Analysis: Ethiopia opens door to retail managers, but keeps ownership

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Richard Lough Addis Ababa

Ethiopia has pushed ajar the door 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 US and Kenya’s Nakumatt supermarket. They 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 needed 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.

In addition, the arrival of big foreign competitors will hurt the locally owned supermarkets springing up in the new malls, while the small traders who still dominate retailing fear the development will put them out of business altogether.

Instead of following other African countries, which have opened up to foreign retailers, Ethiopia is launching a state-owned cash-and-carry wholesaler called Alle, which it promises to run as a private firm.

“Retail distribution is not competitive, it is archaic,” Finance Minister Sufian Ahmed said 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, which has spurned the liberalising approach of others by holding onto control of its telecoms monopoly and keeping foreigners out of the banks.

The International Monetary Fund (IMF) 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.

Still, an emerging middle class is enjoying increasing buying power.

Experience from emerging markets around the world shows retailing starts to expand significantly when a country’s per capital national income reaches $750 (about R7 700) and really takes off at $3 000, according to McKinsey Global International. In 2012, Ethiopia’s per capita income was $410, while middle-income status is defined as $1 430 by the World Bank.

Ethiopia’s middle class was increasingly brand conscious, even if available cash remained limited, said 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 does not have that disposable income to really go out there and shop.”

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.

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

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

The officials said Alle would bring more competition to the powerful suppliers that dominated the market, thereby forcing down the prices passed on to retailers.

When prices raced out of control in 2011, the then prime minister, Marxist-influenced Meles Zenawi, held talks with Walmart, 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 cannot do it. But I would love to trade in Ethiopia,” Mark Turner, Massmart’s Africa director, said. “They would welcome wholesale operations and that is just not an option for us.”

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

“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. – Reuters


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