Ethiopia’s continued strong economic growth

Ethiopia is one of the most promising regions in Africa for retail development over the next two decades, in our opinion. Ethiopia’s promise  can be attributed to the combination of its large population size and good prospects for economic growth. We highlight this in our Africa Consumer Story, where we feature a list of other countries who show the same potential for economic growth.

The urbanisation rate in Ethiopia is low, sitting at less that 20%, and the rate of migration to cities is expected to remain low in comparison to other African regions.

The fact that people in Ethiopia are more spread out is an important factor that makes the country less inviting for retailers. It is simply more difficult to reach customers, with infrastructure being much better in cities than in rural areas, while farm dwellers also do not have enough income to justify the entry of large retailers in those areas.

Why Ethiopia is on our list

Firstly, the UN’s forecasts are just that – forecasts. Forecasts are subject to a large error of margin, and there is a possibility that the UN could be wrong, and that the pace of urbanisation in Ethiopia could be faster that projected. As a result, it could be a very costly error for a retailer to decide against Ethiopian presence based on the UN urbanisation forecast.

There are also other reasons for including Ethiopia.

  1. A company might consider basing itself in Kenya, and then eventually expanding into other East African markets such as Ethiopia and Tanzania.
  1. Despite the country’s low urbanisation level, Addis Ababa is still home to close to three million people, expected to reach 4.7 million people by 2025.

Retail sector snapshot

Ethiopia’s retail sector remains under-developed, this is largely due to the fact that the sector is closed to foreign investment. According to the World Bank’s Investing Across Borders, foreign direct investment (FDI) in Ethiopia
is closed in 13 sectors, including retail, telecommunications, financial services, and transport. Needless to say, this acts as a major drag on the attractiveness of the country’s retail sector for foreign investors.

Certain retail segments open to FDI

Recently, certain segments of retails have been opened to foreign investment with the possibility that other might follow.

The beverages sector is one that has been opened to foreign investment. After the Ethiopian government prevented SABMiller from purchasing a brewery in the country, the company acquired a 67% stake in the Ambo mineral water factory, with government retaining the remaining share.  Diageo has acquired ownership in the Meta brewery in Ethiopia, while Heineken has acquired two local breweries (Harar and Bedele) and plans to open a new one.

The food retail sector is still dominated by informal vendors although supermarkets are slowly starting to gain prominence. The main supermarkets include Bambis (Greek-owned), Fantu, Friendship, Felix (Israeli-owned), and Novis (Italian-owned). One is yet to witness the entry of a ‘true’ international retailer on the Ethiopian scene. It was reported that British retailer Tesco was negotiating with the Ethiopian government to open a mega store in the country last year, while Walmart has also been involved in discussions with authorities, though no deals have yet been reached.

Operating in Ethiopia

Operating in Ethiopia is not easy; its poor ranking on international indices like the World Bank Doing Business is testament to this fact. However, for companies that are willing to take on the risk, the reward could well make the investment worthwhile.

Apart from the obvious challenges of operating in the Ethiopian market – restrictive government policies and the difficulties associated with the sourcing of products – a number of other factors can potentially dilute the opportunity that the country offers.

  1. The unstable macroeconomic environment, including high inflation rate, that erodes consumer’s purchasing power.
  2. Price and import controls, pervasive corruption red tape and a lack of access to financing have all been challenges faced by the private sector.
  3. Although we think Ethiopia’s level of political risk has declined following the death of Meles Zenawi and the subsequent smooth transition of power, there is as of yet no signs that the new government will be any less autocratic.

Read more from the Africa Consumer Story here

David Okwara

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One Response to Ethiopia’s continued strong economic growth

  1. kene August 21, 2013 at 10:53 am #

    Nice article there.

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