developing a mixed-use project, Cairo Festival City, which will include 160,000 sq metres of GLA and is due to open by the end of 2013 in New Cairo, east of the city centre. In November 2012 Al Futtaim and fellow UAE-based firm Emaar announced plans to develop the LE5bn ($711.5m) Cairo Gate project as a joint venture. The first phase of the project, which is to be located on the Cairo-Alexandria desert road, will include a mall with 120,000 sq metres of GLA. Emaar is separately developing Emaar Square, which will include a 250,000-sq-metre outdoor mall, within its larger Uptown Cairo mixed-use real estate development. Other malls in the pipeline include The District, near the city’s airport, and Emerald Mall in New Cairo. Furthermore, new projects in Alexandria include the Orouba Mall, which was due to open in 2013 with 36,000 sq metres of GLA.

According to Jones Lang LaSalle, annual rents at the larger malls in Cairo averaged between $920 and $1410 per sq metre in the first quarter of 2013, unchanged on the previous quarter, but down by 20-30% year-on-year. The company blamed the fall on reduced spending due to instability. Jones Lang LaSalle said tenants are increasingly succeeding in negotiating rents in local currency against the backdrop of the Egyptian pound’s depreciation. However, others have emphasised that more uniformity would go a long way towards alleviating any concerns. “What we need is clarity and regulatory consistency. The market in general is worried about new laws and regulations adversely affecting the industry, such as new taxes, tax raises and more expensive utility costs,” said Mohamed El Mikawi, the managing director of Al Futtaim.

FRANCHISING & BRANDS: The US State Department’s 2012 Country Commercial Guide for Egypt put the portion of the population that is strongly brand-conscious at around 5m. The country has seen the arrival of major international franchises and brands in recent years. For example, Marks and Spencer’s – brought to the country by its Middle East franchisee Al Futtaim – and H&M both launched activities in the country in 2010 and Ikea – also controlled in the region by Al Futtaim – will open its first branch at Cairo Festival City when the project is completed. The Country Commercial Guide put the total number of existing franchise concepts in the country at an estimated 460 in 2012, of which around three-quarters were local and one-quarter foreign, and total franchising sales at $2.5bn. Of this, around $700m is accounted for by food franchises, with numerous well-known international brands such as McDonalds and Starbucks active in the market. The government is seeking to boost franchise activity through the Franchise Development Department of its Small Enterprise Development Organisation, and the African Development Bank has also provided aid. “The amount of state support that the industry receives especially in direct export subsidies and export promotion support has a positive impact on our export front. New targeted stimuli packages, supporting specific activities in our sectors may also give a boost to the local business front,” said Aref Hakki, the chairman of confectionery firm BiscoMisr.

CONSUMER ELECTRONICS: While electronics sales saw a slight increase in early 2013, there was a small drop in the middle of the year, according to local press. Duke Park, the vice-president of Samsung Egypt, put the number of flatscreen LED televisions sold as a proportion of all televisions sold in the country at 25-30%, of which he said Samsung had a market share of 75%. “Egyptian consumers have begun a paradigm shift of moving from ‘box’ set TV to flat panels,” he told OBG. As for telephone handsets, Park said around 55-60% of sales are in the $50 and below price segment; however, smartphone sales are growing rapidly. A survey by the Arab Advisers Group (AAG) released in November 2012 put the proportion of smartphones out of total mobile handset ownership at 8.4%; Park said this was up from 5% in 2011 and the firm projected the rate to increase to 20% by the end of 2013. “Social networking services will continue to fuel growth in smartphones purchases, which is the major consumer behavioural change happening in Egypt right now,” he said.

PAYMENT CARDS & E-COMMERCE: Consumer credit and payment card ownership is not well developed as only 1% of adults own a credit card, according to the World Bank’s Financial Inclusion Index (Findex). Many banks do not permit card holders to use them for online purchases. Findex does not provide figures for debit card ownership in Egypt, but other sources put the figure at 4%. The low credit card penetration rate is also a barrier to the development of online shopping. Many sites allow for cash payment for purchases on delivery; however, this poses problems for retailers. “If people pay on delivery for products bought online, they can reject the merchandise at any moment and decide not pay,” said Fathalla. Partly as a consequence of this, the segment remains small; AAG puts the proportion of Egyptians to have shopped online at 3.4% and a report by the Boston Consulting Group put the value of online retail at between just 0.2% and 0.3% of total retail sales. However, rising internet penetration is likely to lead to significantly increased online transactions.

OUTLOOK: Growth in the retail sector has closely mirrored wider economic growth in Egypt in recent years and the development of the sector is likely to depend heavily on broader economic trends. In the near term, sector growth is unlikely to return to pre-revolution levels; consumer confidence is low and the depreciation of the pound in the first months of 2013 is likely to constrain spending on imported goods. The large-scale retail and chain segments are set to grow more rapidly than the sector as a whole, as the concentration of the retail market in major cities continues. GLA in malls is also set for rapid expansion, though projects in the pipeline may face some delays. “Demand is growing every year. It shows there are major opportunities in Egypt if the security problems can be solved; if they are, the sector will really take off,” El-Essawy told OBG.