The Dash for Iran
Consumer goods companies are clearly excited about the potential that Iran offers as a consumer market, following the framework agreement over Iran’s nuclear programme. Iran has the largest population in the Middle East, at 77.2 million in 2014; it also has the second largest economy (behind Saudi Arabia) with GDP of US$441 billion in the same year – a similar size to Austria. Yet size isn’t everything – sanctions have stifled the economy, which returned to growth last year following two years of decline. The country’s economic woes are compounded by high (if falling) inflation, a fragile currency, a troubled banking sector and a weak fiscal position. This is further magnified by a weak business environment, with the government crowding out the private sector.
Despite these challenges, the framework agreement which could herald an end to sanctions, has been greeted with much enthusiasm by multinationals. Is this enthusiasm justified? Although the situation remains fluid, and the US Congress could still reject the deal, the answer is yes and no.
One of Iran’s great strengths is its young, fast-growing population. The average age in 2014 was 29.4 years. The population is expected to increase by 31.9% by 2030, a rate of growth almost twice that of neighbouring Turkey. Almost one in–three Iranians were aged between 15 and 30 in 2014 and many are Internet-savvy, with social networking hugely popular amongst the young. A note of caution is that youth unemployment is a major concern, with the rate at 29.3% in 2014 – set in the context of youth labour participation of just 22.6%, this figure is even starker.
Age Structure of the Population at a Glance 1980-2030
Source: Euromonitor International from national statistics/UN
Reading the chart: This “heat chart” depicts changes in the age structure of the population over time. Each dot represents the number of people in a specific (single year) age group in a given year. Accordingly, a dark red dot shows the largest concentration of people, by age, in a particular year while deep blue dots refer to the lowest concentrations. The areas of red therefore represent a large potential market in demographic terms.
Iran’s challenging economic situation has meant that the average household disposable income has actually fallen in real terms since 2009 to reach US$12,078 in 2014. As has the proportion of high income households – 11.3% earned more than US$25,000 in 2014 – compared to 14.6% in 2011. In 2014, the average disposable income of the highest earning 10% of households was just US$38,687. Income inequality is a major problem and there is widespread poverty in the country, with 28.1% of households earning disposable incomes of less than US$5,000 in 2014.
Nevertheless, even under sanctions, consumer spending on certain discretionary categories is relatively high. Expenditure on health goods and medical services and transport totalled US$16,133 million and US$16,059 million respectively in 2014; and between 2009 and 2014 spending on education grew by 39.8% in real terms.
Consumer Expenditure in Iran: 2014
Source: Euromonitor International from national statistics/UN/IMF
Unleashing pent-up demand
Knowledge of Western brands is high amongst the middle classes and many are admired. Iranians are not cut off from the world, household possession of satellite TVs, internet-enabled computers and mobile phones is high – particularly amongst the middle classes. If the lifting of sanctions acts to spur economic growth, then demand for Western brands will surely grow.
Possession of Selected Durable Goods: 2014
Source: Euromonitor International from national statistics/ International Telecommunications Union (ITU)/ European Audiovisual Observatory (EAO)
Note: Deciles are calculated by ranking all of the households in a country by disposable income, from the lowest-earning to the highest earning. The ranking is then split into 10 equal sized groups of households. Decile 1 refers to the lowest earning 10%, through to Decile 10, which refers to the highest earning 10% of households.
However spending power is limited; middle income households currently devote 65.6% of their budgets to necessities (housing and food and non-alcoholic beverages) leaving just US$1,704 in 2014 for discretionary spending.
Spending Patterns of Deciles 1, 5 and 10: 2014
Source: Euromonitor International from national statistical offices/OECD
Note: A: Food and non-alcoholic beverages; B: Alcoholic beverages and tobacco; C: Clothing and footwear; D: Housing; E: Household goods and services; F: Health goods and medical services; G: Transport; H: Communications; I: Leisure and recreation; J: Education; K: Hotels and catering; L: Miscellaneous goods and services. The figure in brackets refers to the average disposable income of households in each decile.
Income inequality, the large proportion of low-income households and a middle class without a great deal of discretionary income has a bearing on the type of goods likely to sell well. Bottom of the pyramid strategies should be considered, goods and services which meet aspirations and offer quality, without putting undue strain on the wallet should find a market. Although ATMs and financial cards have been increasingly available, consumer credit is undeveloped and cash is still king. This should also be a consideration.
Nostalgia for Western products may exist in some quarters, but with 62.4% of Iranians born after the 1979 revolution it will not be the driving force. Companies from Europe and the USA will be competing with countries which have maintained closer ties with Iran; including the UAE, China and Turkey. The Turkish president, Recep Tayyip Erdogan, has already visited Iran and signed trade agreements aimed at increasing bilateral trade.
Iranian Imports by Origin: 2014
Source: Euromonitor International from International Monetary Fund (IMF), Direction of Trade Statistics
Offset by potential for falling flat
The potential of the market remains just that – potential. There are many risks and with a lack of trust on both sides, the deal could just as easily disintegrate. In addition:
- The difficult business environment should not be underestimated. Iran ranked 130 out of 189 countries in the World Bank’s 2015 Doing Business report and corruption is a huge issue;
- The fragility of the economy cannot be overlooked – despite sanctions, oil accounted for 59.0% of export revenues in 2014 and oil revenues are thought to account for 40-50% of government revenues. At a time of low oil prices, which might even face increased downward pressure once Iran has free access to global markets, this is doubly problematic;
- The manufacturing sector is small and dominated by the public sector, diversifying the economy will take time, investment and drive. The government is working towards this aim but progress is slow. Another key concern is geopolitical instability;
- The region as a whole is rife with instability – Iraq, Syria and Yemen. Iran also refuses to recognise Israel’s right to exist.
Proceed with caution
The situation in Iran is not likely to change overnight – in fact the two sides are not in agreement over when sanctions should be lifted. There still remains a chance that they will not be able to agree on the fine print or that the deal will not hold in the long-term. The country’s potential is clear – its wealth of resources, large and young population can be key drivers of economic growth. All-in-all a watch-this-space attitude combined with “proceed with caution” may be the best approach for consumer goods companies.