Consumer confidence and growth return to Egypt's retail sector

The retail environment in Egypt is set for a transformation over the coming decade. While it has always been a key facet of the country’s economy, with household consumption expenditure accounting for 82.8% of GDP in 2014, it is likely to become all the more formalised over the next 10 years. The sector has remained intact in the face of economic uncertainty because it has largely been geared to mass-market essentials and value products fuelled by the informal sector. However, given the strong demand fundamentals in the market, a number of international brands, retail franchise operators and mall developers are now targeting the market. This suggests that while the low-income, high-volume segment remains attractive, there are growing opportunities for the formal market to offer a range of higher-value products. “For Egypt to attain more sustainable growth, the black market needs to be formalised,” Omar Mandour, general manager of Coca-Cola in Egypt, told OBG.

Sector Performance

The country has great potential in terms of retail demand. With a population estimate of 88.5m in mid-2015, Egypt is the biggest market in the MENA region. Further, with almost 50% of the population under the age of 25, the prospects for growth look strong.

General economic growth trends in the country have also been positive. Data provided by the World Bank shows that economic growth between 2005 and 2010 remained for the most part above 5%, topping 7% in 2007 and 2008. Due to the fallout from the 2011 revolution, the growth rate dropped to around 2%, but has now begun to pick up again. The IMF has forecast real GDP growth at market prices of 4.3% for fiscal year 2015/16.

These predictions of a recovery bode well for the retail sector. As the economy expanded in the half-decade leading up to the revolution, retailers thrived. According to a 2013 report on the retail sector by the American Chamber of Commerce (Amcham) in Egypt, between 2007 and 2011, retail sales increased at a compound annual growth rate (CAGR) of 14.2%, reaching $102.8bn. This upward trend was reflected in rising foreign interest in the sector around the same time. Online business publication “How we made it in Africa” reported that between 1999 and 2010, the number of international brands in the retail market rose from 25 to 360. Moreover, despite the uncertainty generated by the revolution, the number of foreign brands jumped to 430 in 2012. This suggests that the retail industry, unlike other sectors of the Egyptian economy during the political and economic instability of the post-revolution period, managed to weather the storm and emerge relatively unscathed.

Snacks & More

This is particularly evident in the food and grocery segment. According to “How we made it in Africa”, retail sales in the grocery sector increased by 7% in 2012 and a further 9% in 2013. Similarly, the snack food market has remained robust in the face of tightened consumer spending, with investment banking firm Renaissance Capital reporting that the snack food segment in Egypt is particularly pronounced, with the ability to target the low-income mass market.

Sales revenues from impulse-purchase food products reached $3.5bn in 2014, according to Renaissance Capital, which informed the press that segment spending stood well above comparable and more populous markets, such as Pakistan and Nigeria, where sales stood at $1.2bn and $1.6bn, respectively. As such, the firm remains bullish about this segment, saying: “We believe that over 60,000 fast food retail outlets ... large and medium-sized malls … and a young, spending population … make for a strong consumer growth story.”

With the economy beginning to pick up once more, retail sales across the board are expected to return to strong growth. Between 2013 and 2016, Amcham predicts sales to grow at a CAGR of 16.8%.

Despite this, the fallout from the revolution did have a negative impact on the consumer base. According to the IMF, unemployment in Egypt, which was already an issue in the years leading up to 2011, reached a peak of 13.4% in fiscal year 2013/14 and remained high in 2015.

The poverty rate also increased, hitting 26.3% in 2012/13 and bringing a further 20% of the population close to the poverty line. However, some indicators have shown a more positive performance. In 2013 the Central Agency for Public Mobilisation and Statistics reported an increase in average weekly salaries of 18.7% to LE761 ($104), which, although positive, illustrates the persistence of low income levels for the majority of Egyptians.

Consumer Confidence

A general sense of optimism that Egypt has turned a corner in terms of its recovery is a view that appears, at least to some extent, to be shared by the country’s consumers. The Consumer Confidence Index, a global report released by consumer trends and insights company Nielsen, stated that consumer confidence in Egypt increased by nine points to 90 in the second half of 2014. As the company’s baseline is 100, these figures suggest the persistence of some negative sentiment. However, the score is the highest the country has registered in more than two years.

The index remained stable in the first quarter of 2015, with Nielsen reporting a rise in confidence regarding job prospects, and a decrease in confidence in terms of personal finances and power of investment. In a statement accompanying the release of the index, Tamer El Araby, managing director of Nielsen for North Africa and Levant, concluded the following, “The jump in Egypt’s consumer confidence in the last two quarters of 2014 opened up possibilities of what could happen in the market. The next best thing to a rise in the confidence score is for it to remain stable. Moreover, the fact that the score is the highest it has been in over two years is a positive sign for the future.”

Price Points

Nonetheless, the market is not without its challenges. The effects of the 2011 revolution, as well as ongoing security concerns, have led to a drop in tourist and visitor figures, a weakened Egyptian pound, and a highly inflationary environment in general, all of which constrains activity. “You’re finding that people are spending more, not because of a rise in quantity, but rather because of inflation,” Yomna Sultan, associate director of consumer insights at Nielsen, told OBG.

At the end of 2014 news site Central Bank News reported that headline inflation in Egypt was at 10.1%, while core inflation was at 7.7%. This represented a softening in the rate, which had reached 11.8% in October 2014, on the back of school fee increases. The Central Bank of Egypt (CBE) intervened in July 2014 to curb inflation after government cuts in fuel subsidies led to a price increase. The CBE raised the overnight deposit rate by 100 basis points to 9.25%. Subsequently, between July and September 2014, the Egyptian pound dropped 0.43% in value against the US dollar. By December of the same year it had regained all of its value to stand at 0.1395 against the dollar.

Inflation Flux

In 2015 the inflation rate in Egypt fluctuated significantly. By July the headline rate reflected in the consumer price index (CPI) had dropped to 8.38%, its lowest rate since June 2014. The Egyptian pound lost 8.5% of its value against the dollar between December 2014 and July 2015. Many food and retail items saw a slight price increase in July 2015 compared to the previous month. Fresh vegetables rose by 0.84%, fish and seafood by 3.53% and retail items by 0.3%.

With the government working to accelerate fiscal consolidation through the removal of long-standing subsidies, further price rises are expected. In July 2014 fuel subsidies were reduced at a rate ranging from 40% to 80%. The government intervened again in July 2015, increasing the price of electricity by 21.2%, water by 14.3% and railway tickets by 10.7%. This contributed 0.71% to monthly headline inflation, according to the CBE. Also on the books is a new value-added tax.

Mohamed Farid, chairman of Dcode Economic and Financial Consulting, told press in April 2015, “The tax rate will range from 12.5% to 15%, which will create a huge impact on the inflation indicators. Additionally, inflation indicators are expected to increase by 2-3.5% once the law is applied, before inflation retreats to normal rates. Producers usually let consumers carry the burden of the tax cost.”

Traditional Trade

Despite a large population and impressive growth, the formal market in Egypt, targetable by international brands and investors, comprises just a small segment of the overall retail landscape. Traditional trade, on the other hand, dominates. Comprising small grocery stores and kiosks, Sultan told OBG that the segment “accounts for 90% of the market”. However, modern trade, such as malls and formal branded shops, is establishing a strong foothold in the market, growing 8-10% year on year, according to Nielsen.

“About 70% of our volume consists of low- and middle-class consumers,” Mandour explained to OBG. “While huge, this population is also more impacted by things like price increases and the reduction of fuel subsidies, which has indeed taken money out of their pockets and forced them to alter spending patterns.”

Furthermore, the breakdown shifts by region, with modern trade much more established in Cairo than in the rural areas of Upper Egypt. Consumers also shift between the two modes. “People resort to modern trade when it comes to bulk shopping,” Sultan told OBG. It is also clear that the higher income demographics, found mainly in Cairo and Alexandria, display a broader range of spending habits, and focus more on the products that modern trade offers. “For the apparel market,” Sultan told OBG, “it would be the high-end income bracket allocating budget for that rather than the masses.”

The prevailing sentiment in the market is that the formal sector, defined by higher purchasing power and broader segmentation, will continue to expand in the coming decade. According to Sultan, currently an average of about 50% of income is spent on food and groceries, but as purchasing power and social mobility increase, this should change.

And while accessing consumer finance remains a challenge, it has been on the increase. According to data released by the Central Bank, domestic credit to the household sector increased by 13.6% between June 2013 and June 2014, reaching LE145.3bn ($19.8bn). By May 2015, it had increased further to LE172.9bn ($23.4bn) INCOMING: Given these prospects and the basic underlying demand in the market, it is perhaps unsurprising that a number of retailers are eyeing market entry or expansion. “We do see more chains coming into the market,” Sultan told OBG. “A lot of Turkish brands are opening here, and some of the retailers from GCC countries are coming here as well.” This increased level of activity is at least partly driven by the fact that the local market is still under-served in terms of formal retail offerings. Although much of the foreign interest in Egypt remains in the grocery segment, the scope of retailers and franchise holders studying the market is certainly increasing. “Mid-size global brands are already here, encouraging high-end brands to follow. The average income is growing. The upper-middle segment has especially seen an increase, those in the LE20,000 ($2726) to 30,000 ($4089) bracket,” Bassem Nabil, general manager of Dandy Mega Mall, told OBG.

On The Rise

The plans that Kuwaiti retail franchise operator Alshaya has for the Egyptian market illustrate the potential operators see in the sector. Mohammed Abdul Aziz Alshaya, the executive chairman, told local press that the company, which currently holds the franchise for over 55 brands, including Starbucks, H&M, Debenhams, American Eagle Outfitters and Mothercare, intends to invest as much as $3bn in the Egyptian market in the next four years, with the majority of this capital directed towards the construction of a mega-mall.

Meanwhile, the Dubai-based retail and hospitality group Landmark told the media in October 2014 of its plan to open 20 new stores in Egypt in the next two years. The firm has operated in Egypt since 2009, when it purchased 150,000 sq metres of space in Alexandria City Centre mall. It shows no signs of slowing down in this market. According to Vipen Sethi, CEO of the group, Landmark is set to invest as much as Dh500m ($68.2m) in the sector, due to the improved political climate. “Egypt had its ups and downs with the new government coming in, and at that point in time we could not push is stability … we are looking to add new stores and expand,” Sethi told the press.

Another heavyweight from the UAE, Majid Al Futtaim, is also looking to invest substantial funds into the local retail market. According to media sources, the retail developer and supermarket franchise holder is planning LE18bn ($2.5bn) worth of expenditure within Egypt by 2019. The company’s chief executive, Alain Bejjani, told local press in March 2015, “Egypt is our second market and will see one of our largest expansions.”

In May 2015, it was announced that the Saudi Arabian grocery retailer, Azizia Panda United, a subsidiary of the Kingdom’s food processing giant, Savola Group, will open 16 supermarkets in Egypt over the next two years. Six of these will open in Cairo in the next 12 months, while the remaining 10 will open in other governorates, including Assiut, Alexandria and Mansoura, by 2017.

E-Commerce

As is the case in many emerging markets, given the general growth patterns in Egyptian retail – which includes a young population – the potential for online retail is strong. The country is, however, beginning from a low base. Market penetration of smartphones had reached just 23% by the second quarter of 2015, compared to 83% in the UAE and Qatar, according to data by the Groupe Speciale Mobile Association. Moreover, less than 5% of internet subscribers in Egypt make purchases online or use internet banking services, according to the Information Technology Industry Development Agency. Indeed, at the beginning of 2014, e-commerce only accounted for 0.3% of the country’s retail sales. Still, there are positive indications that the general environment necessary for online retail to flourish is being primed. Internet penetration in Egypt has more than doubled since 2011 and now approaches 40%, according to the press. As a result, several e-commerce firms are looking to position themselves for future growth.

According to Omar Elsahy, general manager in Egypt for Souq.com, an e-commerce firm, in late 2014 there were 142 e-commerce companies in Egypt. The majority of early successes in the industry are well-established regional players which have extended operations to the Egyptian market. As well as Souq.com, this includes Nefsak, Dubizzle and Eshtery, a virtual supermarket. One such success is Jumia, an online retailer of electronics, apparel and sports equipment founded by Rocket Internet of Germany that, by early 2014, had a 35% share in Egypt’s online retail market. A key component of its success was exploiting the growing and dedicated social media trend in the country. As much as 40% of Jumia’s site traffic comes via Facebook compared to 25% from advertising.

Outlook

The success of companies like Jumia is likely to be a sign of things to come. With a young and technologically literate population, many retailers are expecting to generate an increasing proportion of their sales online in the years to come. However, just as the same opportunities exist for online retailers as for their traditional counterparts, the same challenges also exist. In the short term at least, an uneven economic recovery compounded by long-standing issues surrounding subsidy reform, import dependence and inflation are likely to cause all retailers in the industry concern. While Egypt has a massive market in terms of population, spending power remains a limiting factor for many Egyptians.