Rising incomes encouraging retailers in Morocco to expand online and outside major cities

 

As average incomes expand along with Morocco’s middle class, the retail sector is seeing a rising number of opportunities for development. Large-scale outlets have become the norm in several of the kingdom’s major cities, and while less-formal commerce still accounts for a large proportion of sales, the movement towards modern retail is underpinned by stable economic fundamentals that are expected to continue over the long term.

It is exactly the country’s political and economic stability that has made it increasingly attractive for international retail brands. Another potential avenue of growth comes from the rising level of IT usage, which is opening the door for online retail platforms to convince more Moroccans to conduct at least some of their buying activity online.

URBAN VERSUS RURAL: However, sector operators still face a series of challenges. Despite the fact that the country’s population of more than 34m people represents an attractive potential market for new brands and products, 45% of Moroccans still live in rural areas, where purchasing power is generally lower than in the cities. Furthermore, distribution in these areas can be much more challenging, with transport infrastructure there still lagging behind that of the bigger urban centres.

In these rural areas, low penetration of modern retail options, such as supermarkets and hypermarkets, restricts the level of access to new brands and product categories. As modern retail saturates available opportunities for growth in the largest cities, medium-sized and smaller urban centres, such as Larache, Beni Mellal and Al Hoceima, are increasingly seen as a promising segment to expand into.

SPREADING OUT: Retail has become an important component of the Moroccan economy. Sector growth has been supported by a handful of relevant changes in the country’s economic and social fabric. First, the rise in urbanisation levels has led to expansion in the kingdom’s cities, which now account for around half of the population.

Second, the rise in the country’s GDP per capita from $1322 to $2833 between 2000 and 2016, according to World Bank figures, has increased the number of Moroccans with disposable income. This has translated into demand for modern retail areas, the introduction of international lifestyle and clothing brands, and a profusion of franchise food chains and other entertainment options.

Technology also plays an increasingly important role in the development of Morocco’s retail sector. Modern electronic payment systems have expanded considerably over the past decade, in hand with the development of the domestic banking sector. An estimated 11m bank cards were in circulation in 2015, with this figure expected to increase by a compound annual growth rate of 11% during the 2015-20 period. Furthermore, the dissemination of banking cards, in conjunction with rising internet penetration levels, are strengthening the case for expansion of online retail and alternative payment systems such as Islamic banking.

FIGURES: The retail sector’s weight in the economy has been expanding considerably, with the Moroccan Investment Development and Export Agency (Agence Marocaine de Développement des Investissements et des Exportations, AMDIE) estimating that it now accounts for 11% of GDP. Retail employment represents 12.8% of total employment, with as many as 1.2m people working in the sector.

The 2017 Global Retail Development Index, published by US consulting firm AT Kearney, ranked Morocco seventh out of 30 countries in the category of attractiveness for retail development, seven places up from 14th in the 2016 index. The country fared better than its closest neighbours, Algeria and Tunisia, which ranked 14th and 24th, respectively, and even ranked higher than well-established retail markets Saudi Arabia and Jordan, at 11th and 15th, respectively. The highest-ranked countries in the MENA region were Turkey and the UAE, which were in fourth and fifth place, respectively.

The report also highlighted several of the elements that make the kingdom’s retail sector attractive, including economic macro-stability and a growing middle class. Total retail sales in Morocco increased by 13% in 2016 to $40bn, according to AT Kearney. The 2017 report also noted that the country’s popularity as a tourism destination is another advantage for the sector. Furthermore, the government’s plan to introduce mobile-to-mobile payments for both the retail and utilities sectors will create opportunities for online retail.

POLICY: Understanding the role that the sector already plays in the economy, the Moroccan authorities have developed a plan to accelerate retail expansion across the kingdom.

The Rawaj Vision 2020 programme, which was launched in 2007 by the Ministry of Trade, Industry and Digital Economy – now the Ministry of Industry, Trade, Investment and Digital Economy – aims to help formalise retail operations, and improve logistics and distribution.

In line with the plan, the government’s goal is for modern, formalised retail to account for some 30% of all commerce by 2020. The plan included the establishment of a commerce fund to support informal traders to organise or relocate to specific areas in cities. According to AMDIE, the fund allocated Dh200m (€18.5m) annually between 2009 and 2012.

Besides the role of strengthening the sector’s contribution to the economy and employment, implementation of Rawaj Vision 2020 is also framed as a move towards formalisation of commerce. “The Rawaj plan is also in full process of being implemented, even though more emphasis should be placed on the integration of the informal sector,” Hakim Marrakchi, general manager at Maghreb Industries, told OBG. “The problem for industrialists is less of an informal one for production, but rather an informal one related to distribution.”

With the large majority of retail still in the hands of informal operators and small-scale businesses, the authorities see formalisation efforts as a mechanism to not only improve tax collection and development, but as a way to secure a more comprehensive offering for consumers. “The traditional retail segment is very resilient, though commodity prices dropped,” Kamal Khalis, deputy CEO of Marjane Holding, told OBG. “However, there is a tendency in Morocco to think that the word modern means expensive. So-called modern supermarkets were not able to create a reliable supply chain model, which explains why the traditional segment still prevails.” Under Rawaj Vision 2020 the government hopes that the advantages of hygiene control for fresh produce, for example, and traceability of product origin will reach a larger proportion of the Moroccan population.

MALL EXPANSION: The development of modern shopping malls has been accelerating since the mid-2000s, and although the country’s larger cities now have several malls, a rapid multiplication in the number of new projects has underlined the need for more organic growth that accompanies the still relatively slow increase in disposable incomes. As a result, excessive offerings in cities such as Rabat have made new large-scale retail projects less profitable. “The same cake is having to be distributed by more and more players, as new malls are coming on-line, but the rise in consumers is not growing as fast. This creates difficulties for new projects. Everybody does the same type of thing,” Malik El Harim, general manager at Mega Mall in Rabat, told OBG.

Growing demand for known international brands, coupled with improved incomes and modern retail outlets, has attracted major clothing franchises to the Moroccan market. Most of these brands begin operations through agreements with local partners, which in most cases can have the franchising rights for several brands in a specific sector.

International players such as Zara, Massimo Dutti, Timberland and Gucci now populate Morocco’s clothing and luxury retailing markets, balancing their presence between a rising number of modern shopping malls and stand-alone stores in high-end neighbourhoods of Morocco’s main cities, such as Casablanca and Rabat. This trend has changed the buying habits of Moroccans through increased convenience and local offerings.

“The arrival of modern shopping malls and international clothing brands has brought a change to consumer behaviour. Before, Moroccan consumers would go outside of the country to buy; they would take trips to Spain and France looking for these brands. Now they are here,” El Harim told OBG.

RETAIL SPACE: Modern shopping areas are also increasingly attractive to the growing number of tourists arriving in Morocco. Casablanca’s Dh2bn (€185.2m) Morocco Mall, for example, gets 10% of its sales from African and Asian shoppers visiting the kingdom, according to local media reports. The mall was considered the continent’s largest when it opened in 2011. With local partners owning the rights to countrywide franchises, investors opening new retail outlets in both shopping malls and on the street are the same across all cities in Morocco.

However, the multiplication of locations has begun to pose commercial challenges. “The problem is that locations become too close to one another. So, franchise owners cannot multiply their earnings; they are only dividing them throughout several stores. It is beneficial for the consumer, but not necessarily for the franchise owner,” El Harim told OBG.

This might limit the rate at which new brands in sectors such as clothing and luxury items enter the Moroccan market over the coming years. “The rationale for brands to expand their retail networks is limited by the concentration of potential customers in certain areas,” Selma Belkhayat, managing director at Aswaq Management Services Morocco, told OBG. “In some cases, the cost of having that extra store is not worth it in terms of the added sales it can potentially bring to the operator.”

BALANCE: Another challenge is the mismatch between large-volume areas where retailers can be exposed to many potential buyers and the spending power of the population. “The areas of our bigger cities that concentrate large volumes of people are generally inhabited by lower-income groups. When you go to middle-income areas, the transit volumes are less significant. Most purchasing occurs during a specific time of day, so it is a challenge for retailers to keep their store busy all day,” Belkhayat told OBG.

Restaurant franchises are becoming not only increasingly appealing for Moroccans, but may be able to avoid the problem of over-concentration. In March 2017 one of the largest pizza delivery franchises in the world, US-based Papa John’s, began operating in Morocco, opening a restaurant in Casablanca. The new unit was established under an agreement with Moroccan firm Planet Pizza, which will be in charge of expanding the brand in the country. The group has announced a target of eventually opening 20 locations across the kingdom.

REIT: The commercial real estate sector is likely to get an injection of capital from a recent change in regulation. In 2015 Moroccan authorities enacted new laws that provided a framework for the establishment of real estate investment trusts (REITs).

As a result, retail distributor Label’Vie Group is aiming to establish Morocco’s first REIT, Vecteur LV, in order to manage its retail areas around the country. In March 2017 Vecteur LV announced that it would merge with another real estate managing platform, Petra, which has a portfolio that includes a number of shopping malls across the kingdom. The new REIT would have a combined portfolio of 27 venues with a total of approximately 215,000 sq metres of retail space under the trust’s management.

However, attracting financing for new infrastructure that will be needed to support the retail sector might also require a change of mentality in the banking sector. Not only have the troubles of the real estate segment in previous years dampened the willingness of finance providers to increase sector exposure, but the current structures for finance allocation at Moroccan banks are more geared towards real estate construction than the development of rent-based commercial developments.

MODERN DISTRIBUTION: Due to a culture of in-house entertainment and socialisation, Morocco’s food retailing segment remains one of the most dynamic components of the sector.

The industry has undergone a fair amount of change with the quick expansion of large-scale supermarket chains, which represent an important addition to the country’s large and medium-sized cities in recent times. Despite the modernisation push and growing offerings, small stores still accounted for around 80% of grocery shopping in Morocco in 2016, according to figures from a report by the US Department of Agriculture’s Global Agricultural Information Network (GAIN).

However, the report also stated that by 2025 modern supermarkets could account for as much as 30% of food retailing in the country. Larger cities have attracted the majority of hyper and supermarkets, with Casablanca, Rabat and the surrounding areas accounting for around 50% of modern supermarkets in the kingdom, according to the GAIN report.

The number of modern grocery retailing outlets in Morocco has been increasing rapidly. Between 2011 and 2016 the number of hypermarkets rose from 45 to 67, and the number of supermarkets grew from 252 to 316, according to Euromonitor and GAIN. Despite this, the same period also saw a slight uptick in the number of traditional grocery retailers, from 235,898 to 240,569.

As in other countries, large super and hypermarkets in Morocco have also become efficient ways to centralise retailers and services, either by being the anchor point of larger shopping malls or by setting aside connected commercial spaces for stores and restaurants. In some areas, especially medium-sized cities, these types of retail areas have become attractive spaces for families to spend free time.

According to GAIN, modern grocery retail areas in the kingdom generally have between 10 and 25 other stores or restaurants in the same area. Expenditure levels at Moroccan supermarkets average between Dh100 (€9.26) and Dh110 (€10.19), according to GAIN, with consumers prioritising the purchase of staple commodities, such as flour and sugar, followed by fruit and vegetables, dairy and, lastly, more costly products such as fish and meat.

PLAYERS: A handful of large-scale distributors are increasingly opening new stores across Morocco. According to 2016 figures from GAIN, the market is dominated by Marjane, which is owned by Morocco’s Société Nationale d’Investissement. The firm runs 38 Marjane hypermarkets and 40 stores under the Acima brand, which typically operates small supermarkets with about six cashier lanes.

The second-largest retail distributor in the market is HLV SAS, which operates under the Label’Vie brand name. The group is the result of a partnership between Morocco’s Label’Vie and French retailer Carrefour. Overall, the structure manages 47 Carrefour markets, seven Carrefour hypermarkets and 11 Atacadao wholesale stores. Another important player in the Moroccan market is Turkey’s BIM, which runs hard discount stores and had 300 locations in 2016. Aswak Essalam, which is 100% Moroccan owned, also operates 15 supermarkets in the kingdom’s main cities. In 2016 Marjane had a 22% market share, followed by Label’Vie with 15%.

SMALL FISH: Prioritising expansion in the largest cities has put modern retail distributors in the country’s main economic centres, where disposable incomes are higher, and where consumers will have greater inclination to look for choice and the imported goods that most modern chains carry.

The challenge for the foreseeable future, however, will be how to extend the concept of modern retail into smaller urban areas. In recent years the market’s biggest retailers have increasingly expanded into medium-sized cities such as Larache, Beni Mellal, Fquih Ben Salah, Taza, Al Hoceima and El Kalaat des Sraghna, according to GAIN.

Moving into smaller cities has also allowed retailing groups to more easily access land plots for new stores. Availability of land has become an especially acute problem in the larger cities, especially for hypermarkets, which normally involve the establishment of associated retail spaces and, in some cases, up to 1000 parking spaces.

Expansion of modern retail will also be dependent on the modern distribution segment’s capacity to capture new sections of the population. Branding more accessible products under retailers’ names, a practice common in more mature modern distribution markets, has been a way to attract lower-income Moroccans, who are used to buying in their local corner shops, into modern retail stores.

Promotions, financed through the large groups’ economies of scale, have been another method used to attract new buyers. According to GAIN, only 10-15% of Moroccans regularly buy imported products. Another likely way for larger chains to grow is to use their brand names in smaller, neighbourhood-oriented operations. Label’Vie, for example, already operates several smaller stores that effectively act as corner shops, serving a well-defined consumer base in the immediate area.

ONLINE RETAILING: On the other side of the spectrum, and sometimes in conjunction with brick-and-mortar operations, a handful of online retailers are accounting for a growing segment of the market. The strong base for the rise of online retailing in the kingdom has been established by increasing internet usage. According to the National Agency for Telecommunications Regulation (Agence Nationale de Réglementation des Télécommunications, ANRT), the number of internet connections in Morocco rose from 14.48m in the first quarter of 2016 to 18.26m in the first quarter of 2017, while the internet penetration rate stood at 53.94%. As of March 2017, 92.96% of internet connections were mobile links, according to ANRT figures.

As in many markets where online commerce is expanding, security worries continue to deter faster adoption. To counter this, grocery delivery platforms, as well as online delivery websites from existing supermarket chains, allow for direct payment on delivery, which has helped to support the growth of online grocery shopping in Morocco.

REGULATION: Renting retail space will likely become a more attractive proposition for owners with the implementation of new real estate regulations.

A new law passed in early 2017 will make it easier for property owners to reclaim control of their property following delayed rent payments or the cessation of the activity for which it was leased. The legislature addresses a problem that had long troubled owners of retail space, who sometimes faced lengthy judicial processes in order to get their property back from non-compliant renters.

“The new regulation has provided more confidence in the sector and real estate owners,” Belkhayat told OBG. “Furthermore, it  regulates some of the challenges previously faced in commercial leases but excludes shopping centres from its scope of application to allow more flexibility in their management,” she added.

OUTLOOK: Retail operations have been growing significantly in Morocco. As the kingdom becomes more and more integrated with the international economy, consumers will also demand an expanding number of retail options and experiences.

This will present both challenges and opportunities for retail space developers, as well as for investors aiming to represent international brands in Morocco. Although modern malls have certainly showed that they have a market in the country, the model through which future growth is likely to come is still uncertain, as larger cities show a certain level of saturation in terms of shopping malls. Matching new retail products with the specificities of the Moroccan market will be critical.

Modern retail distribution is slowly gaining ground in the kingdom, and although traditional grocery shopping accounts for the majority of the sector, Rawaj Vision 2020 is likely to push for further formalisation, and equally importantly, for improved quality standards across the board.

With these conditions in mind, the outlook suggests that the retail sector in Morocco is expected to continue to see growth over the coming years.

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The Report: Morocco 2018

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