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Wed 4 Oct 2006 04:00 AM

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Navigating Iraq's FMCG channel

While Iraq’s security situation remains difficult, its population of 29 million people is hungry for branded consumer goods.

|~|Iraq200web.jpg|~|Zulfi Hydari: "Road transport, with border checks, is very expensive."|~|Iraq might not be the country of choice for most FMCG companies looking for lucrative new export markets. But with a population of almost 29 million people and borders with countries including Kuwait, Saudi Arabia and Jordan, Iraq presents FMCG producers and distributors in the region with an enormous opportunity.

While many local FMCG producers and distributors are now taking a closer look at Iraq, some of their multinational counterparts were quick to start exporting their products into Iraq after the collapse of Saddam Hussein’s regime, which had prevented the import of most branded consumer goods during its 24 years in power.

Unilever, one of the world’s biggest consumer goods companies, started exporting its main brands to Iraq in 2003, and the company now has five main brands, Dove, Lipton, Sunsilk, Lux and Signal, present in the country.

“We’re finding the market has a lot of potential and is very promising,” Yehia Saad, Unilever’s country manager for Iraq and Sudan told Retail News Middle East. “The Iraqi consumer is accepting the brands better than Unilever expected. We are doing very good business right now, more than we expected.” He added that a lot of companies, such as P&G, Colgate and other multinationals are now operating in Iraq.

But while there is a strong demand for branded goods in Iraq, distribution is difficult. One of the problems for companies such as Unilever is that Baghdad, which is potentially the country’s biggest market, with a population of some 5.6 million, is also one of the most difficult cities to distribute products to. For example, Baghdad represents 50% Unilever’s business in Iraq, while the company’s Iraqi operations are concentrated in the more stable north of the country.

“One of the main challenges is how can we tackle our business in Baghdad,” Saad said. “It is totally prohibited to go to Baghdad according to Unilever rules because of the security issue. We are handling the business just from the north area. We have some distributors in the main cities in Iraq, but right now, the products are sent through the north area and then distributed to other cities.”

The retail sector is also far more fragmented in Iraq than in its neigbouring countries. While countries such as Saudi Arabia and Jordan have large and well-established hypermarket groups, Iraq’s FMCG retail sector is dominated by wholesalers and small and medium sized grocery stores. “It’s about 80% to 85% wholesale and 15% to 20% retail,” Saad said. “People tend to go to wholesalers, and producers and importers prefer to sell direct to wholesalers because of the security issue.”

While multinational supermarket groups are unlikely to set up operations in Iraq for the foreseeable future, the country does have a handful of homegrown hypermarkets, mainly in the north of the country.

These include two stores in Arbil, one on Bhok, and one in As Sulaymaniyah, according to Saad. But this lack of an established supermarket and hypermarket presence in the country has done little to dampen modernisation in other areas of Iraq’s FMCG sector, and this is particularly apparent on the streets of big cities such as Baghdad where billboards advertise international brands including some of Unilever’s products.

“We are running some similar activity, such as TV advertising in the local channels in Iraq,” Saad said. “There were no multinational brands in Iraq for the past 25 years so this activity is very attractive for consumers and it has an impact on our business in Iraq.”

But such a strong demand for consumer goods in a country that has traditionally been starved of international brands also brings its share of challenges; grey goods and counterfeits are rife in the Iraqi market, according to Saad. “There is a major security issue,” he said. “The open border means we cannot control grey products coming from China and some other countries.”

Some 35% of certain branded FMCG goods in Iraq could be counterfeit, and the problem is made worse because it is difficult for companies to assess and address the problem inside Iraq, according to Saad. Despite this, Unilever is attempting to educate its trade customers about the problem of fake goods and the need to avoid them.

“We try to build a very strong relationship with the trade so we try to explain to them that this is the genuine product…and we are doing some press campaigns to explain to the end consumer the differences between the genuine products and the counterfeits,” he said.

But a booming market for grey goods and counterfeits is not the only serious challenge facing FMCG producers and brand owners looking to sell their goods in Iraq. The security situation can also make distribution across the country a major headache. Zulfi Hydari, managing director of HBG Holdings, a Dubai-based food and drink distributor, is no stranger to these challenges.

His company, which exports private label FMCG goods into Iraq from Jordan, sends its products into Iraq by land and breaks down its loads into smaller convoys for distribution by third parties. This helps the company to avoid losing large amounts of products in the event of loads being hit by criminals or terrorists.

“It goes by land and it is broken up into different convoys because the likelihood of a convoy being hit is still quite high. What you will find is that perhaps one out of five or six convoys may not make it,” Hydari said. “You break it down to reduce the risk, but road transport, with the border checks, is very expensive. But even after you’ve taken these costs into account and the fact that Iraq is a country at war, you can still export significantly into the country. It is quite amazing.”

HBG distributed deals with a number of different people who handle the distribution inside the country. “We have all sorts of people to distribute our goods into Iraq,” Hydari said. “We now have some trusted people who we have been working with over a period of time.

“Our volumes with them have grown and we definitely prefer them to pass it on to others rather than us have to deal with many people, because you can’t really tell who you are dealing with.”

While companies such as Unilever are concerned about the problem of grey goods in Iraq harming its official exports to the country, Hydari is more concerned about his Iraqi exports ending up as grey goods in other countries. “The one thing we are very careful with is that our products don’t end up somewhere else. Products destined for Iraq can end up in another country – they can end up anywhere,” he said.

“It has happened to others so we are very vigilant that the product we are selling is going to end up in Iraq. We keep custody of it until it is stamped at the border and then we have people on the ground in Iraq who make sure and confirm to us that it did reach where it was supposed to reach.”

Furthermore, while many companies view Iraq as a no-go area, Hydari is keen to point out that parts of the country, particularly the north, are relatively stable and offer good business opportunities. “There are pockets of Iraq that are stable, where business is being transacted and those pockets alone are more significant than certain countries,” he said.

With the volume of HBG Holdings’ products to southern Iraq increasing, the company is looking to side-step some of its transport costs by importing directly into the southern part of the country via ports such as Umm Qsar.

Hydari added that the company is also looking to establish a distribution centre in the north of Iraq. “We are currently looking for land, at least 100,000 sq ft plus, so that we can set up a proper centre, because we think there is enough demand coming from the Turkish side and from the Jordanian side. Distribution properly positioned would be ideal for our expansion plans,” he said.

HBG Holdings has a contact in Iraq who is looking for land on behalf of the company, and Hydari said there are two or three criteria for selecting land. “The most important is stability, but most parts of the north are fairly stable. Second is a good connection into Jordan, and the third is cost,” he said.

While companies such as Unilever and HBG Holdings are relatively new to the Iraqi food and drink sector, Mazin Al-Shabibi, a director and partner of Al-Naheem Trading, a Dubai-based distributor of products including branded flour, sugar, and ingredients such as preservatives and thickeners, has been exporting goods to Iraq since the late 1980s.

This gives Al-Shabibi a different perspective on the challenges presented by the post-Saddam Iraqi market compared with many other distributors involved in the sector.
For Al-Shabibi, Iraq now presents a different set of challenges than during the Saddam Hussein era.

“We have been exporting to Iraq since about 1988 when I started the business,” he said. “It was not that easy to get products in, especially during the sanctions. Now it’s easy to get goods to Iraq, but it’s not easy to get them to the capital of the country, so we’re getting the same problem in transportation.”

Al-Naheem Trading, which is the agent for flour producer Oman Flour Mills for Iraq and Jordan, exports most of its goods to Iraq from Dubai, with the remainder sent from Jordan. Products from Dubai are transported by sea-freight to Al Basrah, and are then distributed to Baghdad by road. One of the big challenges for Al-Naheem Trading is that transportation costs are rising.

The cost of sending one metric tone from Dubai to Al Basrah by sea freight has risen by about US $3.5 in recent months from about US $22 to US $25.5, according to Al-Shabibi. “The cost of transporting goods from Basrah to Baghdad by road has also risen, so the overall cost has increased by about US $8 in the past three months,” he said. With the company exporting big quantities of food to Iraq – for example about 250 tonnes of branded sugar a month – these costs are significant.

This also makes it difficult for Al Naheem to export products to the north of Iraq, where Turkish companies have a clear geographical advantage, and so the company is focusing on its stronghold of southern Iraq. Indeed, the company has warehouses in Al Hillah and Baghdad, and distributes products to big cities including Najaf, Karbala, and Al Basrah.

Al-Shabibi is optimistic about his overall business in the country. “The market is increasing…we made around a 200% rise in the sale of flour in the past 18 months. We started with about 200 tones to 300 tonnes and now we are selling almost 1000 tonnes – so it’s around a 300% rise,” he said.

Al Naheem distributes its products to wholesalers in its main markets, and then passes on the goods to third party distributors. “We have contracts with wholesale people where we deliver to them and they start distributing our products. Although we have our own distribution and logistics, the security in Iraq is not that good, so it’s easier to send around 15 or 20 cars around Baghdad to distribute our products, thereby lowering the risk,” Al Shabibi said. He added that the company’s products are sold in supermarkets, groceries, and bakeries.

While Al-Shabibi is pleased with recent increases in business, he is optimistic that the Iraqi market still has far more room for growth. “It’s a very big country and Iraqis usually spend more money on food than anything else – they like to have good quality food. I think the market in Iraq, if it becomes more stable, will boom,” he said. “We have the ability to increase if there is the security, better transport. You cannot do the logistics properly without the security.”

In terms of the food people are buying in Iraq, flour, rice and ghee, and anything that is needed daily is selling well. HBG Holding’s Hydari added that commodities, particularly rice, pulses, grain, sugar, and day-to-day items such as cheese are performing strongly. Personal care items like soap and general hygiene products are also in demand, he said.

The Iraqi population seems to be particularly keen on branded consumers goods, according to Hydari. “Although our business into Iraq consists of more private label goods, I’ve noticed that among the Iraqi population there is a big demand for branded items,” he said.

“They recognise good brands, multinational Western brands and are prepared to pay a premium for them.” He added that while business for many Western multinationals distributing locally in Iraq appears to be somewhat sporadic, it is certainly something that HBG Holdings in interested in doing in the future.

“I think the Iraq market is the jewel in the entire Levant. It’s a bit like Saudi is in the GCC. You’ve got to be in Saudi if you’re a GCC player. I think ultimately you’ve got to be in Iraq if you’re a Levant player. You can’t sit on the sidelines forever just because things are not doing so well.”

Unilever’s Yehia Saad is equally optimistic about the Iraqi market. “Everyday, the market is opening up and improving,” he said. “There is a very big future for FMCG. We have to be there. I know the situation is quite difficult right now, but we should look to the future, and we should see changes toward a better situation,” he added.

Coca-Cola: brand owner’s perspective

The Coca-Cola Company, which is already exporting some of its products to Iraq, including Coca-Cola, Sprite and Fanta, is enjoying significant growth in the country and is even planning to set up a factory in Iraq, although it has not set a timeframe on its plans, the company confirmed to Retail News Middle East.

The company has granted authority for distribution – and eventually production – to a local business, Al Buneiya, in Iraq. Coca-Cola products are already available in most of the country through this distribution operation. “The local distributor is setting up a complete distribution system with trucks and salesmen to reach as many consumers as possible. Currently our products are being imported from neighboring countries,” said Lubna Forzley, public affairs and communications manager, Coca Cola Middle East.

Forzley admits that distribution can be difficult: “There are some challenges in certain areas of the country due to the security situation, which delays distribution. Our distributor is doing its best to work effectively given the constraints in order to reach as many outlets and consumers as possible,” she said. “Apart from the security situation there are limited differences [between Iraq and Coca-Cola’s other markets], especially since our product and consumer characteristics are similar.”

Despite these challenges, the Coca-Cola Company is optimistic that the Iraqi market will prove fruitful for the company. “Iraq has a great potential as a market, and is responding well to branded goods. Coca-Cola is committed to grow its business in the Middle-East, both by expanding its products portfolio as well as expanding its business into new markets. The Arab countries, including Iraq present our company with many opportunities,” Forzley said.||**||

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