Egypt's young and expanding population helps rebound in retail sector

Egypt’s retail market is competitive and highly fragmented. The maturing formal retail sector features a range of shopping malls, supermarkets, hypermarkets and smaller franchised competitors, as well as the more informal options that have traditionally served Egypt’s shopping needs, such as souqs, street vendors, independent high-street shops and neighbourhood corner stores. As of 2014 small-scale, traditional and independent retailers still accounted for more than 70% of sector sales, with the five largest retailers holding 9.9% (see analysis).

However, some high-profile mergers and acquisitions are expected, with large-scale retailers gaining market share at the expense of smaller independents. The country’s modern retail segment grew at a compound annual growth rate of 6.3% from 2013 to 2015, and is expected to grow by of 10% in 2017, potentially doubling by 2021.

Demographic Demand

Social trends are making clear the extent of opportunities for investors as modern retail options proliferate and gain in popularity among the country’s younger population – about a third of Egypt’s 92m citizens are between the age of 20 and 39, a core demographic. Furthermore, the rising number of women in the workforce – 18% as of 2015, according to government statistics – is boosting household incomes and purchasing power, while the ongoing decongestion of Cairo through building new suburbs has made finding retail space easier.

Total household spending is expected to grow from $101.3bn in 2014 to $173.9bn in 2018, according to the General Authority for Investment and Free Zones (GAFI), the state’s investment promotion agency. Sector growth is expected to be further supported by a growing population, with the potential to reach 100m by 2020, as well as an expanding middle class – categorised as households earning between $10,000 and $25,000 – which could rise from 19% in 2015 to 34% in 2019, significantly increasing disposable income.

Size & Scope

Modern retail sales were valued at $133bn in 2016 according to AT Kearney, which ranks Egypt 30th on its Global Retail Development Index. This marks the return to the consulting firm’s top-30 developing countries for retail investment worldwide after several years of absence.

The market is highly concentrated in terms of geography, with Cairo accounting for the vast majority of modern options, and most retailers penetrating only a select few markets beyond the capital city, such as Alexandria. The current available gross leasable area (GLA) in Cairo’s retail market has climbed from a total of 836,000 sq metres in 2012 to 1.3m sq metres as of the fourth quarter of 2016, and is projected to grow to 1.6m by 2018. The vacancy rate dropped from 17% in the third quarter of 2015 to 15% in the same period 2016, while prime retail rents climbed to an average of $1600 per square metre from $1560 a year earlier. A further 104,000 sq metres is in the works for 2017, according to market data from global real estate consultancy JLL. Overall, the market is seen as able to absorb an additional 1.76m of GLA by 2020, with much of it located in mixed-use developments in Cairo’s newer suburbs.

Risks

Throughout most of 2016 the retail sector faced challenges, particularly in light of downward pressures on the Egyptian pound, and the implementation of a value-added tax. Government reduction of subsidies for some consumer staples in the food and energy sectors, the depreciation of the local currency against the US dollar, and concerns over bureaucracy and terrorism, put further pressure on tourism, consumer spending and inflation. The country maintained an official exchange rate for the Egyptian pound at LE8.8:$1, instead of allowing it to float leading to an illegal parallel market in which the pound was worth less, though the actual amount fluctuates. In April 2016 informal exchanges were offering as much as LE11.47:$1, according to financial media. As a result, retailers reported growing backlogs of goods and products, some of which became obsolete as new versions became available.

However, following the long-anticipated currency float in November 2016, the Egyptian pound lost half its value against the dollar, driving annual headline inflation 29.6% in January 2017 and causing price spikes for basic goods, food and beverages in the same period. Meanwhile, Egyptian stocks soared following the announcement, with many stakeholders pointing out that the depreciation would increase the competitiveness of the country’s exports and make it an even more affordable tourism destination, as well as increase demand for locally produced goods.

Brands

Most international brands find their way to Egypt through established regional franchisors. Retail Group Egypt, for example, a subsidiary of Saudi Arabia’s Fawaz Al Hokair Investment, operates 92 stores for 20 global brands and plans to add 12-14 new locations for the Spanish fashion brand Mango in the next two years. Other major groups include Al Sawani Group and MAC of Saudi Arabia, Lebanon’s Azadea Group, and Dubai’s Majid Al Futtaim. In the electronics sector the former U.S. franchise Radio Shack is the leader, with 39 stores across the country. In the restaurant sector, food franchising is a market valued at about $300m, according to GAFI data.

Consumer Preferences

Imported goods play a key role in the retail offering in Egypt. In 2009-13 the import market more than doubled, going from $48m to more than $110m, mostly due to free trade agreements. Basic consumption makes up the largest element of retail spending, with food, tobacco and non-alcoholic beverages accounting for 74% of the total, and clothing and footwear 10%. All of the top-10 categories of consumer-oriented imports were food products in 2012 and 2013, according to the Central Agency for Public Mobilisation and Statistics.

However, in a country where 27.8% of the population is making less than the minimum income required to meet basic daily needs, consumption patterns are changing. Recent rising inflation has made Egyptians more careful in the marketplace; and imports have taken a back seat in favour of cheaper, locally produced items. While the official government figures had yet to be released at the time of publishing, Reuters reported that imports had fallen from $70.28bn in 2015 to $62.93bn at the end of 2016, indicating that consumer preferences are rapidly changing in the country and impacting the industry. “Several retailers could be looking at moving into manufacturing,” Hany Genena, head of research for Cairo-based Beltone Securities told OBG. Local production to displace imports would help reduce the risks currency exchange presents to retailers.

Malls

Because of the population density in Cairo, space is at a premium, especially in the strip in the middle of the city straddling the Nile. Finding suitable land is a significant challenge. As a result, shopping malls are clustered in the western and eastern suburbs, in particular at the outskirts where new suburbs are expanding. The retail offering caters to a wide range of income brackets. With the currency challenges experienced in 2015 and 2016, those aimed at mass-market consumers were reporting higher footfalls and fewer concerns, according to Genena, whereas occupancy rates dipped as low as 40% in some less-desirable locations.

In Heliopolis, City Stars was the country’s first mall, opening its doors in 2004 due to the lifting of the import ban on clothing. Other major malls include Mall of Arabia, owned by Fawaz Al Hokair Group, with 105,990 sq metre of GLA, next to 6th of October City, and the 160,000-sq-metre Cairo Festival City, nestled in the development of New Cairo. It opened in 2013 and includes the first Ikea in Egypt and the country’s largest Marks & Spencer.

Egypt’s biggest and newest mall, Mall of Egypt, is planned to open in March of 2017 in Giza. Developed by Majid Al Futtaim (MAF), the new centre spans 165,000 sq metres of GLA and is complemented by a 21-screen cinema and an indoor ski slope, similar to what the company developed in Dubai’s Mall of the Emirates. It is looked at to become MAF’s flagship property in Egypt and is expected to cost LE5bn (equivalent to $265m as of December 2016). Overall, the group is planning several more major projects by 2020, including three other malls in Almaza, Alexandria, and the Maadi neighbourhood of Cairo worth a combined $1.6bn. Another major project in the works is valued at $746.8m and establish 32 hypermarkets.

With such a high number of young consumers, malls are increasingly designed around the needs of young adults and families. This means a focus on entertainment, such as play areas for children, with features often integrated into restaurant offerings.

Grocery Sector

The grocery and fast-moving consumer goods (FMCG) sector is one of the most competitive, with a range of formal and informal outlets competing for market share, and two potential merger and acquisition deals in the pipeline. Market share figures demonstrate the growth of food retailing in Egypt; as of 2014 the sector was valued at LE202.8bn ($10.8m), a 46% increase from LE138.9bn ($7.4bn) in 2009. Traditional small-scale retailers numbered around 85,000, accounting for 81.9% of the market in 2014. This is down only slightly from 85.3% in 2009, but formal players are expanding. As of 2014 the largest supermarket chain by market share was Metro, owned by the Mansour Manufacturing and Distribution Group. Its total market share was 3% in 2014. The largest by locations was BIM, a Turkish discount retailer that entered the market in 2013 and now has 110 stores, according to GAFI. As of 2014 three other chains had 50 locations or more, including Ragab Sons, with 64 supermarkets and two hypermarkets in Cairo and Alexandria. Metro had 58 outlets in both supermarket and convenience store formats, and a wide geographical footprint, with outlets in 15 cities. Kheir Zaman’s 50 stores were located in Cairo and Alexandria. Major foreign brands include Carrefour, whose 23 supermarkets and hypermarkets are operated by MAF, and Spinneys, which was founded in 1924 in Alexandria but is now owned by UAE-based private equity firm Abraaj Group. Spinneys has six locations in Egypt.

The trend of formal retailers entering the market is set to continue as GAFI reports major growth plans by several major players. MAF has set a goal of opening 60 new supermarkets and hypermarkets by 2019, for example. New entrants include Abu Dhabi-based LuLu Group, which aims to open 10 locations in 2016 and 2017. Overall, the top-five retailers increased their market share from 5.5% in 2010 to 9.9% in 2014.

Mergers

In a sign of the expected consolidation of market share, Spinneys’ Egypt locations were the subject of sale negotiations in early 2016. The stores were valued at about $100m, with press reports suggesting TPG Capital, a US-based private equity group, was a potential suitor. Another possible transaction could involve MAF, which in 2013 entered into negotiations with Mansour to buy its supermarket operations. While these discussions did not result in an agreement, MAF recently expressed an interest in revisiting the idea in the future.

Food retailers are also looking to smaller-scale concepts, such as convenience stores, which are often part of petrol stations. As of mid-2015 there were about 225 locations in the country. The market leader is ExxonMobil, with a 74% market share and branded stores including Mobil Market, Esso Snack and Shop, and On The Run. Franchises at filling stations include Burger King and a local confectioner called La Poire. Kazyon is a growing chain of stand-alone convenience stores operated by the Egyptian joint-stock company Tawfeer, selling staples and basic foodstuffs. Tawfeer has opened 135 Kazyon locations since 2014 in 11 of the country’s 27 governorates.

Traditional

Many factors have allowed smallscale traditional vendors to retain their place in the market. These include a lack of land, densely populated central neighbourhoods and traditional consumer habits, such as daily trips to the market. These all have cemented the neighbourhood corner store as a mainstay that can be relied on for beverages, tobacco and basic non-perishables. These small-scale retail outlets accounted for roughly 99% of all retail establishments in Egypt as of 2014, with a report by the US Department of Agriculture (USDA) counting 1.56m of them in total. Of that amount, 75% primarily stocked drinks, cigarettes and snacks, and their owners often count as key customers for modern retailers’ distribution arms. Other traditional options include mobile sellers, who pilot their small, flat-bed trucks through narrow passenger streets carrying crates of produce, providing another close-to-home option. These traditional vendor-customer relationships double as social connections as well, allowing for a system in which many shopkeepers are willing to offer goods on credit on an informal basis.

Another factor reinforcing traditional shopping culture is the state-subsidised bread system through which Egyptians are entitled to purchase discounted bread on a daily basis. This savings opportunity further reinforces the consumer preference for small, daily shopping trips, as opposed to a weekly visit to a supermarket to stock up on essentials. However, small-scale shops are coming under increasing pressure, as this segment of the market is shrinking at a rate of 5% per year, according to a USDA report, a trend that is more pronounced in large cities.

Outside Cairo

Upper Egypt is an area that could see attention from retailers in the future, according to Genena. FMCG sales growth is around 40% in markets such as Luxor and Aswan, compared to 10-15% in Cairo and Alexandria. Upper Egypt is traditionally less affluent than Cairo and Alexandria, but increased remittances – up 11.8% year-on-year in the fourth quarter of 2016 – to the region from locals working elsewhere has boosted wealth and created growth from a small base. “Upper Egypt is the star right now, and companies are investing in distribution networks to cater to informal markets there,” Genena told OBG. Danone, for example, has invested in a fleet of refrigerated trucks in order to make direct delivery of its yoghurt and other dairy products.

Going Online

Online retailing is considered an option for the future but has yet to claim a significant market share; as of early 2014 e-commerce accounted for just 0.3% of retail sales. However, the number of Egyptians online is growing, with the internet penetration rate more than doubling since 2011 to close to 40%, and e-retailers are establishing themselves. Jumia, a general retailer backed by Germany’s Rocket Internet, boasts a 35% market share.

For now, however, Egyptians are much more likely to use the internet for other purposes. According to research from Payfort, a Dubai-based payment-services provider, and Yaoota, an Egyptian shopping-focused search engine, online retailers as a group receive 12m to 18m visits monthly, whereas a single news portal receives 17m to 20m visitors.

Retailers are nonetheless preparing for a digital migration, and more than 450 online stores already serve the Egyptian market, according to Payfort and Yaoota’s findings. More than 100 have established a relationship with aggregators like Yaoota. The list includes general retailers such as Jumia and Souq.com, and electronics are a prominent offering, with retailers such as Radio Shack, Egypt Laptop and E3050. com as participants. Electronics accounted for 24.4% of online stores, the largest of any market segment. No other accounted for more than 20% of the total as of September 2015. A review of online searches showed that mobile phones and pharmaceuticals were the most popular.

Outlook

Despite the instability of recent years, retailers remain focused on the long-term opportunity Egypt’s fast-growing population presents, as evidenced by the country’s return to the top of AT Kearney’s global retail index, notwithstanding the challenges presented by Cairo’s urban density, downward pressure on the pound and other obstacles. The short and medium terms appear likely to be dominated by the absorption of new mall space and consolidation in the food retailing sector. “Consumption is a huge part of getting the economy moving. The worst case scenario is money sitting stagnant,” Ahmed Badrawi, group CEO of Marakez, told OBG. Once the Egyptian pound has stabilised, the retail sector should see clear benefits from its strong fundamentals.

 

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The Report: Egypt 2017

Industry & Retail chapter from The Report: Egypt 2017