With a population of close to 90m, Egypt is the biggest consumer market in the MENA region and one of the largest emerging markets in the world. While average incomes are still fairly low – Egypt’s GDP per capita, according to the World Bank, reached $3314 in 2013 – the country presents a huge opportunity for manufacturers of fast-moving consumer goods (FMCGs). FMCGs encompass packaged goods that tend to be low in price and sold quickly, including soft drinks, processed food, toiletries, over-the-counter pharmaceuticals and other consumables. Because they are usually staples, and affordable, demand tends to be more resilient to economic fluctuations than for discretionary items.
Many international FMCG manufacturers such as Unilever, Kraft, Danone and Nestlé have established local production facilities in Egypt to capitalise on the large and growing domestic market. In addition, they often use Egypt as a base for exporting to the wider region and beyond, for which the country has advantages including a low cost base, government incentives for investment, and a local supply of inputs such as sugar and other agricultural products.
Moving Into Positive
FMCG producers reported a drop in demand and disruptions to production in late summer 2013. Tamer El Araby, the managing director of market information and research firm Nielsen for Egypt and the Levant, said that Egyptian consumer confidence had been fluctuating from one quarter to another over the past few years, in response to the country’s ongoing political, social and economic changes and occasional outbreaks of violence since the revolution in January 2011.
Furthermore, local manufacturers and distributors were directly affected by the instability, with industrial action and government-imposed curfews resulting in delays and driving up costs. “The curfew that was imposed in 2013 affected the industry terribly. It had a negative impact on the distribution cycles, making them shorter,” Omar Mandour, CEO of CocaCola Egypt, said. “Companies had fewer hours than normal to deliver their products.”
However, the market has improved since then, particularly following the presidential elections in early 2014. Consumer sentiment moved back into positive territory within months, while the country’s greater political and fiscal stability has supported the recovery. “Egyptians’ faith for a better tomorrow is big. Despite challenges, the country is moving ahead with a high level of optimism and dedication,” El Araby told the media. Executives in the FMCG sector who spoke to OBG generally agreed that the outlook is positive, though downside risks and limits on potential growth undoubtedly exist.
“The FMCG sector has a gigantic market – every year 1m new Egyptians are added to the workforce,” Ahmed El Sheikh, senior vice-president and general manager of PepsiCo Egypt, said. “The sector seems to be seeing the light at the end of the tunnel after two years of reforms. The country has the potential to rebound and grow at 7% for five to six years.”
Investment
A testament to the continuing appeal of the sector’s investment potential was the March 2014 announcement by Coca-Cola that it would be investing $500m in Egypt to boost its production base, as well as to increase spending on community projects, over the coming three years. The US-based company forecasts both higher domestic demand in Egypt and increasing exports from the country, from which it already ships to 40 nations. Mandour told OBG the company continued to see growth in the country’s beverage industry, led by his firm and rival Pepsi. Carbonated drinks sales have been growing at 8-10% per year, Mandour said, though the juice market is growing even more quickly, at 10-12%, while bottled water sales have been surging by 15-20% a year. The latter can be attributed to water shortages that have forced more people to buy bottled water, as well as growing awareness about the greater cleanliness of mineral water over tap water, which is not always reliable in Egypt. In addition, milk sales are also on the rise – a phenomenon that ties into the wider expansion of the country’s dairy industry. According to Ludovic Bertrand, general manager for the Northeast Africa region at Bel Group, a French-owned dairy product company, the consumer market is divided into two large groups, one comprised of roughly 16m people with higher purchasing power, and another that includes the rest of the population. “Such market segmentation pushes dairy companies to have a diverse product portfolio,” Bertrand told OBG.
Price Sensitivity
While Coca-Cola is upbeat about the outlook, there are a number of caveats. Mandour, for example, notes that the market is becoming less quality-driven, as consumes become more price-conscious, perhaps due to Egypt’s slower economic growth. Consumers are switching from quality products – which would include those produced by the likes of Coca-Cola and Pepsi – to lower-value brands.
“Quality is no longer a priority,” he told OBG. “Brands of lesser value of carbonated soft drinks have grown between 45% and 60% in 2013. Therefore, those in the sector that are offering more value for less are the ones performing best. This is a trend that will continue to be seen in the short to mid term.”
He says that the FMCG market has been driven by the middle classes, who have been particularly hard hit by the political turbulence of the past few years, and that consumers are still somewhat sceptical about the outlook. Even without the fluctuations of the past few years, Egypt fundamentally remains a low- to low-middle income market. According to the official Central Agency for Public Mobilisation and Statistics (CAPMAS), just over a quarter of Egyptians live below the poverty line. This means that many families struggle to afford even the most basic of necessities, let alone non-essential consumer goods.
“FMCG remains price-sensitive. The main challenge is to find the right balance between integrating production costs while maintaining an affordable price for customers,” Henri de l’Epine, managing director of Danone Egypt, told OBG.
Poverty is particularly high in some pockets of the country. While unemployment officially hovers around 13%, it reportedly rises as high as 50% in Upper Egypt. Youth unemployment is significantly above the average, and young people are a natural market for many FMCGs, not least soft drinks. However, even relative poverty does not necessarily price consumers out of the FMCG market. “A large proportion of Egyptians are below the poverty line,” PepsiCo’s El Sheikh told OBG. “Therefore, companies in the FMCG industry need to come up with products for everyone. There is a need to address value and quality.”
One of the issues that FMCG manufacturers face in Egypt is that much of the food and beverage sector exists in the informal economy, whether from small restaurants or street stalls. Indeed, linked to the market trend towards value, the informal segment grew considerably more quickly than the formal one did in both 2012 and 2013.
This adds to another challenge: data collection and management. It is sometimes hard for FMCG firms to know exactly where their products end up, and thus which segments are performing more strongly than others. Better data collection would allow companies, and the government, to improve planning. Finally, the availability of skilled labour can be an issue, and the industry would benefit from developing more targeted, skills-based training.
Potential
With these caveats taken into account, Mandour says that, for an investor with the correct strategy, the market has tremendous potential. He sees a number of niches as particularly promising, including the juice business, which despite its recent growth is “far from reaching its full potential”. In addition, some dairy niches are also under-developed, as are value-added beverages, the top end of the market, appealing to consumers who may not have had their incomes or confidence as affected by the past few years’ turbulence as others. “Egypt offers great opportunities, but it’s all about having the right tools,” Mandour said. “Those willing to take risks at this time will have more to gain in the long run.”
The most fundamental factors determining the outlook for the FMCG sector are the country’s population and broader economic growth trends. In both areas, Egypt shows undeniably strong upsides. This is a huge market, and if it can return to its pre-revolution growth rate, or even somewhat below, the FMCG sector is well placed to benefit. The changes that have taken place in market dynamics in the wake of the revolution may not be long-lasting, provided political stability remains, middle-class wages start growing again and the class as a whole expands as a proportion of the population. This, however, may bring new challenges and opportunities for the industry as businesses will need to differentiate in a competitive market and develop niches in which there is growing demand. While quality and innovation will be important, prices are likely to remain a key factor.
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