Ethiopia pushes retail door ajar to foreigners


* Foreign retailers blocked from Ethiopian market

* Government says it’s open to foreigners managing state
firms

* “Archaic” distribution networks force prices up

* High public spending squeezing out private sector

By Richard Lough

ADDIS ABABA, May 26 (Reuters) – Ethiopia has pushed the door
ajar for foreign retailers keen to enter the fast-growing market
of 90 million people, welcoming them as managers but keeping the
state in control.

It is a tantalising, if limited, offer for firms such as
Walmart of the United States and Kenya’s Nakumatt
supermarket, which already have stores elsewhere on the
continent and would like a foothold in sub-Saharan Africa’s
fifth biggest economy.

“It is a vibrant market. The population is huge, the income
is there, they have a lot to go around,” Nakumatt’s managing
director Atul Shah said. “Why are we not there?”

Ethiopia has said it needs to modernise its supply and
distribution networks and encourage competition to cut costs and
keep down inflation, which leapt to 40 percent in 2011 when food
prices surged and government price caps led to hoarding.

On top of that, the arrival of big foreign competitors would
hurt locally-owned supermarkets springing up in the country’s
new malls while the small traders who still dominate retailing
fear it would put them out of business altogether.

Instead of following other African countries which have
opened up to foreign retailers, the nation that was once run by
communists is launching a state-owned cash-and-carry wholesaler
called Alle that it promises to run as if a private firm.

“Retail distribution is not competitive, it is archaic,”
Finance Minister Sufian Ahmed told Reuters when asked about
Ethiopia’s plans to shake up the retail industry.

“We are looking for outside management just to get
international experience. We are open to any option, not only
for Alle, but for any other major public enterprise,” he added.

It follows a well-trodden route for Ethiopia, one of
Africa’s fastest growing economies that has spurned the
liberalising approach of others by holding onto control of its
telecoms monopoly and keeping foreigners out of the banks.

Management contracts have been offered to foreigners outside
the retail business in the past, but these have usually been
short. France Telecom won a two-year deal in 2010 to run Ethio
Telecom, one of Africa’s few government monopolies in the
sector. Control of management then returned to Ethiopia.

UNSUSTAINABLE COSTS

The International Monetary Fund has warned that huge state
spending on roads, railways and power could derail economic
growth – which is projected at 11 percent a year by the finance
ministry but less by the IMF – if it keeps squeezing out private
business.

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Still, an emerging middle class is enjoying increasing
buying power in a country that failed to feed itself just three
decades ago. Ethiopia could still meet a target to become a
middle-income nation by 2025, the IMF says.

Such prospects elsewhere in Africa – despite huge wealth
disparities across the continent – have drawn big retail names
to flashy shopping malls serving the middle class.

“Africa is brimming with potential for global retailers with
its one billion people and growing economy,” consultancy A.T.
Kearney said in its 2014 African Retail Index report. “It is
easy to see why many retailers consider sub-Saharan Africa the
next big thing.”

Big brands are prising open the door in some areas. Drinks
giant Diageo bought a brewery and fashion retailer
Hennes Mauritz makes garments in Ethiopia. The Ethiopian
Investment Agency told Reuters last year that Unilever
and Nestle were both sniffing around.

But Ethiopia, whether on its own or with foreign firms,
needs to improve its supply and distribution network if it is to
keep a lid on costs. Inflation has come down from its 2011 peak,
but has still hovered around 8 or 9 percent for months.

“Supply costs have a significant share (of import costs),
going up to 50 percent of the overall cost,” said Mirko Warschun
of A.T. Kearney’s Africa leadership team. “That is not
sustainable.”

A.T. Kearney, which was hired as consultants to help set up
Alle, and Ethiopian officials said the new cash-and-carry would
be run as a private business, with some Ethiopians returning
from the large diaspora to join the management team.

The officials say Alle will bring more competition to the
powerful suppliers who dominate the market, thereby forcing down
the prices passed on to retailers.

“COMPELLING OPPORTUNITY”

When prices raced out of control in 2011, the then prime
minister, Marxist-influenced Meles Zenawi, held talks with
Wal-Mart, initially raising speculation it might open up.

Walmart’s South African subsidiary Massmart Holdings
said Ethiopia was a “compelling growth opportunity” but
one it could not yet exploit. “Legally we just can’t do it. But
I’d love to trade in Ethiopia,” Mark Turner, Massmart’s Africa
director told Reuters. “They’d welcome wholesale operations and
that’s just not an option for us.”

In Addis Ababa, Turner’s loss is regarded as a temporary
reprieve for the local supermarkets in new city centre malls,
without the logistic networks of a big chain.

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“We would suffer,” said one supermarket manager, barricaded
in a pokey office behind piles of imported Chinese furniture in
the upmarket Bole district, when asked what it would mean if
foreign retailers were allowed in.

Yet in the teeming alleys of Mercato, a hillside maze of
ramshackle stores and kiosks, small-time vendors already suffer
as the new middle class with more cash turn to mini-markets.

“We used to turn over 60,000 birr (about $3,000) on a good
day. Now it’s more like 20,000 birr,” said Feysel Kidr, 21,
sitting under a mountain of deodorants, shampoos and
toothpastes.

The fate of his 30-year-old family business would be sealed
if foreign firms opened shop, he said: “That would finish us.”

BRAND CONSCIOUS

But even if foreign firms could open stores, other problems
remain. The use of electronic payment systems remains limited.
Visa entered Ethiopia a decade ago and is seeking to persuade
the authorities to ease regulations.

Ethiopia’s massive public spending means private credit is
in short supply as the government drains liquidity from the
economy. Even so, wider use of cards would help to increase
lending, Visa says.

“Electronic payments (mean) more money stays in the banks
and banks are able to lend that money back to retailers to do
more business,” Jabu Basopo, Visa’s country manager for Southern
and East Africa, told Reuters.

Despite hurdles, Ethiopia remains an enticing market.
Experience from emerging markets around the world shows
retailing starts to expand significantly when a country’s per
capital national income reaches $750 and really takes off at
$3000, according to McKinsey Global International.

In 2012, Ethiopia’s per capita income was $410 and it aims
to reach middle income status – defined as $1,430 by the World
Bank – in just over a decade.

Ethiopia’s middle class is already increasingly brand
conscious, even if available cash remains limited, said
U.S.-educated Nega Asfaha who manages the Zefmesh Grand Mall,
Ethiopia’s largest shopping centre.

“The middle class is demanding more convenience, more
choice, more brands,” said Nega. “But it doesn’t have that
disposable income to really go out there and shop like you would
at Macy’s at the weekend.”

(Additional reporting by Aaron Maasho in Addis Ababa and
Tiisetso Motsoeneng in Johannesburg; Writing by Richard Lough;
Editing by Edmund Blair and David Stamp)

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