Turkey: Expanding in retail

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As Turkey wraps up the 2012 Istanbul Shopping Fest, all eyes are on the country’s retail sector, which has earned the distinction of being the nation’s largest employer. While the festival was, at least in part, designed to draw in foreign visitors, the domestic market has seen plenty of growth as well, especially in rapidly developing segments like e-commerce.

According to a recent report issued by the Economic Policy Research Foundation of Turkey (TEPAV), retail is the sector with the highest level of employment in the country. With around 1.7m workers as of January 2012, the sector provides more jobs than the construction and transportation industries, which had 869,000 workers and 563,000 workers, respectively. Among retail employees, 422,000 worked in the clothing segment, 394,000 in textiles and 379,000 in food production.

These figures are not surprising in light of retail’s demonstrable growth in the past year. One key indicator of this is the sector’s robust performance in the capital markets. Turkish retail stocks have been rallying since the start of 2012. Food and beverage segments in particular have made significant gains. Ülker, a Turkish food manufacturer, traded at 15 times its estimated earnings for 2012. Another shining star in retail is Coca-Cola İçecek (CCI). According to Morgan Stanley Research, CCI is one of the fastest-growing Coca-Cola bottlers globally, with nearly 70% of its revenue coming from domestic sales.

According to a 2012 report by CBRE, a global real estate services firm, Turkey ranked 14th out of 70 countries for its attractiveness to international retailers. The research – which tracked 326 top global retailers in 200 cities – showed that Turkey attracted 39% of the brands surveyed. It also found that in Istanbul, the country’s most populous city, 48.1% of the European retailers included in the study were present.

Sector growth has been bolstered by a number of key developments, such as the expansion of e-commerce. According to the Interbank Card Centre, online Turkish retail transactions grew to TL22bn ($12.05bn) in 2011, a 57% increase over the previous year. The companies leading this segment include Markafoni – the world’s second most-visited, members-only shopping network – and Trendyol, an online retail site. Markafoni, which lists eBay and Amazon among its investors, grew by 60% last year, while Trendyol’s revenues hit $100m less than 18 months after launching.

This growth has had a significant impact on job creation in Turkey. Employment in the e-commerce segment tripled in the first eight months of 2011, while labour demand grew 200%, rendering e-commerce the fastest-growing sector with respect to employment in the same time period.

The country is taking notice of the growth potential in retail and has launched some important initiatives to ensure the sector grows sustainably. At the beginning of 2012, a law to regulate wholesale produce distribution markets, or hal, went into effect. Prepared within the framework of the EU harmonisation process, the law mandates that all produce in wholesale markets bear product identification. This is meant to ensure that produce is traceable to its source, thus assuring quality. According to Hayati Yazıcı, the Customs and trade minister, the regulation will bring about innovations and promote access to safe and healthy produce, as well as significantly reduce the TL15bn ($8.22bn) in annual losses from unregistered sales.

Another initiative is the Istanbul Shopping Fest. Now in its second year, the 21-day retail event hopes to attract shoppers to the city and the country to promote the products and services of hundreds of retailers. At least 1m consumers were expected to take advantage of the massive discounts and deals during the shopping festival, which kicked off on June 9. Stores were open until late at night, while a number of performances, parties and concerts were scheduled to attract more shoppers. Retailers anticipated a turnover of TL7bn ($3.83bn) during the festival.

Although retail’s ascent is supported by encouraging demographic factors, such as a large young, tech-savvy population, and steady investments − particularly in retail real estate − some concerns have arisen. One such concern is the security of online transactions; with a rate of 4.5%, Turkey has the highest incidence of e-commerce fraud in Europe.

Other concerns have to do with the economy at large. The country’s GDP growth rate is expected to drop to 2.3% this year, according to IMF forecasts. A widening current account deficit, as well as Turkey’s continued, albeit lessening, dependence on trade with the economically troubled EU – some 40% of Turkish exports go to the EU – highlights the potential risks for the country’s economy. There are also concerns that growth is happening too rapidly – both in the retail sector and more broadly – and that too much “hot money” is flooding the country.

These challenges need to be confronted in order to fully realise the potential of Turkey’s retail sector. Growth needs to be promoted, yet scrutinised, and regulations need to be thoughtfully crafted to ensure long-term benefits for the country. Still, with its attractiveness to international brands, high level of home-grown entrepreneurship, and – perhaps most importantly—its massive job creation potential, there is cause to be optimistic.

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