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Sat 14 Feb 2009 04:00 AM

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Time to look at our northern neighbours

IMES Consulting Group MD David Edwards investigates why Iran and Iraq are now bright spots on the global retail landscape.

IMES Consulting Group MD David Edwards investigates why Iran and Iraq are now bright spots on the global retail landscape.

So it's official. The US, the UK and most other developed economies are formally in recession, as defined by two consecutive quarters of negative growth. Of course, we all knew that this was coming, indeed to read the newspapers you would have thought it was the case months ago, but it's nice to have expectations confirmed.

Meanwhile here in the Gulf the gloom deepens, with almost daily announcements of projects delayed, workers laid off, hotel bookings down and retail sales slipping. All of this means that we denizens of the Gulf feel rather as if we're in a recession even though we're not.

Western-style supermarkets are rare even in the more prosperous districts of North Tehran.

That's why this is an interesting time to look at two regional countries where market prospects are somewhat detached from the malaise in the Western economic system, Iran and Iraq.

Prior to 1979 the Iranian market was very open to imported consumer goods but the Islamic revolution brought this to an end. More recently, Iran has come under strong pressure since President Bush declared it part of an "axis of evil" in 2002, pressure which intensified after Washington accused Tehran of attempting to develop nuclear weapons and of trying to subvert US efforts in Iraq.

Relations remain very strained and in particular limit the ability of American companies to do business in Iran.

Yet with a population of more than 72 million people, the Iranian market is potentially twice the size of the entire GCC. Moreover the country has many characteristics that are attractive to marketers - over 50% of the population is under the age of 25, most people are relatively well educated with a literacy rate at around 80% and 65% live in urban areas, simplifying distribution to them.

Although from statistics Iranians appear relatively poor with a per capita gross domestic product (GDP) of just over US $4000, it can be argued that most households are not too badly off at all: nearly all homes have refrigerators, televisions etc; many people hold down two jobs; women are active in the workforce; Iranians living overseas remit funds to family at home.

Working on a purchasing power parity basis, which adjusts for the relative cost of living, the International Monetary Fund (IMF) estimates that GDP per capita is more realistically over $10,600, or at a level close to that of Oman. On the negative side, both unemployment, which is at least 16%, and inflation (17.5% in 2007) are high.

Iran's economy is characterised by an inefficient public sector, an over reliance on exports of oil, and statist policies that create market distortions.

A large proportion of economic activity is still controlled by the state, through a system of ‘Bonyads', large charitable foundations set up after the Revolution to control economic interests that had previously been owned by the Shah or his supporters.

Increasingly, however, the Bonyads are entering private ownership, since the Government's position on privatisation started to change in the late 1990s. For example, by far the largest dairy company is the Iran Dairy Industries Company (IDIC), which was previously wholly state-owned but is now undergoing at least partial privatisation.

The retail sector is severely underdeveloped with Western-style supermarkets rare even in the more prosperous residential districts of north Tehran.

Restrictions on imports arising either from international sanctions or more importantly from Iran's own protectionist licensing and tariff regime have encouraged international companies to look increasingly to joint ventures or other forms of local co-operation in order to penetrate the market.

For example, unlike in other markets around the region, Coca-Cola and Pepsi do not dominate supply of carbonated soft drinks. Rather the market is predominantly in the hands of four charitable foundations, which together control around 60% of the carbonates market.

However both Coca-Cola and Pepsi have now recommenced local filling operations, and indeed are taking increasing market shares, in co-operation with local partners. The only really significant imported product in the beverage market is Aujan Industries' Rani juice imported from Dubai.

In light of its success, Aujan is currently building two neighbouring factories in Iran - one to produce cans, both for its own use and sale, and one to fill them with Rani for the local market, after which imports will cease.

In the dairy sector, local processor Sahar Dairy Company has finalised joint ventures with two international partners, Fromagerie Bel and Groupe Danone, with in each case the international company holding the majority. In the short term at least, the venture with Fromagerie Bel is the more significant as it involves milk, cheese, cream and butter while the Danone venture is more limited, being focused on dairy desserts.

Looking west to Iraq, far less is known. This large country, with a population approaching 30 million people and substantial oil resources, has been more or less off-limits to outside businesses for almost 20 years, originally because of sanctions following the first Gulf War and more recently because of poor security subsequent to the US invasion in 2003. It is one of the world's great untapped markets.

At a time when property prices around the world are plunging, those in Baghdad are soaring and are now double the level of three years ago, a trend which has accelerated since the security agreement under which US forces will leave Iraq by the end of 2011.

In terms of trade, there is no question that very significant volumes of consumer goods enter Iraq overland from neighbouring countries including Iran but also Kuwait, the UAE, Saudi Arabia, Jordan, Syria and Turkey.

Perhaps more surprisingly it is also clear that some of this is re-exported. The local consumer goods industry itself is very underdeveloped, not least because of the difficulty in obtaining new plant and machinery over the last two decades, and industrial scale food processors are few - although some traditional market pioneers such as Coca-Cola do already have bottlers in place.

However, the market is served by a large and thriving artisanal sector supplying a basic range of products to the local populace where they are located.

David Edwards is a Chartered Marketer, a Fellow of the Chartered Institute of Marketing and a Liveryman in the Worshipful Company of Marketors. He is Managing Director of IMES Consulting Group based in Dubai Media City and can be reached on +971 4 3672177 or dje@imesconsulting.com or via the website www.imesconsulting.com

Iran’s retail sector is severely underdeveloped• Retail groups, including co-operatives and union stores, which work on relatively low margins (10% or less). By far the largest of these is the Urban & Rural Co-operative which operates approximately 500 stores, 100 of which are in Tehran. Most of their stores are very small with only one till and serve the lower end of the market.

The most upmarket group is probably Shahrvand which has around 10 branches in Tehran and claims to be the only fully computerised chain store in Iran. Its flagship, a 5,000m² store n Argentine square, has a food hall open 24 hours a day plus other halls for household products and clothes.

• Private supermarkets and mini-markets are located mainly in the more prosperous areas, are independently run and few in number. Outlets are typically small in size (most are less than 200 square metres), are overcrowded and offer a large selection of products and brands. It is quite common for leading brands to be out of stock. Retail prices in these stores are also high, often 10-20% higher than in smaller mid-market outlets.

• Small independent groceries are where most Iranians do their grocery shopping. No reliable census has been carried out to establish their number, but estimates range between 100,000 and 200,000, with an estimated 65-75% of consumer goods passing through them.

Typically these ‘local stores' are owner-managed with convenience being a key factor. In Tehran and particularly in Northern Tehran where the land is expensive they tend to be very compact - perhaps 5m² or 10m². However, most will also have a storeroom nearby to hold additional stock. Being small, these stores carry only a limited range of goods, and tend to stock a small number of leading brands.

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