Egypt’s modern retail segment set to record higher growth rates

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With slow growth and double-digit inflation, Egypt has its fair share of challenges, but the country’s retail sector appears to be easing into recovery mode, aided by an increase in formal activity and favourable demographics.

The most visible evidence of the return to form of the 82m-person consumer market was Egypt’s reinstatement on AT Kearney’s 2016 Global Retail Development Index for the first time since 2011.

The country’s modern retail segment is forecast to grow by a compound annual growth rate (CAGR) of 10% this year and next, potentially doubling by 2021, according to AT Kearney’s “Egypt (Cautiously) Back in Business” report. Between 2013 and 2015, retail sales grew by a CAGR of 6.3%, despite economic and political uncertainty during that period.

Long-term fundamentals

Sector growth is expected to further be 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.

Recovering economic growth is another key factor behind the retail sector’s strengthening outlook over the medium term.

Egypt’s GDP reached 4.2% in FY 2014/15, and although it dropped to an estimated 3.8% in FY 2015/16, GDP is predicted to pick up again to 4% in FY 2016/17, according to the IMF’s “World Economic Outlook” for October 2016.

Shifting trends

The retail sector’s prospects go beyond the sheer size of the market. Crucially, Egypt is also seeing a shift in consumption patterns, with consumers increasingly turning to retail units, such as supermarkets and hypermarkets, instead of traditional outlets, with modern retailers’ share of the grocery market predicted to grow from 18% last year to 28% in 2019.

The relatively low market share of the modern retail segment demonstrates how far the market is from saturation, with ample room for growth over the coming years, according to Ahmed Badrawi, CEO of Marakez Group.

“The retail sector in Egypt is significantly underserved, with the population growing by 2m people per year,” Badrawi told OBG.

With the bulk of sales – particularly for fast-moving consumer goods – happening at the lower end of the market, the performance of formal grocery and discount outlets provides an indicator of the sector’s overall health. Discount markets are expected to record strong growth, with AT Kearney forecasting a CAGR of 47% in sales between 2015 and 2019, with players like Turkey’s BIM and local outfit Kazyon looking to expand. Hypermarkets and supermarkets are expected to see CAGR of 14% and 12%, respectively, in the same period.

Proceed with caution

That being said, there are still plenty of risks ahead, such as supply chain problems and inflation, which could slow or reverse the sector’s performance.

Some industry stakeholders, for example, point to the time-consuming procedures for importing and registering products, and the importance of focusing on stock availability, while others note the importance of government policies to promote investment.

"The formal retail sector is a key source of inward investment, job creation and tax contribution. In spite of this, government policy seems much more focused on imposing restrictions to reduce imports rather than growing the industry,” Badrawi told OBG.

Inflation is another key area of concern, with the annual urban consumer price inflation (CPI) rate rising to 15.5% in August, up significantly from 14% in July, according to the Central Agency for Public Mobilisation and Statistics. With a potential devaluation on the cards, the cost of imported goods is also likely to contribute to upward pressure on the CPI.

The jump in CPI in August may indicate a resumption of an uptick in prices, at a time when economic growth may be temporarily slowing. The IMF expects inflation to trend upwards in the medium term from 10.2% in FY 2015/16 to 18.2% in FY 2016/17, but to see a large decrease to 7.1% in FY 2020/21.

But these rates are still high by international standards and could offset wage increases, including financial aid programmes established by the government to mitigate the impact of fiscal consolidation on the poorest – schemes that could otherwise help support small retailers.

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