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RETAIL REVOLUTION BREWS IN UNDERSTORED IRAN

By Mark Faithfull

Iran’s apparent immunity to the consumerism rampant among many of its neighbors has left the country completely off the retail map, but that might be about to change. This year French hypermarket group Carrefour surprised the retail industry when it committed to opening its first store in Iran by mid-2008 under the auspices of mall development firm Majid Al Futtaim, its regional franchise holder. In the meantime work is well under way on a massive tourist destination at Kish Island, a free-trade zone just off Iran’s southern coast that has relaxed its visa requirements.

“In terms of emerging market opportunities, we believe Iran is very interesting and scores very highly,” Jim O’Neill, global head of economic research at Goldman Sachs, told SCT.

That is how Graham Dreverman, CEO of Majid Al Futtaim’s mall division, sees it too. “This year is a year of investigation for that market in particular,” he told investors at a conference in the spring. “Tehran is 16 million people. It’s hugely important — bigger than the combined [gross domestic product] of Shanghai and Beijing.”

Dubai-based Majid Al Futtaim, or MAF, which is highly experienced in development across a number of Middle Eastern markets, is reportedly aiming to open 14 Carrefour stores in Iran by 2012 and is apparently undeterred by the high price of land in Tehran. “The land price is very expensive in Tehran, extremely expensive, amongst the most expensive in the world, but we’ll continue to look at that market,” Dreverman told investors.

The company has good reason to be interested in Iran, observers say. “If you look at the basics, it has a population of 70 million, with a young demographic, so it should be an attractive market,” said Hana Ben-Shabat, a partner at A.T. Kearney’s London office. “Carrefour is going in with a very experienced regional operator which already runs over 140 Carrefour stores in the Middle East. MAF will use the [United Arab Emirates] as a hub, and its strong presence there is very important.”

If Carrefour’s announcement came as a surprise, it should be no surprise that it is using MAF as its vehicle into Iran, says Simon Thomson, head of Retail International, consulting firm that specializes in the Middle East. “MAF has been making quite a lot of noise about Iran for some time,” he said. “MAF also has strong ties to Iran, as has the United Arab Emirates as a whole, so it would be no surprise if UAE retailers were the first to go in.”

But alluring as the market is, there are some sticky issues, especially as involves U.S. retailers and goods. U.S. sanctions ban trade with Iran. Consequently, Carrefour, whose shelves are usually well stocked with U.S. products, will have to plug the gaps with merchandise from elsewhere.

At present the Iranian retail industry is largely in the hands of cooperatives, many of them government-sponsored, and of independent retailers in the bazaars. The bulk of food sales occur at street markets, where the Chief Statistics Bureau sets the prices.

More mini-markets and supermarkets are emerging, but these are mostly one-off, independently owned operations. The most significant chains are the state-owned Etka, Refah and Shahrvand supermarkets, all of which are gearing up for expansion in the wake of the Carrefour announcement.

Consequently, Iran is ripe for modern retail. “As a territory, it is almost devoid of what we would call organized, chain retail,” said Oliver Heins, a grocery sector analyst at Planet Retail, a London-based consulting firm. “Carrefour has the advantage of a highly experienced joint venture operator, and to announce they are going in means they must have negotiated the red tape which was, no doubt, very difficult.

Carrefour is not the only retailer to eye the market. Turkish supermarket group Migros Turk was interested in opening in Tehran and conducted significant research accordingly, though in the end it opted out. Similarly, electronics chain JVC, which has a distributor liaison office in Tehran, said last year that it was considering opening its own stores in Iran.

Imports still account for a considerable proportion of consumer goods consumption in Iran, and Dubai, United Arab Emirates-based companies meet much of the demand; they re-export from Western and Asian countries, making Iran the UAE’s most important re-export market.

Before the revolution in 1979, Iran was a major importer of Western apparel and foreign-manufactured consumer goods, particularly through Armenian-run stores that served expatriate workers.

Even now Iran is no stranger to Western retail influences, much to the consternation of its clerical rulers, with numerous brands and goods available in shopping centers and outlets on Kish Island.

Opportunities here will be further boosted by Flower of the East, a massive tourist attraction under construction since 2004. Architecturally modeled on the French Riviera, the $2.3 billion project will offer 570,000 square feet of retail space, the second seven-star hotel in the world (the first is in Dubai), two five-star hotels with a total of 1,000 rooms and suites, three residential areas, 4,700 luxury residences, a 27-hole golf course and a marina. The project will cover an area nearly one square mile on the northeast side of Kish Island when it is completed by 2010.

Its scale, location and accessibility to affluent Iranian nationals and foreigners alike (it will include an international airport) points to another revolution in the offing, this one of a distinctly retail nature.