THE RETAIL INDUSTRY IN ETHIOPIA

INTRODUCTION

In Ethiopia, according to a census carried out by Central Statistics Agency (CSA) in 2004, there were 672,484 business enterprises of which 671,627 (99.9%) were private owned, 823 government owned and only 34 enterprises were owned by joint venture. These figures are including formal business establishments, informal business establishments, and those neither formal nor informal.

Source: Central Statistics Authority Among the private owned companies, the number of those which are engaged in the wholesale and retail business were 291,482 (43.39%), of which the formal establishments which had a business licence were only 97,743 which was 33.53% of the industry.

Source: Central Statistics Authority The purpose of this paper is to analyze the retail market environment of Ethiopia by considering the fundamental components of marketing environment. To this end major macro environment forces are discussed and opportunities, challenges and factors affecting the retail industry are highlighted.

1-Industry Analysis (Macro Environment)

Successful companies Recognize and respond profitably to unmet needs and trends in the macroenvironment. Unmet needs always exist. Companies could make a fortune if they could solve any of these problems: a cure for , and affordable housing.1

Companies and their suppliers, marketing intermediaries, customers, competitors, and publics all operate in a macroenvironment of forces and trends that shape opportunities and pose threat. These threats form the noncontrollables, which the company must monitor and respond to. Every organization is subject to these general forces that are felt in many industries and that are not usually amenable to influence by single organization. These forces can be classified as political, economical, technological, and social.

1.1- Regulatory/Legal and Political Environment Marketing decisions are strongly affected by developments in the political and legal environments. This environment is composed of laws, government agencies, and pressure groups that influence and limit various organizations and individuals. Political conflicts can also influence how a number of industries operate, especially those with tight global ties. The outcomes of elections and judicial court decisions, as well have their impact on the macroenvironment. Sometimes these laws also create new opportunities for businesses.

Since the retail industry is the 3rd class taxpayer, all the activities that are performed should be monitored by Inland Revenue and Customs Authority and other concerned government bodies. Mostly cosmetics products and other equipments are imported from abroad to resell in domestic market. The imported cosmetics products and other equipments come through government transportation and these builds a great link between the retailers and different government bodies that has to be monitored. These bodies are the Foreign Minister, Inland Revenue & Customs Authority, National Bank, and other related Government bodies.

1.2-Economic Environment

During the fiscal year 2007/08, real GDP grew by 11.6 percent. This high growth rate was achieved for the fifth time in a row (i.e. 11.7 percent in 2003/04, 12.6 in 2004/05, 11.5 in 2005/06 and 11.5 in 2006/07), which places Ethiopia among the top performing economies in the Sub-Saharan Africa. A ll sectors contributed to this relatively high economic growth with the service expanding by 17.0 percent and contributing about 62.8 percent to the overall real GDP growth. The agriculture and industry sectors also grew by 7.5 and 10.4 percent, respectively. Furthermost real GDP is projected to grow by 11.2 percent in 2008/09.

Source: National Bank of Ethiopia

According to the World Bank report, Ethiopia is experiencing an unprecedented spell of economic growth, although this performance has been accompanied by growing economic imbalances. For the fourth year in succession, Ethiopias economy has grown at an annual rate of over 11 percent an important achievement for a country whose per capita income in 2002/031 was same as in 1972/73. The average Ethiopian now has a level of income that is about 43 percent higher than the level prevailing at the end of the 1990s (figure 1). Yet given the extremely low initial per capita income, the country remains one of the poorest in the world, underscoring the urgency of accelerated growth and development on a sustained basis.2 Moreover, the economy faces several risks, e.g., double-digit inflation, that imply that the understandable optimism over recent growth should be moderated by caution over the potential threats to sustained economic expansion. Figure 1: Ethiopias Per-Capita Income: A Long Term Perspective

Many dates in this document refer to the Ethiopian Fiscal Year (EFY). In this case, 2002/03 refers to EFY 1995, or July 8, 2002 to July 7, 2003. 2 See Ethiopia Accelerating Equitable Growth, Country Economic Memorandum, World Bank Report No 368662-ET.

Real GDP per capita (Birr, in 1 999/00 prices) 1 ,335 1 ,235 1 35 ,1 1 ,035 935 835 2002/03 drought War with Eritrea End of Derg regime

Source: WDI and MOFED

The current boom is a combination of cyclical recovery and structural shifts in the economy towards a higher growth path. The Ethiopian economy returned to growth in the early 1990s after the overthrow of the Derg and the end of its repressive economic policies. This recovery was however interrupted by two major shocks: the war with Eritrea from May 1998 to June 2000 and a severe drought in 2002/03 (figure 1). Since then growth has resumed and with a stronger momentum than before. The cumulative impact of public investment in basic infrastructure, in particular roads, power, telecommunications, and water as well as public spending in education and health have clearly raised the overall productivity of the economy. Most macro indicators including GDP have recorded growth rates much higher during the 2002/03-2006/07 period than in any comparable period in the past. As shown in figure 2, imports, exports and foreign direct investment grew at annual rates of 27, 24 and 39 percent respectively during the

2002/03-2006/07 period, compared to 6, -1, and -14 percent during the 1995/96-2002/03 period. Economic growth has been broad-based. In contrast to the public sector consumption led growth of the 1990s, rapid growth of private consumption has been the driving force behind the current expansionaccounting for 88 percent of growth during 2002/032006/07 period relative to 54 percent during 1997/98-2001/02 period.3 Agriculture, which accounts for 46 percent of GDP and nearly 85 percent of employment, has grown at 13 percent per year since 2003/04. The higher agricultural growth has come largely through increased area expansion (following the 2002/03 drought) as well as though higher yields in selected crops. This has helped Ethiopia to gradually diversify its exports to non-traditional products like flower and agro-based products. The services sector, which accounts for 42 percent of aggregate output, has grown at 12 percent per annum during the last four yearshelped by rapid growth of financial services, retail trade and transport and communication sectors. The industrial sector, which is the smallest of the three sectors of the economy and accounts for 14 percent of GDP, has also grown at an average rate of around 10 percent per annum since 2003/04, with construction sector being the biggest driver of industrial growth in the country. In the coming years, with its large potential for hydropower, Ethiopia is expected to become one of the largest producers and exporters of electricity in the region. Figure 2: Most macroeconomic indicators including GDP have registered rapid growth in the last four years
M ovement of key macroeconomic indicators (Index; 1 995/96=) 1 Average annual growth rate 1 995/96-2002/03 vs. 2002/03-2006/07 6% 27% Imports of goods

6 5 4 3 2 1
3

1 0%

1 8%

Broad money

-1 % 4% -1 6%

24% 1% 1 39%

Exports of goods

GDP at market prices (real)

Foreign Direct The decline in private investment as a ratio of GDP in recent years is unusual, especially in light of the Investment rapid growth in foreign direct investment and the visible increase in pace of private economic activities, especially in the urban areas. Since private investment is measured as a residual item in the national income accounts, the possibility of it being underestimated cannot be ruled out.

Source: MOFED and CSA Ethiopias strong economic performance can be attributed to a combination of several factors: improvements in structural policies, strengthening of economic institutions, and some good luck. Tariffs and non-trade barriers have been significantly reduced, many sectors have been opened for domestic and foreign investors, and land market distortions are being gradually addressed. Regional states have been given considerable autonomy in developing independent economic policies and a more radical devolution process is underway, moving finances and functionaries to the woreda level. The favorable global environment, generous debt write-off, large and increasing Official Development Assistance (ODA) and remittances, and a long spell of good weather have all played important roles in moving Ethiopia to a higher growth trajectory, though these favorable factors have been offset to some extent by the rising price of oil, of which Ethiopia imports all of its consumption. The over all performance of the Ethiopian Economy since 2000/01 has been less than satisfactory. The transition from war to peace has not delivered the expected peace dividend. The country again went into a war of different kind, this time with the drought, which threatened to take the lives of more than a million people and recently, political crises which may contribute to the hindrance of the general growth. The decline in the value -added of the agricultural sector by 3.1% in 2001/02 and by 12.2% in 2002/03, was the major contributor to the over all decline in the economy. This decline in value-added and the declaration in overall growth is felt throughout the major sectors, except same sub-sectors with relatively low share in the GDP such as education, health, mining and quarrying and construction sub-sectors.4 In contrast, the last fiscal year 2003/04 the overall performance of the macro economy was better. Owing to the favorable weather condition the economy recorded a significant improvement reversing the decline in GDP that was registered in the year that proceeded. The recent performance of the Ethiopian macro economy again highlighted the instability that has characterized it over the last few decades.

Ethiopian Economic Association, Report on the Economy, Vol. 4. Addis Ababa, Ethiopia 2004/05.

Real GDP growth averaged 1.7% during the 2000/01-20002/03 period. This translates into 1.2% decline in per capita income. After a 4.8% growth into 2000/01, per capita income fail by 1.79% and 6.6% in the years in 2001/02 and 2002/03 respectively. Owing to the high population growth rate about 2.5%; the growth rate of GDP has not been high enough to improve the standard of living of the population. GDP per capita grew by a mere 0.1%, on average, over the last few decades. Needless to say, this is to small a change for an economy that is at a subsistence level. It has to be noted also that due to the variability in the growth rate of GDP, the gains made in good years tend to be lost in bad years. As has been the cause in the last several years the composition and the structure of the economy showed no appreciable change. The Ethiopian industrial sector exhibits all the characteristic of undeveloped economy. The share of the industrial sector in GDP has floated around the 10% mark and it's over all sector growth rates between 5% and 7% since 1960s. Hence such a small share and weak long term growth is unlikely to absorb the huge growth in the labor force and improve trade balance.5 The two dominant characteristics of this industrial sector are its small and stagnant contribution to GDP and its stable growth rate over the year. This sector has not gone any structural transformation that could enable the sector to increase its share in total GDP and kick off dynamic growth. The above economic analysis can be supported by the following statistics. The following table displays the trend of Ethiopia's gross domestic product at market prices, according to Ethiopia Economic Association Report with figures in millions of Ethiopian Birr.[5]Year Table 1-Gross Domestic Products Per Capita Income & Exchange Rate Year Gross Domestic Product Birr (millions) 106,473 131,672 171,834 GDP (USD) per capita 169 202 253 US Dollar Exchange 8.65 Birr 8.39 Birr 8.93 Birr

2004 2005 2006

Ethiopia Economic Association, Report on the Ethiopian Economy, Vol. 14. Addis Ababa, 2008/09

2007 2008 2009

245,973 353,455 403,100 (est)

333 418 398 (est)

9.67 Birr 12.39 Birr 13.33 Birr

Source:____________________________________

Table 1. 2 Gross Domestic Product Per Capita Income by Industrial Sector 2 (In millions of Birr) Activity/year E.P. Y Agriculture and allied activities Agriculture Forestry Fishing Industry Mining and Quarrying Large and Medium scale Manufacturing Small scale Industry and handicraft Electricity and water 223.0 226.0 234.9 243.0 260.2 270.4 275.4 293.5 301.8 317.3 321.0 325.6 1566.6 68.9 587.2 1700.0 75.4 687.7 1731.3 82.6 712.6 1818.1 90.0 736.4 1923.1 98.1 773.2 2018.0 107.9 811.9 2004 6620.6 2005 6873.5 2006 7024.7 2007 7831.1 2008 7586.0 2009 6663.0

Construction Distributive service Trade, hotels, restaurants Transport and Comm. OTHER SERCLES Banking, Insurance, Real estate Public Admn. And defense Education Health Domestic and other services TOTAL 1

41 2 - 1

418.3 2253.9

399.4 2423.1 1396.6 1026.5 4933.2 1144.4

431.4 2550.1 1469.2 1080.9 5155.1 1207.4

467.6 2663.3 1519.3 1144.0 5394.5 1203.9

502.2 2748.9 1528.4 1220.5 5474.0 1259.3

1263.3 914.6 --4-0-64.0 1003.6

1343.9 910.0 4465.8 1045.7

1848.3 327.0 175.9 709.2

2138.5 356.4 187.6 737.6

2448.6 388.1 186.5 765.6

2512.5 439.0 201.5 794.7

2665.3 487.0 215.8 822.5

2594.4 536.2 285.2 848.9

14429.1

15294.1

16112.3

17354. 4

17566. 9 65344 268.8

16903. 9 6722 251.5

TOTAL POPULATION GDP per CAPITTA

581 7 2483

59882 255.4

61672 261.3

63495 273.3

Source:__________________________________ The exchange rate table shows an increment both in official and parallel exchange. This implies that the purchasing power of Ethiopian Birr is decreasing and due to this inflation has occurred in the country. This situation especially in internal market may affect the retail Industry. The Interest rate prevailing as indicated above expresses that there is a good opportunity to borrow money from banks to expand the retailer business. Employment

According to a survey conducted (CSA: 2009), total population of urban areas is 12,119,898 and from this figure, the number of population above age of 10 are 9,577,941. Among this figure 5,453,281 or 56.9% are economically active and from this number those who are employed are 4,547,437 and the unemployment rate is 16.6%.

But for the country as a whole, employment data are not available. However, it is conventionally believed that agricultural and related activities are the largest employers in the economy. This conventional wisdom emanates from the fact that most of the population increase takes place in the rural (both due to size and higher fertility rate), and the rate of rural urban migratory is too small to have any significant impact on the size of the rural labor force. Further, institutional constraints such as loss of cultivable land following even temporary change of residence from rural to urban areas and the limited job opportunity in urban areas are also likely to discourage some potential migrants. Despite the fact that most industries, if not all, are labor intensive, job creating capacity of retailers is quite insignificant. In a country with a population of 75 million, the retailer sector as a whole (large, medium and small scale) provides employment for trivial workers. However, the retailer industry contributed its part to decrease unemployment rate in the Country. Monetary Policies and Inflation Rate One of the volatile components of the monetary aggregates is domestic credit, particularly the credit claimed by the central government. More than half or 62% of the total domestic credit went to the central government while the remaining balance went to the private sector. It is worth noting that while the credit made available to the public sector has been, on average increasing, the credit offered to the other sectors has been declining and reached a very negligible level increment year. As retailers are an importer of finished products from abroad the changing foreign currency exchange rate and the high inflation prevailing locally will affect the retail industry negatively.

According to the monetary policy of the country banks are discouraging saving. However, in contrast the policy encourages borrowers by rewarding with a positive return. This gave retailers good opportunity to borrow and expand the business.

1. 3- Technological Forces

Technological forces include scientific improvement and innovations that create opportunities or threats for businesses. The rate of technological change varies considerably from one industry to another and can affect a firm's operations as well as its product and services. Technological capability building necessitates investing not only on machinery and equipment, but also on human skill and information. In addition, however, there is a system failure for acquiring, diffusing, and developing technological capability, both on the part of the government and the private sector. Determinants of productivity levels in retail industries, such as investment, degree of automation of shops, age structure of firms, and educational status of workers indicate the existence of unfavorable condition for industrialization and competitiveness. These noted conditions are supposed to be threats generally for industrialization development in which the retailers industry can be affected. Therefore, to overcome such threats, the retailers owners should encourage innovations and give more attention to research and training of man power for advanced technological application in the process of retailing the product.

Demographic Environment The first macroenvironmental force that marketers monitor is population because people make up markets. Marketers are keenly interested in the size and growth rate of population in different cities, regions, and nations; age distribution and ethnic mix; educational level; household pattern; and regional characteristics and movement (Kotler, 1997).

From this perspective, it is understood that the retail industry in Ethiopia acts in the same way. The demography of Ethiopia, as a survey conducted in 2005 indicates, as per the census conducted in 1994, the total population is 53.4 million. The following table provides a summary of the basic demographic indicators for Ethiopia from data collected in the two population and housing censuses. The population increased over the decade from 42.6 million in 1984 to 53.5 million in 1994. There was a slight decline in the population growth rate over the decade, from 3.1 percent in 1984 to 2.9 percent in 1994. Ethiopia is one of the least urbanized countries in the world, with less than 14 percent of the country urbanized in 1994. Female life expectancy is about two years higher than male life expectancy. Over the decade, life expectancy for both males and females did not improve.

Source: Central Statistics Authority By understanding the demographic indicators, the retail industry business tries to fulfil the requirements, needs of the population which is segregated by sex, age, religion, and other factors.

Summary of Environmental Analysis

As discussed above, the macroenvironment of Ethiopia is changing from year to year and these changes are being seen as a developmental increase. Based on the external analysis the following opportunity and threats are identified. Opportunity The country is economically backward and dominated by highly fragmented agricultural farm. The rate of population increase is very high. Furthermore, with poor life style, high unemployment rate insist the economic transformation and change of life style. This gives a room for capital good manufacturers to increase their product by using the cheap labor and borrowing for investment and further expansion based on monetary policy of the country and the encouraging law of investment. The existence of small number of competitor, no barrier of new entrant because of the low initial investment capital requirement, the low degree of bargaining power of the buyer and the great advantage is easy to exit from the retail industry are the opportunities observed in the analysis. Threat The negative impact of globalization on under developed country and the local inflation, high interest rate with low technological development prevailed in the country. The low technological skill level of the country manpower is due to the lack of capital to acquire modem technology. There also exists high interest on borrowing. On top of these the unstable local and global political situation is a big discouragement. These will hinder the desired growth of retail industry. Despite the substantially improved business environment, productivity remains very low, and the trajectory of improvement is not commensurate with the challenge firms are constrained both by factors at the firm level, and factors that impact allocative efficiency

 the allocation of resources in the economy. Problems of access to finance and access to land have reduced aggregate industrial productivity growth through both of these channels.

B- Competitors Analysis (Task Environment)

Micro environments analysis: Marks 40

This part of analysis should cover data, trends and discussions on various indicators related to micro business environment in South Africa. It is important to understand that in the government data bases, the South African retail sector is covered under Wholesale, retail trade and Motor trade. The retail trade sector is classified under formal and informal retail trade. Students are requested to remain focused on formal retail sector for this part of assignment. Formal retail is further categorised into various sub-sectors/types/segments (based on product categories). For this part of assignment, students are advised to focus only on the following categories of retailers: (a)Retailers in specialised food, beverages and tobacco stores, (b) Retailers in pharmaceutical and medical goods, cosmetics and toiletries, (c) Retailers in textiles, clothing, footwear and leather goods (d) Retailers in household furniture, appliance and equipment and (e) retailers in hardware, paint and glass Analysis of following micro-environments should be covered: Suppliers environment: Indicators related to suppliers and factors influencing their power. Consumers environment: Indicators related to consumers and factors impacting their buying decisions.

Competitors environment: Indicators which are related to competitors and factors influencing their positioning and power. After a detailed analysis, each group should be able to summarize the findings in following form:

Trends (Past and present changes) Favorable or unfavorable How they impacted the growth of the market/industry sector Suppliers environment

Consumers environment

Competitors environment

Cosmetics Economic Inflation Higher inflation rate as compared to the previous fiscal year. This has been affecting the consumption of cosmetics products in the Ethiopian market. The same scenario forces the retailer to increases their selling price in each product to remain profitable...However, the inflation weakness the purchasing power of the consumer and customer as well. Unemployment The annual report of Ethiopian Statistics Authority indicates that the rate of unemployment is higher than the previous periods. From the retailer perspective point of view the increasing in unemployment rate enables them to retain experienced workforce for a longer period of time. Moreover it allows them to pull well-educated and qualified manpower at a lower cost. However, the growth and expansion capability of the retailers is distressed by the unemployment trend. GDP In the year2008 four new manufacturing firms joined the cosmetics industry of Ethiopia; in previous year of 2009 they supplied various types of cosmetics product for the local retailers at a lower price. In the retailers shape majority of the local brands have higher consumer acceptance which forced the distruster to shift from the imported product to domestic ones. Nonetheles, some of the manufacturer started their own sales outlets. By doing so they may take the market share or customers of the existing retailers. Growth According to ESA, in the year 2008, the Ethiopia economic growth was 11%.This growth followed by a shift in the attitude, test, & preference of customers towards cosmetics product. This intern helps the retailers to expand their business.

The low entry barriers increase the intensity of computation among the retailers which ultimately makes the industry repellent. Political Environment In the previous year the Ethiopia Inland & Customs Authority pass the directive that address the retailers to collect 15% of V.A.T. from the consumer when ever sales is made. The poor practices and implementing V.A.T. in the industry creates unfair computation among them. These results, to mislay their target market. On the other hand, collecting V.A.T. from the ultimate consumer makes the retailer industry more responsible and stake holder for the growth and development of the country. Technology The poor infrastructure in information and technology of the country coupled with the retailers limited knowledge in respect of information technology create a major challenge in identifying and satisfying the wants and needs of the target market.

2- Micro 2.1 Suppliers Environment To access the bargaining power of suppliers in the immediate environment, we need to consider the source of supply for the retailers. The retailer can procure the cosmetics product from the maker or whole sale distributer. When the retailer buy from the local producer they will have weak bargaining power because the producer have an option to dispatching the products to the ultimate consumer (zero channel) in addition to the retailer can be a sole agent of the foreign cosmetics producer.However, the foreign producer allows to earn a fixed amount of margined which intern weakness their barging power. On the other hand, when they purchase from whole sellers, the barging power of either party is determined based on the number of distributors or wholesaler involved in the supply of specific cosmetics product