Retailing in
Iran
EXECUTIVE SUMMARY
In the traditional Iranian retailing
environment small and independent players remain dominant
With few major chain stores and only
one multinational retailer the Iranian retailing spectrum is full of
independent outlets that are connected to the main bazaar of Tehran. In recent
years, as a result of a recession in other economic sectors such as agriculture
and industry, investors have been attracted to retailing and the growth in
number of outlets has continued. This traditional distribution network is very
ineffective and usually culminates in several mark-ups on price before products
reach the consumer. Consequently, the price of a single product may vary from
region to region as small independent retailers attempt to boost their profits.
Carrefour with the Hyperstar brand
is the first multinational retailer to become active in Iran
French giant Carrefour opened the
first modern hypermarket with international standards in Iran. The store,
located in the western part of Teheran, is being operated by the Majid Al
Futtaim group, Carrefour’s franchisee partner for the region. The store was
opened under the Hyperstar banner, rather than Carrefour’s name. The opening of
the store at the end of 2009 changed the balance, especially for grocery
retailing in Tehran, and had a huge impact on the retailing environment as a
whole. Hyperstar’s success and popularity was not even predictable for its
investors and it made them eager to start construction of more branches in
Tehran and other key cities of the country.
Grocery retailing continues to have
huge potential
Convenience is slowly becoming one
of the major needs of Iranian consumers. The store formats with the greatest
growth in terms of consumer preference were hypermarkets and supermarkets due
to the wide variety of products on offer. Grocery retailing in Iran also
entered a new phase of development as the multinational giants started
activities in the country. On the other hand, non-grocery retailing is highly
fragmented, largely dominated by single-outlet operations featured in the
largest retailing formats including clothing and footwear specialist retailers
and leisure and personal goods retailers. The concept of chain stores for
non-grocery retailers still is not well grasped in Iran.
Absence of international retailing
conglomerates means relatively high number of outlets and considerable
fragmentation
A sudden increase in oil prices,
which peaked in 2008, led to impressive growth in disposable income. To fill
this massive demand the Iranian market was flooded with foreign goods and the
total value of imports to Iran increased exponentially. Most of the imports,
especially in recent years, were consumer products – which was a reason for the
increase in number of outlets. Iran has an extremely high number of outlets for
both grocery and non-grocery retailers. This is largely because, despite the
existence of hypermarkets, Iranians are used to going to a variety of outlets
to do their weekly shopping.
Sales to show healthy growth over
the forecast period
Despite the fact that retail prices
are predicted to continue to increase over the forecast period, total sales are
forecast to grow at a healthier CAGR in constant value terms than during the
review period. Sales growth will be fuelled by the same factors that drove
growth over the review period, including rising purchasing power and improving
standards of living and lifestyles. The emergence of any multinational
retailers will further drive growth. On the other hand, growth will continue to
be inhibited by the government’s policies regarding foreign investment and
privatisation.
KEY TRENDS AND DEVELOPMENTS
Economic conditions
Iran’s
economy relies heavily on oil export revenues, which account for around 80-90%
of total export earnings and 40-50% of the government budget. An increase of
over 100% in GDP during 2004-2009 (US$163.2 billion in 2004 and US$330.5
billion in 2009) due to the sudden increase in oil prices, which reached its
maximum in 2008 (at more than US$140 per barrel), gave the government an income
which was significantly more than it had been in the past 50 years. Income per
capita rose during the 2004-2009 period and the number of jobless declined.
However, in 2010, due to the controversial policies of the government and
decrease in the price of oil, this trend could not continue. Overall, the
economy remains generally closed to competition and economic reforms and the
private sector accounts for no more than 20% of GDP.
Agriculture
employs about one fifth of the work force and accounts for 8.9% of GDP.
Manufacturing makes up 10.1% of GDP. Food processing is the largest followed by
machinery, equipment and chemicals. The service sector has seen long-term
growth in terms of its share of GDP, but currency-exchange restrictions,
excessive bureaucracy and the uncertainty of long-term planning have created a
volatile environment.
The
state dominates the economy, accounting for roughly four fifths of all economic
activity. In 2007, Ayatollah Ali Khamenei decreed that the government would
sell partly all but 50 of the 1,500 companies in state hands. Because the
private sector is so small, the privatisation that has gone through primarily
involves the transfer of a state-owned enterprise to a quasi-state enterprise.
The country's Revolutionary Guard controls many of the more profitable
companies.
A
3% VAT was introduced in 2009 but then delayed following widespread
demonstrations. The traditional Iranian bazaar is one of the main barriers for
the government to apply a modern taxation system and its lobby always has a
severe reaction to any change in the taxation law.
Unemployment
is a major problem in Iran. Official statistics reported 10% unemployment in
2010. However, there is much speculation about this number and many believe it
is much higher. Governmental policies could not reduce the unemployment rate in
recent years and moreover that rate faced a rise in the last three years of the
review period.
Iran's
great economic potential is hampered by low levels of foreign direct investment
(FDI) due to Western sanctions and an unwelcoming business environment. Low FDI
undermines the government's plans for privatisations, the modernisation of the
hydrocarbon sector, and lowering unemployment. Foreign investment is restricted
in banking, telecommunications and transport and banned in defence, oil and
gas. Political unrest and uncertainty over international sanctions are other
barriers to investment. Cumbersome regulations limit employment opportunities
and productivity growth. Corruption is widespread.
Current mpact
A
sudden rise in the disposable income in recent years (due to increases in the
price of oil) had a significant effect on the consumption pattern of the
Iranian consumers and initiated higher demands. In order to meet this need, the
Iranian market was flooded with imported goods and the total value of imports
to Iran rose by 90% from US$24.7 billion in 2003 to US$47.1 billion in 2008.
Most of the imports, especially in recent years, were consumer products, which
was the reason for an average 1% increase in number of outlets. However, this
increase in the money supply as well as government’s spending and expansionary
policy led to the highest inflation rate in the region (26% in 2008) and
started to limit purchasing power.
Modernisation
of the retailing industry was one of the targets for the Iranian government to
manage the huge mass of imported fmcgs. However, in a country with a very
limited number of modern retailing channels, massive volumes of imported
products primarily go through the wholesale channel with traditional channels
such as independent small grocers, food/drink/ tobacco specialists and other
non-grocery outlets taking a secondary role. This implies that distribution did
not modernise and improve as fast as products did and consumers could not
experience new shopping methods or outlet types effectively.
In
general the increased demand for imports due to higher disposable incomes led
consumers to look for imported products at the cheapest rates. In certain channels
such as electronics and appliance specialist retailers, the relatively lower
bases and strong marketing activities of the key players led to strong growth
in the number of outlets and value sales of both. For instance, in the cell
phone market with the introduction of a third operator (Irancell) in the middle
of the review period and also credit-based phone lines, this category
experienced 40% growth in a number of outlets. Even consumers with lower income
are being seduced into buying mobile phones that are completely out of their
price range with loans and similar credit facilities making the purchase of
these products possible.
Overall,
grocery retailers experienced better growth and faster modernisation trends in
comparison to non-grocery retailers. Major categories available in the grocery
retailers channel (including food, beauty and home care) had much higher volume
of imports in comparison to the non-grocery materials which happened due to the
higher demands from consumers. Consumers prefer to spend their income – which
increased significantly in recent years – on grocery materials. Consequently,
the number of supermarkets and hypermarkets increased by 2% and 7%,
respectively in 2010; this shows the fast trend of conversion from traditional
to modern trade. Each year more consumers become aware of the benefits of the
new channels over traditional ones (discounting, fresh products, pick-
it-yourself concept, shop all in one place, etc) and this makes them reluctant
to keep shopping at independent small grocers. In addition, with the
introduction of the first Carrefour branch in Iran (Hyperstar) in 2009 and
strong performance of this new outlet many existing retailers like Refah and
Shahrvan have had to improve the quality of their service in order to remain
competitive.
On
the other hand, suppliers also prefer to work with modern channels because they
can reduce their distribution costs and also can reach their consumers easily
via promotional activities like sampling, which is impossible in traditional
channels like independent small grocers. As a result, companies encourage big
grocery retailers and sell their products with good offers and discount to them
to strengthen their position in these emerging giants. One can conclude that
higher income and an improved standard of living gave suppliers a good
opportunity, but in order to get the best result, modernising the retailing
channels seems to be inevitable.
In
the highly fragmented Iranian retailing environment there are only three major
grocery retailers (Hyperstar, Shahrvand and Refah). This can be regarded as a
consequence of Iran’s closed economy and lack of foreign direct investment as
well as the highly unstable economic condition. However, the fast trend of
changes in the purchasing habits of the young Iranian population means that
these three companies are facing a huge opportunity to expand their activities
and win the competition with independent small grocers. All of them have
various plans for expansion, especially in the number of outlets to respond to
this increasing demand.
Outlook
On
average, oil revenues are 80% of Iran’s foreign income and their share in the
fiscal budget is over 50%. Ever increasing sanctions is set to detrimentally
affect Iran as an oil-producing economy. Government officials admit that
sanctions and underinvestment have reduced oil production capacity by at least
300,000 barrels per day since 2005. Iran must invest at least US$25 billion per
year or risks becoming a net oil importer.
In
addition, oil prices have tumbled by more than 65% since their 2008 peak and
there are fears they could continue to plunge because of diminishing demand
caused by the current financial meltdown. As a result, real GDP growth is
expected to slow over the forecast period to an average of 2.6%, which is
almost half the rate achieved over the review period. In addition, the
re-election of President Mahmoud Ahmadinejad in 2009’s election means that
current spending and expansionary policies will continue and a major decrease
in the rate of inflation during the forecast period is therefore unlikely. As a
result, importation volumes are predicted to decrease whilst consumer
purchasing will become limited. Overall, economic growth is expected to be near
zero percent, which is much less than the rate during the review period.
About
one million Iranians enter the labour market each year, and it is difficult to
create the necessary jobs. About four fifths of the economy is in public hands
that are not eager to create job opportunities. In 2010, people in their 20s
were the largest age group in Iran with 16.1 million people representing 21% of
the population. This number will slowly decline and reach 13.8 million by 2020.
Although the young demographic offers a promising future for consumer goods,
the large number of young adults entering the job market remains a challenge
for the government in an economically uncertain environment. The 20s are the
years when young people become adults in Iran. Whether they enrol in higher
education or not, they will have to start working and will gain financial
independence.
Given
the current policies of the Iranian governors, which promote confrontation with
the West, introduction of new sanctions is likely to happen. Sanctions on the
banking and insurance industry will make foreign direct investment harder than
before and thus act as a key barrier for further growth of the economy.
The
probable implementation of a subsidies reform program that has been approved by
the Iranian parliament is another factor that can significantly influence the
Iranian economy during the forecast period. This program, which aims to cut the
subsidies for major products and services like bread, fuel and electricity, is
forecasted to cause considerable inflation due to the monthly payments of the
government to the individuals, as these payments aim to cover their additional
expanses for these products and services. Currently, Iranian government claims
that it will implement this law without any additional inflation, which would
seem to be hard to achieve.
Future impact
As
a consequence of the slowdown in economic growth and high rates of inflation
during the forecast period, consumers will seek products at more competitive
prices. Small retailers that do not have the ability to attract consumers by
their quality or prices will not be able to continue their activity. In
addition, the government will try to control ever increasing prices to prevent
unrest. One of the key tools in achieving that will be to decrease the number
of independent small grocers and food/drink/tobacco specialists and expand
hypermarkets and supermarkets instead. The government can control prices in
hypermarkets and supermarkets, which is not practical in traditional channels.
Thus, it is likely that as a result of the economic strains on the government,
it will promote modern retailing formats such as hypermarkets and supermarkets,
and rein in growth of smaller independent grocery outlets. Nevertheless, modern
retail formats would have to offer more competitive prices in order to attract
the majority of consumers. A slowdown in economic growth may also lead to a
decreased demand for imports and therefore greater returns for domestic
manufacturers and retailers.
Grocery
retailing, especially in modern formats like supermarkets and hypermarkets,
will experience a more positive growth than non-grocery retailers. Iranian
retailing giants (Hyperstar, Shahrvand and Refah) will expand their activities
in terms of the quality of their service and their coverage. Various government
supports for modern grocery retailers may encourage many multinational
retailers to start activity in Iran.
Government regulation
The
Iranian government interferes in most industries in the forms of price controls
and subsidies –particularly in industries concerning grocery staples and oil
and energy, and this continues to weigh down the economy. In addition,
contraband, widespread corruption and other rigidities hinder private sector
growth. An occasionally unstable political climate and unpredictable relations
with the West concerning nuclear proliferation also has a detrimental effect on
the economy and retailing in particular. Only in recent years has the Iranian
government come to the conclusion that the current traditional retailing
environment is not effective and serious reforms in regulations are needed to
attract foreigner investment in retailing. Two out of three giant retailers
(Refah and Shahrvand) are controlled directly by the government. Sharvand is
owned by the Tehran municipality and Refah is owned by a trust of Iranian
governmental banks. On the other hand, the central core of the Tehran bazaar
has also a strong connection to the Iranian clergy government. This core can be
regarded as the main supplier of the Iranian wholesale sector.
Current impact
New
changes in government regulations were designed to encourage multinational
retailers to start activity in Iran, but some key issues still act as barriers
for this purpose. The current political unrest in the country and terse
political relations between Iran and the West, which have led to economic
sanctions, have made it difficult for retailers to expand their activities.
Transferring money to/from Iran is a major issue and many Iranian banks are
under the sanctions. In addition, rigid laws regarding foreign investment have
discouraged multinationals from setting up activities in Iran and foreign
investment remains limited compared to what it has been in other countries in
the region. Furthermore, the unclear political situation can also affect
domestic retailers, as was illustrated in June 2009, when many small retailers
in cities such as Tehran had to close their stores due to the unrest on the
streets. In general, government interference in retailing has hindered private
sector growth and is fuelling corruption that benefits the interests of a
select few as opposed to the Iranian population as a whole. Retailing is unable
to achieve organic growth when fettered by a host of government regulations and
interference and retailers are therefore often unable to keep up with consumer
demands and expectations, forcing them to resort to contraband and counterfeit
purchases.
Outlook
As
part of a reform plan, the Iranian government has passed a new subsidy bill
that will see cuts to subsidies on fuel, electricity and other basic
commodities like wheat, sugar, rice and milk. This move will have a significant
impact on the market for fast moving consumer goods and retailing. Cuts to
subsidies in Iran could come as early as January 2011 and the initial impact
would be on raw materials and production costs. The aim of the bill is to raise
prices in Iran to match international levels over the course of five years.
This will be achieved by cutting subsidies on groups of products in different
phases and replacing them with cash hand-outs to the poorest echelons of
Iranian society.
Future impact
Whilst
government regulations will encourage investment of big multinational
retailers, the consequences of this law to the purchasing power of the
consumers seems unclear. This new law will boost the inflation rate and will
make many consumers with constant incomes (like government employees) unable to
pay for FMCGs, which will have a negative effect on retailing. The first phase
of the bill will affect prices of fuel, water and electricity, hence impacting
the production capacity of key suppliers in Iran. It is expected that subsidy
reform will drive the inflation rate in Iran up to at least 40% – more than
double the current rate. This will see the purchasing power of consumers
decrease despite cash injections to monthly salaries from the government. The
effects of this reform bill will manifest themselves differently in various
retailing categories. Many consumers will not be able to match their income
with the increasing rate of inflation and thus will look for better prices and
discounting. New modern channels like discounters and hypermarkets will be
appreciated by those consumers and their further growth will be inevitable.
In
addition, one of the solutions to control this increasing trend in the
inflation rate for the Iranian government is to change the traditional nature
of retailing in Iran. The government cannot control prices in so many outlets
thus has to welcome foreigner giant retailers to decrease the number of
outlets. This can totally change the current balance and result in
strengthening modern channels whilst weakening the strength of the traditional
bazaar and wholesalers.
Foreign direct investment
The
main legislation regarding foreign investment was amended in 2002 when the
Foreign Investment Promotion and Protection Act (FIPPA) was introduced. The new
law brought in incentives and protection for foreign investment, allowing
relatively good terms for repatriation of profits, and saw the establishment of
16 special economic zones as well as six free trade zones to encourage
investment. All economic sectors are open to overseas investment except for the
strategic sectors such as defence and parts of the hydrocarbon sector in the
upstream gas and oil industries. In these off-limit sectors, foreign companies
can still get involved on the basis of buy-back contracts in which the revenues
of the foreign investor partner can be repatriated through the National Iranian
Oil Company (NIOC) in the form of goods and services produced by the project.
One
of the main criticisms of investing in Iran is the heavy bureaucracy, which is
rife throughout the economy with the state continuing to control most aspects
of the economy. Also, due to the political turmoil investment-friendly policies
have taken a back seat to arbitrary policy decisions aligned to political
matters. The country brought down time taken to trade by installing scanners at
the port of Shahid Rajaee and the reorganising customs clearance offices to
separate inspections of special goods (chemicals, petroleum) from those of
general goods. According to the World Bank's Doing Business 2010 report, it
takes 25 days to export and 38 days to import, involving a cost of US$1,706 per
container to import, whilst the cost to export is US$1,061 per container.
The
Iranian government, which had a failed experience of investing in retailing by
establishing Refah hypermarkets, is now trying to attract foreign investors to
convert current the traditional retailing environment to a modern one. By
allowing a major international grocery chain to establish itself in the market,
the Iranian government is hoping to stimulate competition and lower prices
across the rest of the retail landscape. Currently, a high number of outlets
makes any supervision of the products and prices practically impossible.
Currently
only one multinational retailer is active in the Iranian market; that is
Carrefour with its new brand Hyperstar. Despite government support, building up
the Hyperstar chain will be challenging. An underdeveloped regulatory framework
and infrastructure meant that the first outlet, near Tehran's Azadi Stadium,
took two years to construct, rather than the usual six months, and the next 10
stores – which will require an estimated total investment of around US$300
million – could face similar challenges.
Lack
of many modern outlets and traditional distribution networks has made
wholesalers a key element in Iran’s retailing landscape. There are key
wholesalers in Tehran’s bazaar comprising certain industries. For instance,
less than five people were key distributors for cosmetics and toiletries in the
Iranian market in 2010. There have been rumours that these key wholesalers are
connected with top clergy and share their interests with them. This convoluted
mafia-type network is very sensitive to change or modernisation. It is said
that they used their strong power to stop Carrefour hypermarket from entering
Iran in 2009, although ultimately they failed in their endeavour.
FDI
inflows to Iran intensified between 2001 and 2010 but remain low, owing to
international sanctions and an unfriendly business environment. Foreign investment
hit a record $10.2 billion in 2007 from $4.2 billion in 2005 and $2 million in
1994. Net FDI inflows amounted to $901 million in 2008. Iran attracted $1.6
billion in direct investments from abroad in 2008 and over $3 billion in 2009
despite a 20% decrease in the global flow of direct foreign investment.
Current impact
Currently,
the Iranian government is trying to convert traditional retailing to the modern
network and foreign direct investment is a key element for this purpose. The
government needs to change the buying habits of the consumers and make them
used to the “Buy All at Once” concept. A 3% VAT law is still only applied in
big chains that can be supervised by the authorities, whilst independent small
shops usually refuse to pay taxes and thus can offer good prices (although they
usually sacrifice better prices for higher interest). This unfair taxing
structure acts as a barrier for foreign investors who have to pay VAT whilst
small independent retailers usually do not pay them.
Modern
retailing still has a very low base in Iran and there is huge opportunity for
current suppliers to target more consumers. The main policy of key retailers
like Carrefour and Shahrvand is to increase their outlet numbers to expand
coverage. The concept of discounting has been introduced by Carrefour to the
market and is followed by other retailers like Shahrvand. Overall, this low
base gives investors a good opportunity to expand at a fast rate. The virgin
Iranian retailing market with high-income consumers seems to be a good choice
for many giant retailers if they can come to an agreement with the Iranian
government. Although investment is very easy on paper in Iran, the current
political situation and strong lobbies in the government act as strong barriers
for the growth of FDI in Iran.
Outlook
Iran
has suffered from international isolation since 1979. Economic sanctions,
imposed by the US following the Islamic revolution, have been tightened and
reinforced since 2007 because of Iran's nuclear programme. With the current
government expected to rule the country for at least three more years, no major
improvement is expected to happen in the country’s foreign affairs. Sanctions
are expected to become tighter and thus make investment in Iran harder than
before. Probability of a war between the US/Israel and Iran is an issue that no
investor can afford to neglect. However, the Iranian government will try its
best to attract foreign investors as one of the strategic directions to
overcome its complicated economic issues. It is expected that Iranian
government will go for alternative solutions rather than trying to attract US
and Europe retailers. Probability of investments from Russia, Turkey, China and
South Korea is high during the forecast period because these countries can be
regarded as the only remaining choices for Iran’s isolated government.
Carrefour
as the only active multinational will expand its activities and is expected to
establish at least 10 other outlets by the end of the forecast period. The
emergence of new multinational retailers also seems to be very likely during
the forecast period. These companies will try to invest in most of the key
urban areas to target the virgin Iranian market.
Future impact
Two
strong active forces are expected to challenge the Iranian retailing
environment during the forecast period. Iranian government will support
multinational giants and try to attract investors to improve the distribution
network and omit dealers whilst traditional bazaars including key wholesalers
will try their best to maintain the current traditional environment.
However,
the traditional bazaar will not be able to resist these changes and a fast
trend of modernisation in the retailing environment will be inevitable.
Expansion of Carrefour and introduction of new giant retailers to the Iranian
market will increase the knowledge and awareness of Iranian consumers and will
make a major change in their purchasing habits. Many consumers who are used to
going to traditional channels will experience the ease of purchasing from
modern outlets and shopping “all at once” will become very popular during the
forecast period.
Some
reactions to the modernisation trend in retailing seem to be inevitable during
the forecast period. Sainsbury's foray into Egypt famously ended with the chain
being subject to an unofficial fatwa, in part the result of protests from
smaller, traditional retailers who suddenly found their prices undercut and
their shops deserted. A similar backlash in Iran could slow other international
retailers’ progress.
Demographic changes
When
the Iranian monarchy was overthrown in 1979, the leaders of the new Islamic
republic drew attention to a tenet of the Quran that encourages early marriage
and large families. They encouraged families to have more and more children
until the end of the war with Iraq in 1988. Although this trend stopped after
the war, the Iranian government has been one of the most successful in
controlling population growth with the Iranian baby boom now beginning to show
its effects. More than 65.7% of the population was aged between 15 and 64 in
2004; this rose to 71% in 2010. Iran has also experienced one of the fastest
urban growth rates in the world. In 1980, an estimated 49.7% of all inhabitants
were living in an urban setting whilst this jumped to more than 70% in 2010. On
the other hand, traditional Iranian families have also changed and the key
decision makers of the households are no longer males. Yesterday’s children who
are in their mid-20s are now the decision makers about everyday aspects of
life, including what to buy and where to buy it from.
This
young population is seeking new modern retailing channels with big outlets and
eye-catching arrangements of the products. They are open to experience new
products unlike their parents and can spend a lot of money on consumer goods.
All of these points suggest that there is a huge opportunity for modern
retailers to target these young consumers and expand their activities in the
Iranian market.
Current impact
Growing
westernisation amongst the young generations and the increasing urban
population have continued to play an important role in driving sales as a
whole. The youthful nature of the population continues to boost sales of many
retailers within grocery, non-grocery and non-store retailing. The most dynamic
areas in recent years have included modern formats in grocery retailers, namely
hypermarkets, clothing and footwear specialists, electronics and appliance
specialist retailers, triggered by higher demand for PCs, mobile phones, DVD
and CD players, and other audio-visual equipment. Youngsters with mid-upper
incomes are now looking for Western brands, which was not the case in the past.
For instance, the Benetton Group established its first stores in Iran in recent
years and achieved great success and popularity in Tehran. It now aims to
expand to other cities and opened its first store in Mashhad in 2009. Overall,
considering the huge demands from the Iranian young population makes an
increase in the number of outlets a first priority for most of the key
retailers.
Outlook
The
age composition of the population is unlikely to change over the forecast
period, and the Iran population will remain young, with children and young
adults below 30 years old remaining the major age group. It is predicted that
urbanisation will continue at a faster rate. By 2020, the percentage of urban
residents will reach an estimated 74%. With the expansion of communication
tools such as satellite TV and the internet, it is predicted that the Westernisation
trend will continue at a much faster rate than it did during the review period.
The unemployment crisis that started in recent years is likely to continue
because the current structure of the government does not give any chance to
private sector growth and thus makes creation of job opportunities impossible.
In addition, purchasing power of the young people will be hampered by the rise
in the inflation rate, which is expected to increase by over 30% due to the
reforms in the subsidies payments.
Future impact
This
booming young population that is familiar with modern communication methods
such as the internet are providing retailers with an increased number of facets
through which to reach their target market. The demand for products in
hypermarkets, clothing and footwear specialist retailers, electronics and
appliance specialist retailers and leisure and personal goods specialist
retailers will rise significantly and a shift from small and traditional
outlets to modern ones is inevitable. In addition to that, more migration from
the rural areas to cities will make it easy for retailers to target consumers
much more effectively. It is also predicted that as a result of a relatively
high internet penetration index amongst the younger generation, internet retailing
could become increasingly popular over the forecast period. First of all,
digital and computer-related products like CDs and DVDs, multimedia and premium
products like luxury perfumes will be sold through the internet retailing
channel and then by further expansion of online payment methods, other consumer
goods will start to be sold over the internet. However if unemployment rates
continue to increase then this may counteract the effect of modern
communications on the expansion of the retailing market.
Rapid changes in consumer lifestyle fuel impressive growth of retailing
Iran
experienced a sudden rise in its population during the 1980s. The government
could control the population growth since the 1990s. However, a second wave of
growth in population has been started in recent years. Young adults, who
represent the largest age group in Iran, are starting their own families and
contributing to this growth. These young parents and their small children are
acting totally differently from their forebears. In many consumer goods
categories they seek new products with attractive packaging and unique selling
points.
A
good example of the changes in consumer lifestyle is the way Iranian consumers
act towards their babies. Disposable nappies are becoming more popular and
their use has grown as parents increasingly consider them a more hygienic,
affordable and a suitable option compared to the washable clothing
traditionally used. The increasing numbers of fulltime working mothers also
contribute to this growth. All of these changes lead to consumption of new
modern products (disposable nappies) which were not available before and occupy
considerable space on store shelves whilst giving retailers a good interest.
Another
similar issue is for the young population in their 20s. Following Western
trends, appearance is now very important at this age and young Iranians tend to
spend generously on personal care, personal grooming, make-up, clothing and
shoes. Smoking cigarettes and water pipes is also common, and drug usage is a
challenge for the government to tackle. Newlyweds start their own households
and require new furniture, household appliances and consumer electronics. These
demands cannot be answered in the traditional environment and need a major
change in the retailing industry in order to be met.
Overall,
consumer lifestyle is changing rapidly and presence of new communication
methods like the internet and mobile phones have contributed significantly to
these changes. Young Iranian citizens now have totally different demands and
are ready to pay for them in spite of the bad economic situation.
Current impact
This
boost in consumption has given retailers a good chance to increase their
margins and expand the industry as a whole. In the Iranian retailing environment,
which suffers from lack of multinational investment, independent individuals
have started to invest in this growing industry. It is now very common to see
several independent small grocers in small streets in key urban areas that
compete aggressively to attract the attention of the seeking young population.
The unpredictable political and economic situation also makes people reluctant
to invest in productive sectors like agriculture and industry and makes them
eager to look for alternatives with lower risk, like retailing.
Huge
numbers of independent outlets, which is a consequence of the huge demand from
consumers, have made the Iranian retailing environment very competitive. Small
independent shops try to attract the attention of the consumers by offering
better prices, better arrangements and increased availability. In recent years
there was also a major improvement in terms of selling space, especially in the
grocery channel. This happened due to the sudden growth in number of selling
items.
Outlook
The
change in consumer lifestyle is likely to continue at a faster rate than it did
over the review period. The main reasons for this faster trend include
increased education (especially in universities), more coverage of satellite
TV, higher penetration of internet and activities of key suppliers to create
awareness about their products. Young consumers in their 20s and 30s will
account for more than half of the population and will be the main drivers of
the sales of fast moving consumer goods. New products like breakfast cereals,
noodles and ready meals will find their way to the shopping basket of Iranian
households and thus will make the retailing industry more profitable.
Future impact
Retailers
will try to improve alignment with these changes amongst consumers. An increase
in selling space will be necessary in response to the huge mass of new products
which are expected to come to the Iranian market. In addition, modern retailing
concepts like discounting seems to be becoming more common even in small
independent shops. Most of the suppliers will improve their distribution
network and will have a capillary network of salesmen as their priority. This
will be their only method to communicate with the customers and consumers at
the point of purchase. An improved distribution network means less room for the
wholesale and traditional bazaar and gives small retailers a better opportunity
to attract consumers with better prices.
Traditional distribution network leads to relatively high number of outlets
Different
layers of distribution including wholesalers and retailers leads to relatively
high numbers of outlets with more than one and a half million wholesale and
retail outlets in 2010. It is estimated that there is one outlet for every 50
people in the country. In recent years, as a result of recession in other
economic sectors such as agriculture, many people have been attracted to
retailing. There is a general belief that retailing offers higher incomes than
other sectors and most of the small retailers refuse to pay any tax to the
government. In almost all key cities, the traditional bazaars are still active
and wholesalers remain a key element. Lack of modern outlets has given
consumers no other choice except to buy products through many brokers at higher
prices.
Current impact
Lack
of many modern outlets and traditional distribution networks has made
wholesalers a key element in Iran’s retailing landscape. There are key
wholesalers in Tehran’s bazaar that comprise certain industries. For instance,
less than five people were key distributors for cosmetics and toiletries in the
Iranian market in 2010. There have been rumours that these key wholesalers are
connected with top clergy and share their interests with them. This convoluted
mafia-type network is very sensitive to change or modernisation. It is said
that they used their strong power to try and prevent Carrefour hypermarket from
entering Iran in 2009, although ultimately they failed to do so. In general,
the traditional distribution network that sources goods to retailers in Iran is
highly corrupt and inefficient and the clout of members of this network can be
seen as a barrier to privatisation and modernisation. This network also ensures
significant mark-ups in the end price the consumer pays and considerable
variations in price from city to city or even between retailers. Consumers,
therefore, can never be sure they are getting a good deal.
Outlook
If
the government focuses on methods to increase the regulatory role it plays in
retailing and forces small independent retailers to pay taxes, it is likely
that fewer new outlets will open as retailing would no longer be as attractive
to investors, who would find it more expensive to open and run stores.
Furthermore, prices at modern outlets will become more competitive, and it is
possible that more urban dwellers will choose to shop at them. Yet, it is also
possible that the government will be unable to implement increased regulatory
measures and be unable to distance itself from the influence of those at the
heart of this archaic distribution system.
Future impact
The
constant struggle between the traditional bazaar and its political clout and
modern retailing formats will be difficult to solve. However, if an agreement
is reached or the government increases its regulatory activity, there could be
change in Iran’s retailing landscape with a concerted move towards modern
retailing formats and the change in consumer perception of supermarkets and
hypermarkets. However if the government is unable to do the aforementioned, it
is likely that Iran’s retailing, particularly within grocery retailers, will
remain relatively unorganised with widespread price variation and informal
trade.
Overall,
reforms in the current traditional environment seem inevitable. At least for
key urban areas, wholesalers and key bazaar players have to accept these
changes and widen the narrow area of their activities from fast moving consumer
goods to other categories like construction and industrial products. It can be
concluded that the coverage of the bazaar and wholesale channel in different
retailing categories will narrow year by year but is unlikely to disappear at
least for the next decades.
