Egypt: Outlook for Retailing in North Africa’s Most Populous Country

A month after Tunisia’s Jasmine Revolution, the Egyptians succeeded in ousting their beleaguered president Hosni Mubarak in February 2011. As in Tunisia, the following weeks and months revolved around the ongoing struggle between government systems, with the army’s influence on internal politics facing growing criticism.

The revolution led to a contraction in the Egyptian economy, with the country’s GDP declining by 8% in the first quarter of 2011. Retailing growth was flat but concealed very different trends by channel.

Grocery retailing growth reached 5% in value terms. Although positive compared to developed market growth rates, this was half the figure seen in 2010. The most adversely affected channel was electronics and appliance specialist retailers which recorded an 11% decline as looting, supply shortages and consumers cutting back on spending all combined to restrict sales growth during the year.

Beyond retailing, business activity was critically impacted. Foreign investors initially pleased by the change were deterred by the protracted instability. The dismantling of the once-fearsome security system encouraged looting and the destruction of property in the first half of the year.

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Source: Euromonitor International from Countries & Consumers Quarterly Data

Looting of retail stores a temporary blow

Store-based retailers were directly impacted by the riots as shop owners were forced to shut stores for fear of attacks. Delays at airports and docks disrupted supply chains and led to product shortages in some supermarkets. Damage caused to retail stores was mainly driven by poverty and opportunism but, unlike Tunisia, the popular outcry at big retailers’ alleged collusion with the regime was not heard on Egyptian streets.

Among the international retailers operating in Egypt, Carrefour’s hypermarkets and Metro’s cash-and-carry stores were looted in January and February 2011 but quickly resumed normal operations a month later. Majid Al Futtaim, Carrefour’s franchisee in Egypt, runs shopping centres in Cairo and Alexandria and although both were temporarily closed in January 2011 after being looted, they re-opened a few weeks later as security improved.

A highly polarised retail landscape

Despite the slowdown chained retailers did not pay too heavy a price for the country’s transition to democracy, and among the top five grocery chains sales were up in 2011. This was due to their stores being more prominent in upmarket and suburban areas which were less affected by the riots.

Large-scale retailers cater mainly for the upper-income population while the majority of consumers shop at independent small grocers, open markets and street vendors as they are embedded in the local culture and can be found in every neighbourhood. Even the largest chained retailers usually operate less than 100 stores each countrywide, which, for a population of 80 million, represents an underwhelming penetration. In 2011, the country had only 609 supermarkets and 10 hypermarkets.

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Source: Euromonitor International

Egypt is a country of contrasts, with the most westernised supermarkets and the most traditional traders existing side by side. Mansour Group, for example, the country’s largest retailer by value, is well ahead of the multi -channel and convenience trends. The company offers online shopping and also home deliveries to its customers within Greater Cairo.

Most chained retailers allow their clients to order their groceries by phone and have them delivered to their home where they can pay either by cash or credit card. This was particularly convenient for customers who avoided going out because of the insecurity on the streets. It also helped non-store retailing better resist the downturn and grow by 20% in 2011.

Foreign retailers not deterred by post-revolution Egypt

Although a painful one, Egypt’s transition towards democracy was on track by mid-2011 and parliamentary elections were organised for January 2012. Compared with Syria’s bloody crackdown on protesters and Libya’s growing tensions between the forces which defeated Gaddafi’s regime, investors kept a positive eye on Egypt’s future potential.

The end of the Mubarak era was welcomed with optimism as companies saw in it the end of state corruption, prospects of improved governance and a more open society, leading to a more conducive business environment. Being the most populous Arab country and with strong GDP growth over the past five years, Egypt remains the main attraction in North Africa for retailers, despite the risks.

Local and foreign retailers have no shortage of new investment scheduled for 2012 and beyond. Majid al Futtaim is planning to open a new 160,000 sq m shopping centre in Cairo in 2014 to bolster its presence in the market. Building on the strong brand awareness among the young urban population, international apparel retailers The Gap and Sonae entered the still troubled country during the summer of 2011 and expect to rapidly expand their store networks in the short term.

Both apparel retailers could lean on the support from their powerful Saudi franchisee Fawaz Al Hokair Group (turnover of US$1.3 billion in 2008) to access prime retail locations in the country. Al Hokair Group owns the prestigious Mall of Arabia in the western suburbs of Cairo and this is where The Gap and Sonae’s Zippy stores were opened. Given the prominence of Middle Eastern franchise operators in Egypt, it seems logical for international players to enter the country through a franchise agreement, especially as it remains politically risky.

Metro Group’s management has also announced new openings financed by a US$400 million investment over the next four years. The company’s initial move into Egypt was motivated by its booming tourism industry and the growing demand from horeca operators and also small-scale retailers. Regardless of the staggering economy in 2011 and probably 2012, Fawaz Al Hokair Group and Metro Group’s investments, among others, underline retailers’ confidence in Egypt’s long-term ability to generate strong sales growth.

Long-term prospects are good but a deteriorating financial situation will affect short-term growth

There are a number of challenges facing the Egyptian economy in 2012. For the country as a whole, the most pressing is the alarming decline of foreign currency reserves. Even if retailers have increased their investment in the country, FDI in other sectors of the economy has fallen dramatically. Manufacturing output in 2011 dropped due to a disruption in the supply of raw materials, and tourism, a pillar of the country’s economy, almost came to a standstill and with it foreign currency inflows.

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Source: Euromonitor International from Countries & Consumers

The threat of a devaluation of the Egyptian pound seems unavoidable and will lead to a strong rise in the rate of inflation in the country as imports become more expensive. This will put retailers under growing pressure as they are facing higher costs for sourcing their products but at the same time need to maintain competitive retail prices or lose sales to the informal market. As modern retailing is a niche in Egypt, it can only increase its penetration if living standards rise substantially and as a result achieve economies of scale.

As the country is negotiating a US$3 billion IMF loan to help it secure its balance sheet and fund the economic recovery, more pressure will be put on the government to fast-track reforms and reduce deficits. As seen in the past, IMF assistance has been deemed by the public as unfair and only beneficial to the financial sector and not the people. With the immense social legacy left by the previous regime, the popular demand for jobs and real democracy will have to come first or else more upheaval will follow, and such an outcome is not what the retail industry needs at the moment.