Egyptian retail continues to expand and adapt to changing trends

With a population of nearly 100m, expanding by roughly 2m every year, Egypt remains a sizeable market for retailers and fast-moving consumer goods manufacturers. This has sustained a number of large domestic producers and attracted global heavyweights to the market. However, economic instability and the devaluation of the pound has brought new challenges and a need for the sector to adapt to remain competitive. Modern retail areas are nevertheless expanding, and customers are increasingly interested in interacting with retailers through new technologies, bringing new opportunities for the sector to expand in order to cater to changing consumer trends.

Sector Weight

According to Lebanon-based Bank Audi, wholesale and retail trade accounted for 13.8% of GDP in 2018, making it the second-largest sector after manufacturing. The market has seen the expansion of modern distribution areas, shopping malls and luxury offers, showing the country’s retail potential across all segments. Much of the sector’s growth has been driven by the agro-industrial and processing segments.

As of 2018 there were over 7000 food production units operating in Egypt, according to a report by the US Foreign Agricultural Service. These producers reached combined sales of around $22.2bn that year. The report highlighted the “positive results on macroeconomic stability” brought by the policy reforms introduced in 2016, and predicted that demand for food and beverages will rise in the coming years and online retailers will continue to increase in popularity.

Despite this, political conditions continue to affect the sector’s international standing. In 2017 the country failed to make consultancy firm AT Kearney’s Global Retail Development Index due to “substantial political risk”. According to the report, Egypt met the “minimum requirements for attractiveness, saturation and time pressure”, but did not make the rankings as it failed the global risk test. Nevertheless, the report stated that political risk may not affect regional or local companies that are more familiar with the business environment, and the sector shows potential for further expansion.

In the 2016 index, however, Egypt ranked 30th out of the top-30 markets in terms of sector potential. AT Kearney classified Egypt as an “opening” market, as it entered the rankings for the first time in 2016. In the report, an opening market is defined as one in which the middle class is expanding, consumers are exploring organised formats and the government is beginning to enforce a more relaxed regulatory framework.

While the 2017 edition does not include detailed coverage on Egypt, the 2016 edition notes total retail sales of around $133bn, which were projected to double in value by 2021. The report underlined the country’s potential to offer a “medium to long-term value proposition for retail investments”, due to the market’s low level of saturation, as well as its large population and expanding middle class. Despite the potential for retailers to grow in the Egyptian market, some current difficulties might prove to be obstacles for future entrants into the market. Chief among them is the risk to consumer spending caused by inflation, subsidy reduction and the flotation of the pound in late 2016. The report also mentioned the potential disruption that security threats could pose to the tourism industry. Other difficulties faced by sector players are the high level of bureaucracy to set up bricks-and-mortar sales points and the large degree of market fragmentation.

New Retail Options

Nevertheless, retail space development has continued to progress over recent years. According to figures by JLL, a real estate consultancy, retail gross leasable area in Cairo rose from 1.4m sq metres in 2014 to 1.9m sq metres by the third quarter of 2018. The projected addition of 252,000 sq metres before the end of 2018 and an additional 289,000 sq metres during 2019 is expected to raise the city’s retail area to more than 2.4m sq metres by 2020. In May 2018 the government passed the Shopping Centres Act, which eases legislation for the establishment of more new malls, encouraging the amount of retail space to expand even further.

Mall of Egypt

New shopping malls have also recently entered the fray. In 2017 UAE retail operator Majid Al Futtaim inaugurated its $722m Mall of Egypt in 6th of October City in the outskirts of Cairo, which has a total area of 455,500 sq metres.

The same promoter is in charge of another mall, the LE4bn ($224.8m) City Centre Almaza, due to open in 2019 in Heliopolis. The new shopping area is expected to have almost 103,500 sq metres of retail space, with 23 restaurants, a food court and 300 brand stores. In addition, the mall is set to house a 13,000-sq-metre Carrefour supermarket and a cinema.

The Long Run

Although the economic setting has at times brought challenges, several large-scale international producers of fast-moving consumer goods (FMCGs) remain interested in investing in Egypt, underlining the importance of the Middle East’s largest market in terms of population for retailers. Many companies have expanded local production in recent years. For example, Coca-Cola announced that it would invest $500m between 2014 and 2017 to increase its manufacturing capacity in the country.

Investments included the establishing of a $100m juice manufacturing plant through a joint-venture agreement with Saudi Arabian Aujan Coca-Cola Beverages Company, the expansion of capacity at an existing concentrate production unit and the construction of a new drinks factory. In 2014 Saudi-based Almarai also announced it would invest $345m in Egypt to build a new juice manufacturing plant and dairy farm, as well as the necessary sales infrastructure.

The investment was to take place over the following five years, centred around one of its subsidiaries, the International Company for Agro-Industrial Projects, which it owns as part of a joint-venture agreement with US drinks giant PepsiCo. Saudi firm Makkah Industrial and Trade, part of the Mahmood Saed Group, announced in 2017 it would establish a new $4.4m cheese and milk factory in Egypt. In January 2019 Nestlé also opened a new 12,740-sq-metre coffee factory in 6th of October City, the third factory the company has opened in Egypt, with a LE250m ($14.1m) investment.

“There is a lot of opportunity on the manufacturing side, and Egypt is already a centre for FMCGs in Africa, Europe and the Gulf Cooperation Council. This is thanks to its geographic location, supply of qualified labour and low costs. However, import charges and subsidy cuts continue to pose a challenge for the sector,” Tamer Younes, head of corporate affairs at Procter & Gamble Egypt told OBG. Despite the sometimes stringent regulation and recent economic instability, the country still presents a host of opportunities, both for manufacturers wanting to serve the local market, as to those aiming to expand regionally.

Distribution

Expanding production capacity has opened up new opportunities to ease distribution links between producers and customers. Modern distribution stores have increasingly become a vehicle for international retailers to enter the Egyptian market, which is still largely fragmented.

Over 80% of the distribution market is handled by small-scale grocery stores, which are located in most neighbourhoods and focus on convenience. As many as 115,000 traditional grocery shops still operate across Egypt. In recent years their convenience-based model has also been adopted by some modern retailers. Kazyon, a chain of grocery stores, had 182 outlets across the country as of 2017, while another operator, Turkey-based BIM, has opened 256 stores targeting the same market segment. Because of the attractiveness of Egypt’s retail market, smaller operators are increasingly contending with global distribution players. In February 2018 Majid Al Futtaim, which handles the Carrefour franchise in countries across the MENA region, announced plans to expand the French brand’s footprint across Egypt. As of early 2018 the group managed 37 Carrefour supermarkets across the country and is planning to open an additional 100 stores over the coming years.

Although the market is becoming more competitive, a number of unexplored areas across the country present new opportunities. In February 2019 the government signed an agreement with UAE-headquartered department store LuLu, under which the chain will invest $500m to open four hypermarkets across the country, to be built across the next two years. LuLu plans to spend an additional LE15bn ($843m) to establish new outlets in Egypt. The chairman of LuLu Group, Yusuff Ali, told local media that the hypermarkets will “provide food at low and competitive prices”, and create 40,000 direct and indirect jobs.

Spending Limitations

Because of the economic challenges that Egypt has faced, new retailers have encountered a sometimes difficult operating environment. Notably, in late 2016 value-added tax (VAT) was introduced at 13%, and in 2017 this was extended to 14%. “Despite the positive impact of recent reforms on the macroeconomic climate, the biggest challenge to consumer-facing businesses has been the significant decrease in consumer purchasing power from the combined pressures of devaluation, inflation, the introduction of VAT and subsidy cuts,” Wael Ghandour, chair of Awa Food Solutions, told OBG.

Despite opposition from real estate developers and other businesses impacted by the measure, in November 2017 the Ministry of Finance extended the scope of VAT to cover real estate leases. The measure is impacting retail, educational organisations, sports clubs, hotels, resorts and factories.

With rentals of stores in shopping malls and other retail areas subject to VAT, retail operations are likely to become more costly in the coming years. In some cases, these added costs may be transferred to the customer. The economic instability of recent years has also brought difficulties for industrial and commercial operators. Retailers and manufacturers had to deal with the difficulty of accessing foreign currency.

This economic instability created obstacles for planning of future activities, as well the managing of day-to-day operations, such as the payment of imported inputs. “Access to foreign exchange was a big problem for the industrial sector, but the problem has certainly improved post-devaluation of the pound,” Ahmed Hazem Maher, vice-president for research at investment bank EFG Hermes, told OBG.

Online Commerce

New digital shopping opportunities might allow retailers to circumvent the difficulties of bricks-and-mortar expansion. As an increasing share of the population has access to internet services, especially with high smartphone penetration rates in the country, the competitive landscape for online commerce platforms has been expanding rapidly.

Mobile services penetration in Egypt was at 101.6% in December 2018, according to figures from the Ministry of Communications and Information Technology. Although this is a decrease compared to 104.6% in the second quarter of 2018, the number of Egyptians regularly using internet services reached around 42m, and the number of mobile internet subscriptions rose to 35.1m at the end of 2018, compared to 32.8m at the end of the previous year (see ICT chapter).

Although adequate estimates are difficult to obtain, a 2015 report by online payment gateway PayFort projected online sales in Egypt to expand from $1.4bn in 2014 to as much as $2.7bn by 2020. Like many other emerging online commerce markets, tourism — and particularly the ability to book plane tickets online — is expected to act as a critical driver of online shopping behaviour. By 2020 online acquisition of tourism services and products is expected to account for $1.3bn, up from $870m in 2014, according to PayFort.

However, informality and low levels of banking penetration can act as a deterrent for the online sector to grow. According to estimates by Hesham Safwat, Egypt CEO of online commerce platform Jumia, only between 5% and 8% of the country’s internet users have ever made an online acquisition. Realising the nature of the market conditions, Jumia and other online retailers, such as the regional player Souq, allow for cash payments upon delivery.

State Tenders

Some opportunities are also arising for private operators to service the public sector. In late 2018 the government was looking for a private supermarket chain to operate some of the government’s subsidised goods stores.

In January 2019 it was announced that Egyptian supermarkets HyperOne and Seoudi, and Carrefour had won tenders issued by the Ministry of Supply and Internal Trading to develop seven retail complexes in Cairo, Alexandria, Giza and Qena.

The increased involvement of the private sector in the supermarkets segment is part of a broader government plan to reform the legal framework for the distribution of subsidised food. In July 2018 the House of Representatives announced that it was reviewing and unifying different regulations governing subsidised food distribution in order to establish a universal law.

Outlook

That the retail sector in Egypt has been able to progress over recent years, even during difficult economic conditions, is a testament to the country’s potential. However, difficulties related to inflation and the reduction in disposable incomes are likely to remain variables for the sector to contend with.

This might push retailers and FMCG firms to more agilely adapt to market conditions. Inflation in particular is likely to remain a threat over the coming years, and this will require sector players to adequately tailor their price policies and marketing strategies to remain relevant amid changing economic circumstances.

Increasing internet usage, especially among younger demographics, is not only elevating the profile of online shopping platforms, but also moving the competitiveness of traditional retail spaces online, as an increasing number of sector players take advantage of the dissemination of social media as a promotional vehicle.