Iran’s Recent Progress Signals Potential for Foreign Retailers. Which are Most Likely to Move in?
Despite the future unknowns, Iran appears to be making real progress when it comes to international reform. Early in 2016 it began to roll back its nuclear program enough to begin the process of lifting its harsh economic sanctions. Elections later in February were another sign of progress, as a number of reformists and centrists were elected to parliament. Ultimately, Iran may backtrack thanks to its conservative Supreme Leader, Ayatollah Khamenei, but the economic allure of reform and the longer term stability it suggests is a strong incentive for the Iranian people and their representatives. If sanctions are lifted permanently, Iran holds the capacity to become a major player in the international business world, making it a potentially lucrative destination for a number of foreign retailers.
The effects of the sanctions
Iran vs the Middle East—2015 Per Capita Retail Sales
The economic sanctions that have been imposed upon Iran for nearly a decade by the UN in addition to those harboured by the US for even longer have left their mark. Despite being the largest retail market in all of the Middle East, when distributed on a per capita basis the country falls well short of other regional powerhouses like the UAE, Israel, and Saudi Arabia. A lack of international trade and investment has hurt the Iranian economy over time. One clear symptom has been the presence of an average inflation rate of over 20% from 2010-2015. This has contributed to the poor economic climate and has diminished purchasing power across the country. Reform carried out properly would be the best way to bring the country back in line economically with its neighbours.
Which international retail expansions make the most sense?
Despite the recent good news, as with most politically charged events, things will be slow moving. This gives retailers time to plan and assess the situation. Some, like those based in the US, will find that the laws still prevent them from opening up shop. Others may simply write off the region as a poor cultural fit. International expansion is hard enough as it is. Excluding retailers who are well versed in the intricacies of Middle Eastern markets because they call them home leaves a small sample size of potential candidates with enough experience in the region for a worthwhile expansion.
|Brand Name||Global Brand Operator||Middle Eastern Country Presence||2015 Middle East Sales ( US$ millions)|
|IKEA||Inter Ikea Systems BV||Egypt, Israel, Saudi Arabia, Turkey, UAE||2,615.01|
|Zara||Inditex, Industria de Diseño Textil SA||Egypt, Israel, Saudi Arabia, Turkey, UAE||871.71|
|Tiffany & Co||Tiffany & Co||Egypt, Saudi Arabia, UAE||280.65|
|Gucci||Kering SA||Israel, Saudi Arabia, Turkey, UAE||191.61|
|Louis Vuitton||LVMH Moët Hennessy Louis Vuitton SA||Israel, Saudi Arabia, Turkey, UAE||150.41|
IKEA has established themselves as a top player already in the Middle East because of its globally known brand with a sense of style that has cross-cultural appeal. Its products are already widely available in Iran thanks to independent stores that have imported goods from the UAE, but the chance for IKEA to directly represent their own brand and reap more profits because of it could be very tempting. Apparel may be harder to adapt to different cultures than home goods, but Zara has proven itself to be deft at doing so already, especially in more conservative countries similar to Iran. And finally, there are a number of luxury goods retailers that can take advantage of a highly urban populace with a number of high income earners (the Gini coefficient for Tehran in 2015 was above 50, greater than that of New York City).
Beyond the brands, retailers need to think local
With brand strength and regional success already in mind, these retailers (and any others) that are primed to jump into the Iranian market as soon as they are ready need to keep one thing in mind—catering to local demand. This is easier said than done, especially in a country that has previously been subject to a lot of speculative in-looking. Retailers can learn from the success stories mentioned above and lean on local firms to help operate the business. None of the retailers above operates all of their outlets in the Middle East without some licencing, and IKEA, the most successful of the bunch, trusts a different company in each country to tailor their stores to regional preferences. It’s tough to imagine them doing anything different if they decide to branch out to Iran, and other international retailers would be wise to follow in their footsteps if they decide to test out the market.