EghtesadOnline: Consistently low oil prices and government plans to diversify revenue streams have turned investors toward other sectors of the Iranian economy. One of those to watch in the year ahead will be the consumer goods market.
Total value of trade in this area has risen sharply since the nuclear deal was reached, but nowhere near to that of its potential. However, it is important to note that even before the deal’s “Implementation Day” on Jan. 16, 2016, Iran’s consumer goods market was y relatively well developed, supported by a strong retail and distribution infrastructure.
Recent developments will, therefore, now benefit from these pre-existing foundations, allowing for much further and faster growth in the sector.
Building on Pre-Existing Foundations
Iran’s modern shopping spaces, for instance, were reinvented in the aftermath of the Iraq-imposed 1980-88 war under the late Ayatollah Akbar Rafsanjani’s urbanization plans, according to Financial Tribune.
High streets and shopping centers were at that time expanded to boost supply of goods while curtailing the costs of distribution for controlling inflation. These spaces are now commonly used among Iran’s population of over 80 million, many of whom fall into the urban middle class bracket.
McKinsey Global Institute reported that in proportionate terms, Iran boasts a “consuming class” double in size to that of China and Brazil, with more than half of Iranian households receiving income in excess of $20,000, much of which is disposable, especially in Tehran where per capita consumer spending reached $4,700 in 2016, according to Planet Retail.
Luxury goods market would be well served by the abundance of urban shopping spaces and middle class consumers; indeed anyone who has visited the major cities will be familiar with the taste for high-end designer goods.
From the beauty market-which Euromonitor International estimated to be worth $3.68 billion in 2015-to luxury cars, where even during the period of sanctions Maserati and Porsche built corporate offices in Tehran and total imports of all cars almost doubled-from $830 million in 2011 to $1.6 billion in 2013, despite the extravagant premiums on importing.
Coffee is another consumer good that could benefit from this demographic. From a very low base, coffee consumption is growing rapidly in what is still a traditionally tea-devoted nation.
Bourse & Bazaar noted that the total value of the market is expected to reach $200 million by 2020; potential investors should note that only a tenth of the coffee currently being consumed is freshly ground, while Nestle is the only brand with a significant share in today’s Iranian coffee market (circa 20%).
The consumer goods market in Iran has also long thrived off the internal distribution networks, which again were developed in previous generations. Oil price rises in the 1970s enabled major investment towards modernizing Iran’s national transport system; Tehran became a key transport hub, with several terminals set up around the capital connecting it to most major cities. These routes were later reinforced during the Iran-Iraq war for food and military transportation, and now form the spine of Iran’s internal distribution network.
In turn, this has aided the dramatic rise in e-commerce platforms such as Digikala, Iran’s own online shopping site and the biggest of its kind in the Middle East with a total value of $150 million, employing 760 people, and boasting a same-day delivery service in Tehran.
Digikala and its competitors have changed the way goods are delivered and they will be helped even further by plans to boost telecommunications networks in Iran, as seen last year when the government issued new 3G and 4G licenses to more mobile broadband companies.
Iran’s strategic location has also been a traditional enabler for trade, as it shares land borders with seven countries, bridging South Asia with the Middle East and Turkey, and connecting the Caspian region to the Persian Gulf.
Coupled again with recent developments-such as the warming of ties with Turkmenistan, Oman and Kuwait-this provides even further encouragement for the consumer goods market.
It was for this reason that MMAS Eurasia Logistics, a German-based joint venture, announced earlier this month that it would provide international cargo transport services through Iran; and also why the Iranian port of Chabahar is now the focal point of a trilateral transit agreement with India and Afghanistan.
It is, therefore, a good time for international companies to manufacture consumer goods in Iran for export across the region, which is helped by the fact that full foreign company ownership is permitted in Iranian law.
Such moves would inevitably help address unemployment in the country-MGI’s 2016 Iran report predicted that the fast-moving consumer goods sector alone would create an additional 850,000 jobs by 2035.
This chimes well with the Leader Ayatollah Seyyed Ali Khamenei’s New Year message that specifically called for greater employment and support for domestic production. But the latter must also be heeded by international companies when entering Iran, although more as an opportunity than a hindrance.
Indeed, domestic brands dominate the consumer goods market and there is a desire to strengthen them further as part of the “Resistance Economy”—the concept aimed at promoting domestic production and reducing oil dependency, but foreign firms still have a role to play. The local consumer goods market is fragmented and not fully modernized, particularly in supply chain management and R&D, so there remains a demand for international partners capable of transferring the relevant skills and technology.
For instance, Arj Company, a famous Iranian home appliances manufacturer, was forced to close last year due to inefficiencies and mismanagement, but efforts have been made-with the support of the Ministry of Industries, Mining and Trade-to attract investment from European firms to help turn things around. So while international companies should be mindful of Iran’s economic priorities, they can align with them and add value.
Ultimately, Iran’s consumer goods market has for some while benefited from the country’s shopping spaces, distribution networks and geographic location. Now with a sizable consuming class, e-commerce platforms and improving regional ties, it can truly flourish.
Investors should also note that success in this sector could also pave the way for development in more capital intensive area of the economy. In any case, the consumer goods market should, like tourism, become an Iranian economic success story over the coming years, helping to create jobs and wealth, while offering considerable opportunities, both old and new.