Players optimistic for recuperation of Egyptian retail sector

Egyptian retail has come a long way since the days of the winding hustle of the Khan El Khalili market and the tentmaker’s souq. In a September 2017 briefing on the current status of Egypt’s economic reform programme, the IMF listed retail as one of the key sectors driving the 4.2% GDP growth rate during FY 2016/17. In a 2015 report, global management consulting firm AT Kearney forecast a potential doubling of the size of the retail market by 2021.

While economic policies throughout 2017 may have placed a limitation on individual purchasing power in the short term (see Economy chapter), the expectation that inflation rates will stabilise and investment will increase on the back of business-friendly reforms should see the retail sector maintain this growth trajectory in the medium to long term. “I’m optimistic about the prospects for Egypt,” Bilal Sharabati, managing director for North Africa at Mondelez Egypt Foods, told OBG, “The challenges we have managed in recent times are corrective hurdles and not roadblocks to what Egypt has to offer.”

Retail Space

As noted by global real estate management company JLL in a 2017 report, Cairo’s current supply of retail real estate stands at 1.46m sq metres of gross leasable area and will continue to grow, both with standalone projects and as a component of the planned communities developing outside of the city centre. A testament to these expansion efforts is the long-awaited, 165,000-sq-metre Mall of Egypt, which opened in March 2017 in 6th of October City. A $710m project by Dubai-based holding company Majid Al Futtaim, the shopping mall includes over 350 local and international retailers.

Other anticipated projects include Badr El Din Real Estate’s LE200m ($13.2m), 20,000-sq-metre Al Mazar Mall in Sheikh Zayed City, for which the first phase was completed in April 2017, and the 103,000-sq-metre Almaza City Centre near Nasr City, which is expected to open in the first quarter of 2019. “These types of malls help specifically with international brands, which only operate in this kind of environment since they don’t do standalone stores in Egypt,” Mohanad Adly, CEO of supermarket chain Spinneys Egypt, told OBG. “For them, expanding the development of malls is the only way to expand their footprint.”

Other malls in the country include Downtown Katameya, The First Mall, Galleria40, Dandy Mega Mall and Designopolis, which all host a wide range of international brands. Global brands have been making their way into the market for some time, with the visibility of major international names increasing significantly since they first arrived in 2005.

Organised Market Growth

In recent years Egyptians have followed the global trend of moving towards shopping at larger supermarkets and hypermarkets, in pursuit of low prices and convenience. Indeed, as highlighted by the US Foreign Agricultural Service, by the end of 2017 food sales at supermarkets and hypermarkets are expected to have doubled from 2011 figures. This represents a strong shift from the traditional process of visiting multiple stores and stands for household shopping. This trend has been accelerated by the growth of local chains like Kazyon and Mansour Group’s Metro, as well as international and regional retail groups, including regional chain Spinneys, Turkish supermarket chain BIM and Majid Al Futtaim’s Carrefour hypermarkets.

Egypt is the largest consumer market in the Arab world and is developing quickly. Total food retail sales reached LE226bn ($14.9bn) in 2016, up 11% from 2015, and this was estimated to have increased to LE250bn ($16.5bn) in 2017. Though supermarkets account for less than 1% of food retail establishments, they make up 23% of total retail sales. Hypermarket sales constitute about 4.5% of the total. While the base is low, growth has been fast, with the number of hypermarkets rising from 19 in 2011 to 37 in 2017. Supermarkets, meanwhile, rose from 609 to 1215. The majority of the food retail market continues to be made up of around 115,041 traditional outlets; however, according to a 2017 report by the US Foreign Agricultural Service, the number of traditional retailers has dropped for the first time since 2011, signalling formal retail may be gaining an advantage in the competition. “Organised retail is a hugely underdeveloped and still growing market,” Adly told OBG. “If you combine all the major players together – hypermarkets, supermarkets and all organised retail – we only make up 20% of the market, while the majority share of the market is still dominated by mom-and-pop stores. From an investor perspective, that’s 80% of the market that has yet to be transformed.”

Retail chains are capitalising on this potential for expansion. In 2016 BIM announced intentions to open more than 100 new stores within the year, and as of August 2017 the Turkish chain operated 256 stores in Egypt. Kazyon, a local chain owned by Tawfeer for Food Products, launched in 2014, and as of February 2018 it had opened 270 branches across Egypt. Spinneys, for its part, is looking to double its number of stores over the next three years from 2017.

Adly added that Egypt’s demographic profile – where the median age is 23.8 – particularly favours this type of store. “Egypt is a young population with 40% under the age of 30,” he told OBG. “The younger generation understands the benefits of the one-stop approach to shopping, which means the trend towards organised retail is going to be accelerated tremendously in the coming 10 years.”

In a 2015 study of 2000 Cairenes, AT Kearney found that shoppers were willing to drive up to 20 km to shop at a hypermarket, which suggests that the proximity of a store may be less important than the products or prices being offered.

Franchise Support

Egypt is a member of the World Franchise Council, and in 2012 it established the Egyptian Franchise Development Association to support the growth and development of franchises. Due to these efforts, international franchises have grown dramatically since the first fast-food chains arrived in Egypt in the 1970s, with the sector expanding from 25 international brands in 1999, to 360 in 2010 and 430 in 2012. In particular, the country is home to a number of major fast-food franchises from the US, including names such as Burger King, Carvel, Dairy Queen, Domino’s Pizza, KFC, McDonald’s, Pizza Hut, Baskin Robbins, Starbucks and Subway.

As of August 2017 the US International Trade Administration reported that around 600 franchises operated in Egypt, highlighting that further growth can be expected given the increase in so-called A-class consumers, currently estimated at 5m people. As of September 2017 the Federation of Egyptian Chambers of Commerce’s Investment Committee was drafting legislation specifically for franchises to complement the investment law, with the intention to streamline investment procedures by consolidating steps with a single window and electronic system.

In the meantime, convenience stores, especially those associated with petrol stations, are achieving rapid growth, up 21.5% in 2016. Subsector sales totalled about LE2.8bn ($184.5m) in 2017, double the volume of sales in 2014. The expansion is driven primarily by an increase in the number of outlets, which was expected to have ticked up by 10% in 2017. International oil and gas company ExxonMobil is reported to have slightly more than half of the market share, with 138 stores under the retail brands Mobil Market, Esso Snack and Shop, and On The Run. Other franchises across various subsectors include La Poire (25 outlets), Emarat Misr (six outlets), Total (10 outlets) and 7 Mart (four outlets).

Consumer Trends

The highest inflation rate seen in 30 years, following the November 2016 flotation of the Egyptian pound, has impacted Egypt’s economy across the board. According to the UN Food and Agriculture Organisation, the annual food and beverage inflation rate increased from 13.8% in October 2016 to almost 44% in April 2017, easing slightly to 42% in August. This is because many ingredients, even for locally produced brands, have to be imported.

In addition, the implementation of a value-added tax in September 2016 to replace the general sales tax (see Economy chapter) levied a surcharge of 13% on product prices until the end of June 2017, increasing to 14% at the beginning of July 2017. This has understandably impacted consumer behaviour, both for businesses and individuals. “When it comes to retail, there has been a shift from premium products to medium products due to budget concerns,” Korkut Kulbul, managing director for the Egypt office of Norwegian paint company Jotun, told OBG. “For premium products, we have had to increase prices by more than 50% after the 2016 flotation of the Egyptian pound, and not everyone can manage those additional costs.”

In the supermarket and hypermarket space, economic headwinds are triggering a discernable shift in consumer behaviour. “Egypt has traditionally been a price-driven market, and after the devaluation and the high inflation rates, people have become much more price-sensitive,” Adly told OBG. “We’ve witnessed spending habits change in four ways: people are consuming less, they are downgrading from premium brands, they are switching from imports to local brands and they are purchasing fewer ready-made products in favour of going homemade. We’ve seen a huge shift away from imported products because of price, but also due to an inconsistency in supply. Very often importers face difficulty, so even people who can afford imported items will often find them out of stock and have to find a local alternative.”

Mohamed Khalifa, chief investment officer at Arafa Holding, a global fashion and apparel company, noted a similar change in consumer patterns. “Imported goods have become more expensive, and with consumers becoming more value-for-money-oriented, this should provide local players, who have aligned quality production with international trends and standards, with great opportunities,” he told OBG.

Retail Response

Across subsectors of the retail space, companies have been employing various tactics in an effort to maintain growth in spite of the pressure placed on consumer wallets throughout the year. Sharabati told OBG that different fast-moving consumer goods (FMCGs) companies followed different pricing strategies after the depreciation and skyrocketing inflation. “Our strategy was not to shock the consumer by aggressively pricing up our portfolio, but to gradually implement our new recommended selling prices,” he said. “While this strategy has impacts in the short term, we nevertheless chose to support consumers and safeguard the category scale.” With regard to FMCGs in supermarkets, Adly told OBG, “We’ve focused on discounts and promotions, and have seen a change from an average of 16-18% of total sales spent on promotions and discounts to 27% in 2017, showing how price-driven decision-making has become.” A similar trend can be seen in terms of advertising discounts, with a variety of brands using promotions and markdowns to entice customers.

Gulf Interest

Given that the population of Egypt is almost up to 100m, regional players have shown a particular interest in the Egyptian retail space. Saudi investment group Fawaz Alhokair established local subsidiary Marakez, which in turn opened the Mall of Arabia in Cairo in 2011. Saudi Arabia’s Abdullah Al Othaim Markets has also invested heavily in the Egyptian market; the brand opened its 31st branch in Cairo’s Nasr City in October 2017.

Despite the opportunities presented by a sizeable population, however, foreign investment in the retail industry, as well as across a variety of other sectors, has been impeded by Egyptian bureaucratic procedures. “The age-old obstacle is bureaucracy: it takes two years to license a new store,” Adly told OBG. “This inability to expand their footprint and capture market share as quickly as they would elsewhere is one of the main reasons we have seen foreign investors pull out of Egypt, as was the case with Shoprite in 2006.”

Industry players see the Ministry of Trade and Industry’s Industrial Permits Act (see Industry chapter), which aims to expedite licences and limit the number of signatures needed to open new industrial businesses, as a model for reform in the retail sector. This, coupled with the continuing decline in interest rates, will likely see foreign investment pick up again in the future. “When interest rates decrease, the retail sector will recuperate rather quickly, and the development projects that were put on hold will start up again,” Hassan M Elmarakby, chairman at Marakby Steel, told OBG. “The demand is there for both the commercial and residential segments, and as conditions continue to improve, so will business.”

Online Shopping

Expanding retail online also represents further opportunities for Egypt as the e-commerce market is becoming increasingly popular across the Middle East. On the 2017 Forbes list of the top-100 start-ups in the Arab world, 13 were Egyptian companies, a number of which were focused on the online retail market, providing online price comparison services, grocery delivery service and real estate exploration. “Online retail companies are helping with the transition into the formal economy through access to the online marketplace, which in turn helps legitimise business,” Hesham Safwat, CEO of African e-commerce company Jumia Egypt, told OBG. “This is one of the main issues Egypt is currently working on.”

Unsurprisingly, a 2017 PwC survey of retail trends in the Middle East found that online shopping behaviour is correlated with age: 36% of those surveyed between the ages 18 and 24 shop online monthly, compared to 13% for those aged 55 and older. The survey also found that 77% of shoppers in Egypt are increasingly going online to seek out inspiration for purchases via social media sites like Facebook and Twitter.

The rate of internet penetration is lower in Egypt than in other countries in the region, at 41.2% in FY 2016/17, according to the Ministry of Communications and Information Technology. As noted by the 2017 Media Use in the Middle East survey published by Northwestern University in Qatar, Egyptians using the internet spend an average of 26 hours online each week, representing a steady increase in recent years from 18 hours in 2013. In addition, the use of smartphones to connect to the internet has risen from 32% in 2015 to 47% in 2017.

Outlook

With GNI per capita rising steadily in recent years, from $9770 in 2012 to $11,000 in 2016, according to the World Bank, and a growing middle class, high levels of disposable income are on the cards for the majority of the country’s nearly 100m citizens. This, coupled with the fact there is significant scope for growth in retail, suggests that there are promising prospects for the sector in the long term.