How retailers in Egypt are meeting e-commerce demand

 

Egypt’s retail industry benefits from a growing population, affluent middle class and openness to new retail options. Although the currency devaluation in 2016 initially affected business via downward pressure on consumer purchasing power, spending resumed in 2018 and is expected to stabilise further when unemployment and inflation levels balance.

While high-income consumers contributed to the sector in terms of value per purchase, low- and middle-income consumers – who are more likely to buy local brands – purchased in greater volumes. According to the US Department of Agriculture (USDA), growth in Egypt’s hotel, restaurant and retail food sectors is expected to reach 15-20% by 2021. However, the spread of the Covid-19 pandemic in the first half of 2020 had a negative impact on Egypt’s markets and will likely cause retail to experience slower-than-anticipated growth in the short term. The Egyptian government has taken steps to try to offset repercussions on the economy, such as raising online payment limits; increasing tax exemptions; and supporting the informal employee sector. Meanwhile, in the first half of the year e-commerce expanded as more people made purchases online instead of visiting brick-and-mortar stores.

Performance & Size

In 2019 Egypt’s wholesale and retail trade sector comprised 13.7% of GDP – a 0.1% contraction from the previous year. Much of that activity came from foreign investment projects and local construction expansion plans for retail spaces. According to JLL, the sector reached 2.1m sq metres of retail gross leasable area (GLA) in the third quarter of 2019. New market entrants led to higher footfall and increased retail rents by 21%.

Given the rapid expansion of e-commerce, retail spaces have begun developing their online platforms as well as enhancing physical spaces with entertainment options, and food and beverages. Many brands are holding back on investing in physical retail space – instead opting for a pop-up store concept to test demand and market accessibility in advance.

In December 2019 Dubai-based retail operator Majid Al Futtaim opened the City Centre Almaza mall in Cairo – part of its LE23bn ($1.4bn) investment plan for the country. The opening added 104,000 sq metres of retail GLA to Egypt’s retail sector. Majid Al Futtaim also owns 11 Carrefour hypermarkets located throughout the country, which were visited by a total of 23m shoppers in 2019. In April 2019 the company announced plans to add 120 retail stores, entertainment options and restaurants across a 22,000-sq-metre expansion to Cairo Festival City mall. In November 2019 Amr Hassan, head of the ready-made clothes division in the Cairo Chamber of Commerce, told local media that the division had plans to open an LE3bn ($184.8m) mall in 2020. Around 75% of costs will be covered by the private sector, while the remainder will be provided by manufacturers. The project is in line with Egypt’s aim to expand its textiles and ready-made garments sector.

In terms of demand, consumer confidence dropped from 90 points in the third quarter of 2019 to 89 points in the fourth quarter. With the impact of Covid-19 it may continue to decline in the short term.

Foreign Investment

In August 2019 the Egyptian government signed an agreement with UAE-headquartered retailer LuLu to invest $500m in Egypt. The contract covers four hypermarkets that were slated for completion by August 2020; however, this deadline may be delayed due to the Covid-19 pandemic. Upon completion, the hypermarkets will be managed by LuLu. Under the agreement the company will also open a number of mini-markets and supermarkets, expected to be located primarily in Cairo. LuLu has also been in discussion with the government regarding entering the wholesale vegetables and fruits market, as well as possibly launching a logistics centre, as part of its expansion plans in the country. LuLu’s investments are expected to provide 8000 sustainable local jobs.

In July 2019 South Africa-based Investec Asset Management purchased a controlling stake in Spinneys Egypt – a major grocery retailer in the country – to help expand the chain’s store offerings and boost overall growth. The acquisition marks Investec’s first private equity investment in Egypt.

In October 2019 Carrefour announced plans to invest roughly LE500m ($30.8m) in Egypt throughout 2020. The investment will cover the opening of three new hypermarkets and 24 additional supermarkets, adding to the 47 branches already in operation in the country. Carrefour will also work with Egypt’s Internal Trade Development Authority to establish a logistics centre to aid its expansion plans. The centre is set to be built on around 11 ha of land.

In early 2020 Alexandria-headquartered trading company Al Alamia announced an LE2.5bn ($154.1m) partnership with an undisclosed Saudi company to launch a retail chain in Egypt. Planned product offerings include retail items such as cosmetics, household goods and furniture.

Agro-Industry & Processing

Growth in Egypt’s retail sector has also been bolstered by its agro-industrial and food processing activity. This activity is largely driven by the government’s focus on increasing food processing ingredients and products to enhance the sector and boost its exports.

According to the General Authority for Investment and Free Zones (GAFI), which is affiliated with the Ministry of Investment and International Cooperation, dairy imports have decreased since the currency depreciation. However, this is also a result of increased domestic production. Given the resumed appreciation of the Egyptian pound and changing dietary habits in the country, GAFI anticipates that cheese and butter production will continue to grow. Moreover, economic recovery is expected to encourage more consumers to buy higher-quality packaged milk products. In 2019 Egypt’s private equity firm Qalaa Holdings announced a $24m investment in Dina Farms – making it the country’s largest producer of fresh milk. In July 2019 Ahmed Hiekal, chairman of Dina Farms, told local media that the funds will go towards increasing milk production, installing solar plants at the farms and expanding planted areas. The company controls 70% of Egypt’s fresh milk market through its subsidiary ICDP. Meanwhile, Egypt-headquartered cheesemaker Obourland is targeting exports – with a goal of $5m by 2023 – driving growth through its juice products.

Sugar production and consumption is also expected to continue to rise until 2023. A growing population and increased purchasing power – stimulated by economic recovery – are expected to drive demand for sugar-based products such as soft drinks, confectionery and chocolate.

A number of international companies and multinationals have invested in Egypt’s retail sector, contributing to foreign direct investment and boosting overall development. For example, a $300m deal between Russia’s agro-industrial holdings firm EFKO and Egypt’s processing and packaging company United Oil was announced in October 2019. The joint venture is expected to become the largest fat and oil producer in North Africa, aiming to distribute bottled vegetable oil and food ingredients in markets across southern Europe, North Africa and the Middle East.

E-Commerce

As with other markets around the world, Egypt’s retail and real estate sector is preparing for further disruption caused by the e-commerce segment. Brick-and-mortar stores without an online presence have had to rapidly expand their leisure and entertainment offerings to offer customers enriched in-person experiences.

The country’s e-commerce penetration of total retail sales is 2.5% and the segment is expected to grow at a rate of 33% annually, to approximately $3bn by 2022. The largest categories are electronics and beauty, and groceries are growing at the fastest pace. With the unfolding Covid-19 pandemic and social-distancing directives from governments worldwide, more consumers are turning to online shopping for their purchases, presenting a significant opportunity for the e-commerce space.

One of the key drivers of e-commerce in Egypt is the fast-moving consumer goods (FMCG) and groceries segment. Customers have increasingly turned to online platforms – such as Egypt-based grocery start-up GoodsMart – to get their groceries delivered while social-distancing measures are in place and the opening hours of many stores are reduced. In March 2020 Amr Fawzi, founder and CEO of Goodsmart, told local media that the company’s orders had tripled in the wake of the pandemic. Start-ups in the country are working to meet consumer demand in the space – including mobile platforms, as many consumers prefer to shop online. For example, in October 2019 Jumia – a Nigeria-based e-commerce platform that is a major player in the Egyptian market – announced plans to build a technology centre in Egypt to support its online payment service, JumiaPay. The centre will support training and employment in the sector. With the Covid-19 pandemic causing a number of retail stores to close their physical locations in the short term, retailers are increasingly turning to e-commerce to cater to this new reality. Jumia reported receiving an overflow of applications as vendors look for ways to boost their businesses.

Other e-commerce platforms are leveraging consumer trends during Covid-19 and appealing to the Egyptian government to support e-commerce growth. In April 2020 Mostafa Hendawy, general manager for Egypt at Saudi Arabia’s Noon, told local media that the sector helps improve digital connectivity and financial inclusion. He added that e-commerce provides a space for small and medium-sized enterprises to remain solvent when the impact of the Covid-19 pandemic may otherwise cause them to close down. Noon has one customer fulfilment centre in Cairo and has plans for five more centres to streamline services in the country.

The e-commerce space in Egypt is also attracting a number of local start-ups. In mid-2019 Trolley – a Cairo-based grocery delivery web and mobile platform – announced $200,000 in seed funding. The start-up operates with a warehouse of groceries as well as partnerships with local chains to offer two-hour delivery in Cairo and Giza. According to Trolley, it fulfils more than 400 orders per month – approximately 30% of which came from its own warehouse. The company plans to expand to three more governorates in the near future.

MaxAB is another Egyptian start-up targeting the country’s promising $45bn FMCG market. The company aims to connect local informal food and grocery retailers to brands and suppliers. The platform features more than 600 products, and leverages data and analytics to help companies in the sector understand consumer preferences and behaviour. In September 2019 MaxAB closed a $6.2m seed round – one of the largest ever by an Egyptian start-up. With goods shortages and supply chain disruptions due to Covid-19, local start-ups like MaxAB are able to step in to fill some of the demand and expand their footprint in the market. The number of customers using the company’s app has doubled since the onset of the pandemic, whereas previously many preferred to place orders on the phone or directly through a company representative.

Challenges

Traditionally, consumer preference for cash on delivery has been a major challenge to e-commerce growth throughout Egypt and the Middle East. This preference has changed due to the spread of Covid-19, but it remains to be seen whether purchasing behaviours will be affected long term. Shipping times are also a challenge for the sector. At the end of 2019 Egypt Post signed an agreement with German company DHL Express to develop services to ensure faster, more efficient shipping from Egypt to the rest of the continent. The agreement is in line with the country’s goal to position itself as a leading logistics and e-commerce centre in Africa. Internet connectivity also remains a potential challenge to expansion, with penetration at around 48% as of March 2020.

Outlook

As smartphone and internet penetration continues to improve, e-commerce will likely remain on a path of strong, sustained growth. The gradual stabilisation of consumer purchasing power and development of logistics and payments infrastructure are also likely to contribute to this trend.

The global spread of the Covid-19 pandemic revealed a significant opportunity for Egypt to further develop its e-commerce sector, and improve its logistics and warehouse capacity. As growing numbers of customers shift their shopping habits and become increasingly accustomed to taking advantage of online retail options, this may present an insight into trends in a post-Covid-19 world.

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The Report: Egypt 2020

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