Hot Drinks - Egypt- Market Report

EXECUTIVE SUMMARY

Sales of hot drinks continue to grow in 2009 despite low GDP growth

In 2009, Egypt’s economy was impacted negatively by the international financial crisis. Egyptian GDP is predicted to grow at a rate of only 4% for the fiscal year compared with the 7% growth achieved in 2008. However, sales of hot drinks in Egypt continued to grow in volume and value terms in 2009. Strong and positive growth rates were seen in both other hot drinks and coffee. Sales within more established categories such as tea grew slightly due to their maturity, particularly black standard tea, whilst other less-established categories coming from a smaller base such as green tea showed strong growth in 2009.

Driven by child consumption, other hot drinks remains the most dynamic

Other hot drinks witnessed another good year in terms of volume and value sales in 2009, which is mainly attributable to the strong performance of chocolate-based flavoured powder drinks, which became more popular in both off-trade and on-trade channels. This is due to child consumers, who account for almost 10% of the Egyptian population. Moreover, the on-trade channels consumed a sizeable volume of chocolate-based flavoured powder drinks throughout the year. Chocolate-based flavoured powder drinks are served hot in winter and chilled with ice during the long hot summer season and hold great appeal for the young generation. The rise in the number of consumer foodservice outlets also drove demand for other hot drinks as well as coffee and tea.

Badawy & Sons Co leads hot drinks in Egypt with its brand El Arosa

Badawy & Sons Co leads in Egypt due to its strong presence in the retail market in both urban and rural areas as well as its focus on reasonable pricing. El Arosa, which means ‘the bride’ in Arabic, led hot drinks in 2009 with a 53% value share. Multinational companies also maintained a strong presence, specifically Unilever Group with its famous Lipton brand. Unilever Group appeared the most dynamic player in terms of advertising and was responsible for many new innovations across the tea category, especially towards the end of the review period. For example, the company introduced the concept of tea bags into the green tea category and different sizes of packaging for its products in black standard tea bags as well as marketing its loose black standard tea products in smaller-sized packaging in a bid to appeal to lower income consumers.

Sales strategies adopted by hypermarkets stimulate growth for hot drinks

Hypermarkets are becoming attractive outlets for a wider consumer base because of the growing culture in Egypt of 'one-stop-shopping'. The presence of hypermarkets allows for larger display areas offering more brands and variety in addition to the development of private label brands Carrefour and Spinney's. Hypermarkets are not only adopting price reduction techniques but have also started to sell large volume packaging formats at special price discounts such as ‘buy six packs for the price of five’. This contributed to the volume sales increase witnessed in hot drinks during 2009.

Sales will continue to grow during the forecast period

Forecast retail value growth for hot drinks is going to be a CAGR of -3.7% in constant terms compared to 6.5% GACR in constant terms during the review period. This is due to the increase in the Egyptian population at an annual rate of 2% will drive the growth of volume sales during the forecast period. The rising number of consumer foodservice outlets such as specialist coffee shops and casual dining restaurants will also contribute to the healthy performance of hot drinks within on-trade channels. Other hot drinks will continue to be the most dynamic category during the forecast period, which can mainly be attributed to the high number of children among the Egyptian population, numbering some six million.

KEY TRENDS AND DEVELOPMENTS

Economic growth in Egypt drops to 4% as a result of the economic crisis

Recent indicators suggest that the current economic turmoil is having an impact on the Egyptian economy. The financial year 2008-2009 saw a huge decline in Egypt’s GDP growth rate. According to financial analysts, economic growth dropped to 4% in the 2008-2009 fiscal year compared to 7% during 2007-2008.

Current Impact

Sales of hot drinks are experiencing a period of slowdown as a result of the effects of the global economic slump. Consumers are cutting down on expenditure and becoming more prices sensitive. Purchasing power and consumer confidence declined along with the slowdown of the economy. Consumers subsequently became more rational in their spending habits. Key players within hot drinks took necessary measures in terms of running all-year-round consumer promotions in the form of price reductions. Advertising spending was largely limited to multinational companies which could afford to sacrifice their profits in order to maintain their brand image in the domestic market.

Outlook

Sales of hot drinks are expected to grow to maintain its growth rates and perform better in constant terms compared to the review period. This will take place due to the continuous support of main players in the market. Moreover, serious steps will be taken in the near future to find a way out of the economic crisis which took place towards the end of 2008. The Egyptian banking system is willing to take serious positive action in support of the growth sought by the government. Local manufacturers are cutting down on their advertising and marketing budgets in order to survive the coming period with the lowest possible risk. According to Euromonitor International’s sources, new product launches will be postponed until the situation in the economy improves.

Future Impact

The economic crisis will continue to exert a significant influence over the purchasing power of Egyptian consumers, reducing demand especially among low and middle-income consumers. International operators will be able to maintain their operations and business by offering consumer promotions and economy packs to continue pushing volume sales. For instance, in recognition of the decline in consumer purchasing power, Unilever launched Lipton tea bags in packs of 25 and 100. These were previously available only in packs of 15. However, without recourse to these kinds of promotional devices, it is by no means certain that local players will continue to survive in the market.

The boom in supermarkets/hypermarkets boosts sales

The major distribution trend in Egypt during 2009 was the ongoing development in supermarkets/hypermarkets, especially hypermarkets, which demonstrated strong appeal among the Egyptian population across various different socio-economic classes. This was a direct result of the rapid expansion plans enacted by leading local supermarket chain Metro, which has implemented an aggressive expansion plan to establish 35 branches. In addition, the presence of hypermarkets such as Carrefour, Spinney's and Hyper One played an important role in the distribution of hot drinks.

Current Impact

Independent small grocers known as bagallas in Arabic, increased share of hot drinks from 41.9% in 2004 to 43.1% in 2009 due to their popularity and high accessibility across the country to the majority of the population

Sales of hot drinks also benefited from the increased display space on offer in the newly developed retail chains. The constant opening of new outlets also contributed to the increased penetration of private label. For example, Carrefour developed and marketed private label packs of 200 black standard tea bags for E£19.00 compared to the equivalent Lipton product selling in packs of 100 bags for E£15.50.

Outlook

This trend towards hot drinks being sold through larger outlets is expected to continue over the forecast period. Companies operating within supermarkets/hypermarkets are intending to expand not only in the busy areas of Cairo and Alexandria, but also into other regions. The presence of multinational players such as Carrefour will be the main contributor behind the growth of this distribution channel. Carrefour is planning to open five more outlets in Egypt in 2010/2011. Greater penetration is planned for populous residential areas and in resort areas such as Sharm El Sheikh and Hurghada as well as the Delta region and Northern Egypt.

Future Impact

Changes are taking place in retail distribution and modern outlets with very large selling capacity and massive ranges of products are becoming common across all cities in Egypt. Consumers will shift from small grocery retailers to supermarkets/hypermarkets, which successfully compete with all other grocery retail categories in terms of pricing, due to the fierce competitive environment in this category. Supermarkets/hypermarkets will also benefit by companies offering discounts and bonuses on bulk purchases. Sales of hot drinks will continue to benefit from these improvements in retail, which have provided more display space, enhanced product visibility and boosted sales in certain categories such as fruit/herbal tea, instant coffee and other hot drinks.

Private label starting to develop in the Egyptian market

The challenging socio-economic environment in Egypt is limiting the disposable income of consumers and forcing a significant part of the population to select economy products in order to survive amidst the mounting pressure of rising living costs. Furthermore, recent developments in the retail environment towards the establishment of hypermarkets increased the availability of private label products within hot drinks.

Current Impact

Private label products are witnessing a significant rise in their penetration levels focusing on the most popular and successful categories in hot drinks such as loose black standard tea and black standard tea bags. As these popular categories of hot drinks are used regularly by a large consumer base and their appeal is not limited to a niche consumer group, they are helping to provide a lucrative start for the development of private label. Towards the end of the review period, both Carrefour and Spinney's hypermarkets introduced their own private label products. These products are sold at a price 30% lower than branded equivalents and thus rapidly gained popularity and achieved high sales volume. Spinney’s contributed to this development in other hot drinks by offering hot chocolate powder at just E£1.00 per 100g. Mansour Group’s Kher Zamman grocery retail chain introduced 250g loose black standard tea for E£1.25.

Outlook for the Egyptian Pound

Trends related to the potential future challenges of the economic environment as well as the developments in the retail sector are expected to continue during the forecast period. As long as large groups of consumers continue to face difficulties stemming from the constantly rising cost of living in Egypt they are expected to remain on the lookout for economy choices such as those presented by private label products in hot drinks.

Future Impact

Private label products are predicted to continue increasing their penetration levels over the forecast period in hot drinks. A wide number of other larger retail outlets such as Metro, Hyper One and Awlad Ragab will consider focusing on private labels products within hot drinks due to the appeal of private label among middle-income consumers. Manufacturers should focus their efforts on underlining the perceived superior quality of their branded products and keep unit price increases to a minimum in order to overcome the potential threat posed by inexpensive private label alternatives.

Demographic factors boost sales of hot drinks

The total number of households in Egypt reached 17 million in 2009 and the total population reached 78 million. The population of Egypt grew at an average of 2% per annum with more than 50% of the population being under 19 years of age. Certain elements of Egyptian culture and religion are contributing to the high proportion of children among the population by encouraging people to have big families, especially among the low-income population. The government's campaign to control birth rates has failed to achieve its objectives due to the part played by strongly conservative social forces in influencing social trends.

Current Impact

Population growth has contributed to the growth of the total hot drinks market and has led to intensive activity by the companies involved in the category. Egyptians are well-known for being big tea drinkers while the younger population is driving volume consumption of coffee and other hot drinks. Thus, sales growth in coffee has outperformed black standard tea, which is becoming a mature category. Towards the end of the review period, new brands were introduced in green tea, fruit/herbal tea and coffee which targeted younger consumers. Nestlé Egypt SAE’s Nescafé brand remained targeted towards the more affluent segment of the youth population through the use of television commercials.

Outlook

Demographic forecasts predict that the total population of Egypt will continue growing at an average of slightly lower than 2% per annum over the forecast period. Due to rising birth rates, the population will continue increasing rapidly. The Egyptian population will thus remain very young and children below 15 years of age will constitute the largest age group during the forecast period. Subsequently hot drinks will continue witnessing high growth rates in both volume and value sales.

Future Impact

The consumption of coffee, tea and other hot drinks will increase as a result of the additional consumers which will be added each year to the population base, specifically younger consumers, who constitute about 50% of the target market for hot drinks. These young consumers will continue driving demand for instant coffee as it is becoming a popular drink. The increasing birth rate is contributing to the increase in the proportion of children among the Egyptian population, and these younger people are the core consumers of chocolate-based flavoured powder drinks. Tea companies are expected to look into innovative ideas and recipes for tea to appeal to the young generation and their changing lifestyles. Marketing focused on fruit/herbal tea should be able to establish a positive outlook for tea and move away from the potentially unfashionable image of the traditional plain cup of black standard tea.

Consumer foodservice key driver of hot drinks sales

The introduction of international franchising operators into the Egyptian foodservice market is finally taking place and is making a significant contribution to the rise in the number of foodservice outlets and the future shape of the Egyptian foodservice industry. This positive growth and development is attributable to a number of factors, the most obvious of which is that Egypt is visited by large numbers of foreign tourists who require the availability of Western-style foodservice outlets. Moreover, the effects of emerging trends towards westernisation can be witnessed in a series of changes that are gradually having an effect on all categories within hot drinks.

Current Impact

Egypt has become a promising market for coffee shop operators due to the lifestyle changes which drove consumption and demand for hot drinks during the review period, particularly through foodservice and on-trade outlets. Fresh and instant coffee witnessed a substantial increase in volume sales on account of a fall in the popularity of traditional Turkish coffee. Turkish coffee is distinct from other fresh coffee used in Western Europe. This beverage does not hold much appeal for consumers in the younger generation or tourists visiting the country. Within this context, the traditional absolute dominance of Turkish coffee products over other varieties of fresh ground coffee currently seems to be faltering.

Outlook

The trend towards increased consumption of coffee through foodservice channels is expected to continue during the forecast period with the opening of new outlets by operators of existing coffee specialist outlets or the introduction of new chained coffee specialists. The younger segment of the population will continue driving demand for coffee specialist outlets which will remain their favourite location to socialise and have a quick meal with an exciting hot drink such as American coffee, espresso or hot chocolate.

Future Impact

The rising number of coffee specialist outlets along with casual dining outlets will keep the demand for hot drinks high in general. Continuous exposure to westernised lifestyles and eating habits will drive growth for consumer foodservice outlets across different formats. Coffee specialist outlets are expected to remain the most dynamic consumer food service outlets. Operators in this category will focus their efforts on their younger clientele offering them innovative hot drinks with a sandwich or a cold salad. Operators of coffee specialists are likely to further expand their beverage menus adopting international recipes to maintain their reputation as the ideal destination for an exciting hot drink.