North Africa primed for retail growth

27 January 2013

With large, youthful populations and rising consumer spending, Egypt and Algeria pose attractive markets for foreign retailers

For Western multinationals facing sluggish growth at home, North Africa’s underserved retail markets are ripe with potential. The sizeable populations of Egypt and Algeria, with their swelling middle classes, are attractive to both luxury brands and mass retailers.

Egypt in particular offers vast opportunities for retailers, but much will depend on its ability to achieve political stability. Consumer spending was forecast to hit $191bn in 2012, according to consultancy Planet Retail, despite the fragility of the wider economy. The firm expected retail sales to rise by 10 per cent in the period, far outpacing muted gross domestic product (GDP) growth of 2 per cent.

International interest

This increase is largely attributable to Egypt’s 80 million-strong population. Per capita consumer spending in the Arab state is $2,324, the highest in North Africa, according to Planet Retail. Combined with an underserved and scattered retail sector dominated by corner stores, this has done much to catch the eye of foreign brands.

Investment in the market stalled at the height of the unrest, as some retailers scaled back their growth plans. The decline in tourism also affected retail spending in 2011, a year that saw Egypt post just 1.8 per cent GDP growth. Annual mall rents in Greater Cairo fell by as much as 30 per cent over the 12 months to September, according to US property firm Jones Lang LaSalle (JLL), and now average between $920 and $1,410 a square metre. Vacancy rates averaged 24 per cent. But the election of President Mohamed Mursi in June and the subsequent agreement of a $4.8bn financing deal from the Washington-based IMF have gone some way towards shoring up investor confidence.

Egypt’s top grocery stores
CompanyOutletsGrocery banner sales ($m)Market share*
Metro (Egypt)83501.90.69
Metro Group5103.70.01
Seoudi Market742.60.06
*=Share of grocery spend. Source: Planet Retail

The UK’s Marks & Spencer said in November it planned to launch a flagship store in Egypt in 2013, in addition to the three it operates in partnership with the UAE’s Al-Futtaim Group. British apparel chain Superdry opened its first store in Cairo in the third quarter, while US ice-cream chain Cold Stone Creamery launched its first franchise in the country in June.

Grocery, however, offers perhaps the biggest potential for retailers. As in many Arab states, Egypt’s grocery market is led by domestic traders. In Cairo, more than half of retail stock is comprised of local or convenience stores. Shopping malls, by comparison, make up just 10 per cent.

The market share of Egypt’s five largest food retailers – which include the multinationals Carrefour and Spinneys – is in single digits. This highlights the size of the opportunity available to big-box retailers, able to leverage their scale to offer cheap goods to Egypt’s large pool of low-income consumers. Analysts expect organised retail to squeeze out neighbourhood stores, but this trend is likely to take years to fully develop.

For similar reasons, discount retailing is also seen as a growth industry. Turkey’s low-cost giant BIM plans to open its first stores in Egypt in the first half of 2013. The firm, which expects to launch up to 10 outlets in its first year, plans to invest as much as £E8.7m ($14m) to drive its growth over the next two years. Metro (Egypt), the country’s largest grocery chain, launched its discount subsidiary Kheir Zaman, in 2006. By the close of 2012, the group expected to operate more than 110 outlets in total across Egypt.

Modern malls

The country is also seeing renewed activity in mall development, particularly in the capital. Cairo has about $1.8bn-worth of shopping malls under construction, according to regional projects tracker MEED Projects, aimed at addressing a deficit of prime retail space. The city currently holds about 761,000 sq m of quality leasable space, according to JLL, which is set to rise to 1.29 million sq m by the end of 2013. By comparison, Dubai has 2.9 million sq m and Riyadh more than 1.2 million sq m.

One of the largest projects is the Mall of Egypt, which will span 160,000 sq m and house more than 300 stores on completion in 2015. The project, which is located in 6 October City, represents an estimated $800m investment for UAE developer Majid Al-Futtaim.

In October, the UAE’s Emaar properties and Al-Futtaim Group announced plans to enter an $820m joint venture to develop the Cairo Gate shopping and entertainment complex, which will be located alongside the Cairo-Alexandria desert highway. The complex will add a further 120,000 sq m of supply to the market.

This surge in retail space is likely to encourage the entrance of foreign brands keen to tap the Egyptian market. Cairo Festival City, which is scheduled to open in 2013, counts Ikea and Marks & Spencer among its anchor tenants.

By comparison, neighbouring North African state Algeria has few significant retail players. The country saw the launch of its first Western-style mall in 2010, a e70m ($91m) joint venture between the Swiss Valartis Group, department store operator Jelmoli and Darsi Investment. According to Valartis, the mall attracted 5.6 million visitors in 2011.

The mall’s launch was expected to prompt a spike in foreign retailers attempting to break into the market, but this has largely failed to materialise. Analysts suggest companies may have been deterred by curbs on foreign investment, political instability and a lack of available real estate.

Societe des Centres Commerciaux d’Algerie, in which Valartis holds a 35 per cent stake, has said it plans to build a 32,000 sq m retail complex in Oran. The mall would be the first of its kind outside Algeria’s capital, and was slated to open in 2015. However, the scheme does not appear to have progressed. According to MEED Projects, there are no retail developments currently under construction in Algeria.

Slower growth in developed markets, however, is likely to encourage retailers to look again at the country. More than 70 per cent of Algeria’s 36.5 million people are under the age of 30, and the country has the second-highest GDP per capita in North Africa at $5,659. Consumer spending has also been bolstered by government moves to increase wages.

Just as importantly, Algeria’s growing middle class is driving demand for branded products and the opportunity to shop in modern retail outlets. In 2011, US-based consultancy Deloitte named Algeria as one of 10 emerging markets most likely to appeal to multinational store groups in the coming years. The firm tipped non-grocery spending to rise by 15 per cent in 2011, while grocery purchases were forecast to increase by 13 per cent. The trend “is likely to continue through 2016,” Deloitte said.

Several foreign retailers have signalled their interest in the grocery retail sector. Turkey’s BIM has suggested Algeria could be its next target, following its roll-out in Egypt. France’s Auchan previously outlined plans to open a string of hypermarkets in the country, representing a $210m investment, but has yet to announce their launch.

Local retail chains

The North African state’s grocery market is dominated by small, neighbourhood stores, but several domestic chains have established a foothold. Numidis, a subsidiary of local conglomerate Cevital, operates the Uno brand of supermarkets. It opened its first hypermarket in 2010. Algeria’s Arcofina had planned to open 18 supermarkets in partnership with France’s Carrefour. The venture ended in late 2009, with Carrefour citing tough competition from unorganised retail as a factor in its withdrawal. The stores have continued operations under the Arcofina banner. 

Both Egypt and Algeria offer potential gains for foreign retailers, demonstrated by their large, young populations and rising consumer spend. But entrants to the market must be prepared for strong competition from local retailers and, in the case of Algeria, for steady rather than spectacular growth.

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