Egypt: The rise of retail

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Over the greater part of the last decade, Egypt’s retail sector has undergone a transformation while increasing its importance in the national economy. Indeed, the resiliency that the sector displayed throughout the global downturn was partly due to strong domestic demand and growing consumer spending habits.

Since government-enacted reforms in 2004 the retail sector’s contribution to GDP grew steadily from LE56.4bn ($9.67bn) in 2005 to LE113.7bn ($19.48bn) in 2009, and is expected to reach LE147.8bn ($25.33bn) in 2010. However, despite the substantial advances made in the marketplace, there is an under-supply of retail space.

Currently, much of the Egyptian retail market is comprised of small, local shops. This fact, combined with its vast, growing population, has made Egypt an attractive destination for international retailers. Egypt boasts the largest population in the Arab world at around 83m, while its growth rate remains high, at 1.8%, according to World Bank statistics from 2009. As a result Egypt’s consumer base is growing at an estimated 2% per year as its young population and rising middle class continue to drive the development of the sector.

Indeed, the growing number of retail malls and centres herald a market on the rise. The $800m City Stars, the country’s largest retail space with 150,000 sq metres, opened in 2004 and attracted over 22m customers in its first year. The UAE-based Al Futtaim group plans to open its own mixed-use retail space in 2012, Cairo Festival City, which will encompass 160,000 sq metres of leasable space for retail and leisure. Other retail centres such as the Dandy Mega Mall and Maadi City Centre have also emerged in recent years.

Business-friendly reforms have had a significant impact on attracting international brands to shopping centres via reductions in tariffs and customs, tax cuts and privatisations. A prime example of this is the UK’s Marks & Spencer, which opened in December 2010, while Ikea, the Swedish furniture giant, also announced its entrance into the Egyptian market in April of 2010 by leasing space for its first store in the upcoming Cairo Festival City. Spanish firms Zara and Mango, along with numerous other internationally recognised brands, have also made their way into the growing mall segment.

Grocery chains and hypermarkets have also taken advantage of the country’s changing consumer landscape as Carrefour, Spinneys, and the locally owned Hyper One brand have all launched stores. “Egypt is a very attractive market for retailers due to its large, growing population. We are also seeing a great deal of socio-economic movement as a result of the country’s economic growth,” Hervé Majidier, Carrefour’s country head, told OBG.

Egypt’s young middle class, armed with increasing purchasing power, is also slowly changing consumer spending habits, and modern retail models, such as e-commerce and buying on credit, are becoming ever more popular.

While credit card expenditure is on the rise, total levels remain relatively low at present. Plastic is becoming more widely accepted, however, and consumer use of credit lines is also growing more sophisticated. According to Tarek Elhousseiny, general manager of Visa for North and West Africa, “Consumer mentality on spending has matured recently in Egypt. One of the signs is the steady growth in credit card penetration, as well as the fact that we have seen the ratio between total spending and open balances grow at a lower rate, i.e. consumers are not maximising lines of credit.”

E-commerce has also begun to emerge as a viable retail outlet in the country, contributing nearly $2.1bn, including bill payments, to retail sales in 2009. While the country remains a largely cash-based society, a much greater shift toward online sales is expected.

According to Omar Soudodi, general manager of leading e-commerce site souq.com, “The first movers in the Egyptian e-commerce market have generally been under the age of 35, as the youth of Egypt has been exposed to technology at an early age. However, with time we are seeing the average age increase and expect e-commerce to continue its strong upward growth trend.”

Despite the vast potential for growth in virtually all retail segments, there are still concerns for investors such as the country’s uncertain political future, high logistics costs, unnecessary red tape and, perhaps most importantly, the country’s double-digit inflation. According to government statistics the urban consumer price inflation fell to 10.2% year-on-year in November 2010 from 11% in October – which is the lowest in 15 months. Prices of food and beverages, which account for 44% of Egypt’s price basket, fell to 17.1% in November from 19.9% in October.

With an easing of inflationary pressure, ongoing reforms from a business-friendly government and a likely increase in spending ahead of the upcoming presidential elections, the main constraints on growth could very well be out of the equation by the second half of 2011, clearing the way for continued expansion in the local retail sector.

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