Consumer spending patterns shift as the country returns to stability

A large and growing population, restored economic growth and low penetration all make Egypt’s retail market a strong prospect for investors. Household retail spending was worth about $90.3bn in 2013, according to the General Authority for Investment and Free Zones (GAFI), a state agency, and is expected to keep rising at a steady clip over the next few years. Modern retail outlets are taking an increasing share of the market, benefitting from an expansion in dedicated commercial space, although traditional retailers – and indeed the informal sector – will continue to take a large portion of Egyptians’ spending.

After The Revolution

The retail sector has been affected by the instability of the past few years, and by the resulting slower economic growth. This came after the global financial crisis of 2008-09, which Egypt weathered fairly well but which still trimmed GDP and income growth. As a result, at the start of 2014, a handful of retail real estate developments were delayed, while consumer spending patterns shifted away from discretionary items at the lower quintiles of income. “The economic slowdown is leading to changes in consumer behaviour in Egypt, and price is regularly valued over quality,” Mahmoud Bdeir, CEO of Sipes, an Egyptian paint company, told OBG.

The impact of lower spending is uneven across sectors. The drops are larger in automotive purchases, for example, while in fast-moving consumer goods (FMCGs) the effect has been more modest. Hani Berzi, chairman and CEO of Edita Food Industries, one of Egypt’s leading FMCG firms, told OBG, “By and large Egyptians still choose quality over affordability, but spending has become more selective.” He adds that FMCG companies would be better able to understand consumer habits if data collection and management improved – a common concern in many sectors.

Demographics

Egypt’s population is around 90m, the biggest in the MENA region. Some 32% are under15s, indicating the market’s long-term growth potential, while nearly a third are ages 20-39, the range deemed central to driving household retail spending. The young population – a growing number of them middle-class and aspirational consumers – is increasingly seeking out modern retail and established international and domestic brands. These young shoppers, many of them with higher disposable incomes than their parents, are key to the long-term potential of retailers selling non-essential goods. By 2018, GAFI expects there to be 23m households in the country, with a compound annual growth rate of 3.4%, the agency said in its retail report from January 2014.

Increased female participation in the workforce, which rose from 20.2% in 2005 to 23.6% in 2012 according to the UN, is also changing household spending patterns. This will boost disposable income and support growth and changing dynamics in grocery shopping as families with both parents in employment begin to look for quicker, more convenient ways to purchase and prepare food. The “everything under one roof” model of hypermarkets and malls should therefore benefit, as should outlets that sell quick-prep meals – these will often be modern retailers rather than traditional stores. Egypt’s retail market is less saturated than many in the Middle East, such as Saudi Arabia and the UAE.

Such demographic points are good news for Egypt’s future growth prospects, as they allow retailers and manufacturers to use the market as something of a testing ground for new goods. “Egypt’s population size allows companies to test products locally before retailing them elsewhere,” Amir Riad, vice-chairman of Bavaria Fire Fighting Solutions, an Egyptian firm that specialises in fire fighting equipment, told OBG.

Market Structure

Although the trends point to increasing modernisation and consolidation, for now the Egyptian retail market – like those of many emerging markets and, indeed, some in the developed world – remains fragmented. Its small, informal stores account for roughly 98% of total commercial activity. Many Egyptians shop at both modern outlets and traditional stores – buying, say, staples at local shops but groceries at hypermarkets, or going to malls for electronics but to traditional outlets for jewellery. Because they attract the low- and middle-income shoppers who make up the vast bulk of the market, small, independent shops are likely to remain a major part of the retail scene in the short to medium term.

However, the market share of modern retail is growing as customers increasingly switch to modern outlets. This trend has accelerated due to the expansion of mass grocery retail in particular – expansion which has been catalysed by pro-business reforms, especially since 2004. Reductions in tariffs and Customs duties, the lifting of a ban on garment imports, lower taxes and a wave of privatisations have led more foreign retailers from France, Germany, the UAE and as far away as South Africa to enter the market, even as Egyptian retailers continue to expand.

Formal retailing makes up only about 2% of total retail trade, while just 8.6% of the food and beverages (F&B) market goes through mass retailers, according to KPMG. The consultancy attributed this partly to the relatively limited expansion of modern retail chains, saying that few retailers operate more than five outlets in Egypt. The food retail segment in particular is hugely fragmented and competitive, due to both the large number of players and the price-sensitivity and awareness of the market.

KPMG estimates that there are more than 500,000 F&B retailers in throughout the country, but that only a few are true mass retailers. Many are small corner shops or tiny street stalls, particularly in crowded urban areas. As a result, the scope for international and local chains to enter the country, or grow their existing presence there, is substantial.

Modern retailers and traditional shops compete on two fronts: with one another in the formal sector, and with the country’s large informal sector. “The market share of small neighbourhood outlets is undoubtedly beginning to decline as the modern retail sector grows and A-to-B customers start to shift,” Naguib Abadir, chairman of the National Agricultural Chemical Industrial Trading Agency, an automotive and logistics firm, told OBG. “But the informal sector has become an uncontrolled giant, with counterfeit products playing a large role, predominantly with small retail items like car batteries, tyres and accessories.”

Economic Outlook

Economic prospects and socio-economic shifts are both grounds for cautious optimism. On balance, Egypt remains a low- to low-middle income country, and even its stellar economic growth in the 2000s did not deliver jobs and rising incomes to all, if partly because of population growth. Average weekly salaries were LE761 ($108) per head in 2013, according to Egypt’s Central Agency for Public Mobilisation and Statistics (CAPMAS). Meanwhile, some 40% of Egyptians still live on less than $2 a day. Population growth is around 1.5% a year, eroding some of the benefits from GDP expansion, which has slowed in recent years. Unemployment officially stands at just over 13%, but the real figure may be higher.

All the same, the middle class and its disposable income have been growing, and are likely to continue to do so in the medium to long term despite the disruptions of the global economic crisis and Egypt’s 2011 revolution. As of 2013, average net household income stood at $9250, according to GAFI, with 80% of households earning over $5000 and 24% earning over $10,000. By 2018, GAFI expects 72% of households to be in the middle-income category. This should lift household spending on non-essentials such as furnishings, home appliances, communications, personal care and grooming, and clothing and footwear – though the latter to a lower extent, GAFI forecasts.

GDP growth hit 3.7% in the second quarter of 2014, up from 2.5% in the previous quarter, part of a continued rise towards the long-term growth trend. Before the financial crisis, GDP was growing at 7% a year despite structural constraints, suggesting that, if reforms are implemented, growth could be even faster.

Inflation

One of the biggest downside risks to retailers in Egypt is high inflation. Rising prices erode real wages and thus reduce disposable income. Price instability also puts off investors. According to CAPMAS, in September 2014 Egypt’s annual headline inflation rate was 11.1%, down from 11.4% the previous month but still rather high. This has naturally had a significant effect on purchasing power and thus the retail sector. “There has been a cutback on large expenditures with the inflation being so high, and the purchasing power has become more selective,” Mahmoud Bazan, managing director of Hero Middle East and Africa, told OBG.

The Central Bank of Egypt (CBE) has been trying to balance the desire to rein in prices and maintain exchange rate stability with supporting the recovery of economic growth. In July 2014 it raised interest rates to curb inflation, partly driven by reductions in utilities subsidies as the government moved to tackle its yawning budget deficit. In the short term, inflation was expected to keep on rising as the impact of subsidy cuts continued to feed into the real economy. However, these effects should moderate with time.

Exchange Rate Risk

Retailers have also faced risks due to currency fluctuations, capital controls and higher import duties. The Egyptian pound weakened considerably in the wake of the revolution, despite the CBE’s attempts to shore it up with currency market interventions. A weakening currency naturally affects retailers, especially those dealing in imported products. In Egypt, this has pushed up prices, as have higher duties, while capital controls have made it harder to pay for imports. “Some imported discretionary product items have suffered duty increases of up to 70%, which has translated into higher prices and lower demand,” Ahmed Samir Elsayad, CEO of biscuit manufacturer Bisco Misr, told OBG.

Retail Segments

The Egyptian retail sector covers a wide range of outlets, from department stores, supermarkets and hypermarkets to chains, franchises and consumer electronics. Omar Effendi, a department store chain founded in 1856 and once one of Egypt’s top retail brands, has had a difficult last few years. Originally state-owned, it was privatised in 2006 but then faced a long, drawn-out court case that challenged the legality of the deal. All 82 branches were renationalised after a 2013 ruling by the Supreme Administrative Court. Other local department store chains – Shemla, Benzion, Cicurel and others – have been increasingly displaced by foreign brands such as the UK’s Debenhams, which opened stores in Alexandria (2010) and Cairo (November 2014), and Marks & Spencer, which opened outlets in those cities in 2012 and 2010, respectively.

The multinational retail chains, which often cater to the higher income brackets in Egyptian society, have seen more resilient performance through the slowdown of recent years than the middle-market segment, most likely because the wealthiest Egyptians have not seen their disposable incomes fall. “Luxury stores are performing well,” Mohamed Abo El Yazid, the managing director of Citystars, a mall in Cairo, told OBG. “High-end brands, especially multinationals, are among the most successful retailers.”

Super Markets

The growth of supermarkets and hypermarkets has been constrained by lack of space and mobility in urban areas. The large footprint required for modern grocery retailers is rarely manageable in central urban areas without clear forecasting data – which is difficult to come by. As a result, stores are generally located on the periphery of major urban neighbourhoods, leaving them out of reach for the large proportion of potential customers who do not have the time or means for commuter shopping – particularly given that public transport is also limited.

Another damper on sales is prices, which are often higher at supermarkets and hypermarkets than at small, local shops. This is particularly so in the informal sector, which has less regulatory cost to bear – again limiting the scope for market growth. “Sales are hindered by the fact that the majority of Egyptians cannot afford to buy supermarket produce or take advantage of bulk offers such as three-for-two promotions, as they cannot afford the initial prices,” GAFI said. Such constraints have posed challenges for new entrants in the past. South African firm Shoprite entered the market in 2001 with seven stores but withdrew in 2006, cancelling plans for 100 new outlets. The firm blamed “restrictions on free trade” for the annual losses of $50m it had been incurring. Shoprite’s pull-out followed that of UK supermarket chain Sainsbury’s in 2001, two years after its entry.

However, confidence in the segment’s outlook is apparent from the expansion of major international players. France’s Carrefour, the world’s fourth largest retailer, entered Egypt in 2002 and now runs a network of hypermarkets, supermarkets and express shops in partnership with UAE-based Majid Al Futtaim (MAF). By the end of 2014, it aims to be operating 17 hypermarkets and 70 supermarkets in the country.

Mansour Group is another major operator in the sector, owning both the Metro supermarket chain and Kheir Zaman discount store chain. Metro operates more than 40 24-hour supermarkets across 10 cities, making it the country’s largest supermarket chain, while Kheir Zaman operates around 30 outlets. “That local customers in Egypt have heterogeneous consumer patterns similar to Western markets makes Egypt a significant market for F&B companies in particular,” Ludovic Bertrand, general manager for North and East Africa at dairy firm Bel Group, told OBG.

Discount Markets

Several budget supermarkets are also active in grocery retail. While the domestic operators in this segment are well-established, foreign firms are entering as well. Turkish discounter BIM opened its first outlet in Egypt in April 2013, and aims to open 30 more a year for five years, starting in the capital then expanding into Alexandria and the Delta region. BIM’s entry followed the launch of a new discount supermarket chain called Zad in July 2012 by Egyptian businessman Saad El Shater.

The chain began business with the opening of 15 stores, all of them located in Nasr City in eastern Cairo, and reportedly intended to open another 2500 stores across the country within five years. However, due to political instability following the revolution, its expansion plans appear to have halted.

Electronics Segment

Although supermarkets, hypermarkets, and department stores commonly offer them as well, Egypt’s biggest chain for consumer electronics is Radio Shack. Having launched operations in Egypt in 1998, the US retailer – which among other things sells computers, cameras, audio equipment, and computer and video games – now has 21 outlets in Cairo and several more branches in Alexandria, Port Said, Giza, Sharm El Sheikh and Hurghada. In the household appliances segment, the chain B.TECH is a leader, with 58 branches and service centres throughout the country, selling brands like Sony, Ariston, Philips, Electrolux, and Daewoo.

Consumer electronics firms are upbeat about the outlook, given the relatively under-penetrated market and rising demand, particularly from tech-savvy youth. Corporate and government take-up of ICT is also likely to rise steadily in the coming years (see Telecoms & IT chapter), supporting demand and benefitting wholesalers especially. The mobile web is also on the rise, as prices for both hardware and access fall, so sales of tablets and smartphones will likely be an area with potential.

Among the biggest threats to this market is the sale of counterfeit and second-hand hardware, some of it imported illegally. According to Intel, sector leaders want to see the government take more action to curb the import and sale of substandard computers and other equipment, which it says crimps market growth and damages the sector’s reputation.

Food Franchises

Franchising, especially in the food and beverage sector, has been one of the fastest-growing retail segments in recent years. It is of key importance to malls, driving footfall and providing a sizeable chunk of income. GAFI estimates the food franchise sector to be worth more than $300m, with potential to expand further. Foreign chains in Egypt include McDonald’s, Pizza Hut, TGI Friday’s, Chili’s, KFC, Starbucks and Baskin Robbins; local ones include GAD restaurants and sandwich chain Mo’men.

According to the US State Department’s 2012 “Country Commercial Guide for Egypt”, the portion of the population that is “brand-conscious” is around 5m (about 6% of the country’s 85m). The number of franchise concepts in the country is an estimated 460, of which around three-quarters were local. Total franchising sales in 2012 were about $2.5bn, the guide said, of which around $700m comes from food franchises. According to GAFI, the franchise sector is likely to grow by 10-20% a year over the next few years.

Retail Real Estate

In November 2013, the 168,000-sq-metre Cairo Festival City Mall opened its doors – the first of a number of large-scale retail projects to come onto the market in the wake of Egypt’s turbulent post-revolution years. Developed by Al Futtaim Group Real Estate Egypt, the mall had been expected to open by the end of 2010 but was set back by a dispute over land. Its opening is indicative of growing confidence in the market’s stability and medium-term outlook. According to a spokesman for the mall’s developer, 80% of the mall’s space had been pre-leased. Tenants include Egypt’s first outlet of Swedish home furnishing chain Ikea; a 10,755-sqmetre Carrefour hypermarket; the country’s biggest Marks & Spencer; the region’s largest “edutainment” centre from KidZania, a Mexican family entertainment company; and more than 300 other shops and 95 F&B outlets. Located in the centre of Cairo Festival City – a 3m-sq-metre development in New Cairo with residential, office, leisure and social services – the new mall has a catchment area of more than 8m people in the capital city, Al Fuattim said.

Cairo’s supply of modern retail real estate has continued to grow since the revolution, despite political uncertainty and economic difficulty. Gross leasable area (GLA), at 762,000 sq metres in 2011 and 836,000 in 2012, had reached 1.1m sq metres at the end of 2013 and 1.2m sq metres by mid-2014, according to a report on the city by international real estate firm JLL. Vacancy rates, however, have remained high, standing at 25% in mid-2014, the same level as a year before, JLL reports. This indicates that some of the less successful mall developments – those without attractive anchor tenants, or with a poor retail mix or location – are finding it hard to gain occupants. “Some of the mixed-use developments are struggling to attract high-end brand retailers and can only manage to get mid-end brands,” Mohamed El Mikawi, managing director of Al Futtaim Group Real Estate, Egypt, told OBG. But with demand on the rise, JLL expects vacancy rates to fall, even as supply rises.

Demand for retail real estate has recovered through 2014, supported by the improving political and economic climate. Retail rents averaged $720-$1380 per sq metre as of mid-2014, JLL said, generally on par with earlier in the year. But the real estate firm also noted that some “prime” malls had increased asking rent prices due to both the entrance of new brands and to existing retailers’ desire to upgrade to malls with the best access, parking space and security.

Among the projects coming onto the Egyptian market is the Porto Cairo Mall in New Cairo, where development has gathered pace in recent years. Many of the units leased early on in the mall’s opening have been taken by F&B brands. By the end of 2014, another 380,000 sq metres of retail space (in GLA terms) are set to open in Cairo, notably the Madinaty Mega Mall (104,000 sq metres) and the Mirage Mall (43,000 sq metres) in New Cairo. In the pipeline are another 297,000 sq metres of GLA for 2015 and 313,000 sq metres for 2016, indicating investor confidence – supply will almost double between mid-2014 and end-2016. MAF expects to invest around $2.3bn in Egypt in the coming years, as its CEO, Iyad Malas, told the press in January 2014. The company already operates more than 20 large supermarkets in Egypt and plans to open its “supra-regional” Mall of Egypt in 6th of October City in the west of Cairo in 2015, at a total cost of $800m and with 162,500 sq metres of GLA.

Outlook

Egypt’s retail market has continued to expand despite the economic and political challenges of the past few years, though consumer spending patterns have shifted in some areas toward lower-cost goods. Now that the country is on a sounder footing, the sector is returning to stronger growth, and a more vigorous recovery is likely to benefit modern retailers in particular, which should flourish as incomes grow. With large amounts of retail stock coming onto the market, factors like location, brand mix, strong anchors and differentiation will become more important.

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The Report: Egypt 2014

Industry & Retail chapter from The Report: Egypt 2014

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