Egypt is running short on fuel, dollars and water, but when it comes to snack foods, its citizens are spoiled for choice. Chipsy, Cheetos, Borios, Todos, Sand Bites--the kiosks of Cairo are a veritable circus of colorful, cheap packaged foods. On weekdays, office workers and taxi drivers alike eat from the koshk, often making meals out of nothing more substantial than a strawberry yogurt and a bag of Doritos. Every few weeks, new products hit the market, and snacks vary from region to region.

Mohamed Abdel Aal, who used to run a kiosk in a village in Assiut but is in the process of moving his operation to Agouza, cites a potato-based snack called Windows that was his best seller in the countryside.

In the lean years since the 2011 revolution, so-called fast-moving consumer goods--which include everything from milk to gum--have been one of the few sectors to thrive in an otherwise struggling economy. In recent years, local packaged foods leaders like Domty, Juhayna and Edita have gone public and expanded their reach with new factories and lines. While other industries have been forced to contract as incomes dwindle, cheap snack foods have flourished. In 2011, the year of the revolution, Egyptians spent LE 8 billion on "salty snacks, sweets and other treats," according to a report by the United States Department of Agriculture, noting that this amounted to a 5-percent year-on-year increase in sales. Egyptians consume an estimated 130,000 tons of snacks annually, with potato chips and other salty snacks leading the market. The industry has continued to attract new investors, with new brands entering the market all the time. "This sector has also proven to be a good investment, especially post- revolution, as it has managed to maintain growth despite the economic and political upheaval," wrote the USDA. Edita, a leading snack food firm, notes on its website that the Egyptian snack market grew by more than 27 percent between 2010 and 2015.

The key to the sector's success is low prices; quick, cheap foods have obvious appeal in a young country with a massive population of poor people. So it was notable that two local market leaders, Juhayna and Domty, recently indicated that they would raise prices to keep pace with inflation. Juhayna CEO Seif el-Din Thabet told reporters from Al Borsa newspaper and Daily News Egypt in June that the dairy and juice firm was considering a 20-percent price hike across the board in response to rising costs. The Arabian Food Industries Co., or Domty, which specializes in packaged white cheese, raised prices 4 percent on some products in the second quarter of 2016, while the firm plans a 10-percent rise on other products before the end of the year. Inflation has reached record levels in Egypt in 2016. The entire market will soon follow suit, according to two April notes by Beltone Financial and Prime Capital Investment Banking.

Such rises will test the resilience of the market. "Low-income consumers are the driving force behind the FMCG sector growth," says Mohamed Adly, head of the Azadia Group. "How much low-income citizens are willing to spend on such goods is currently the burning question in the industry." Mohamed el Damaty, Domty's vice-CEO, stressed that "Our plan is flexible. It really depends on the foreign exchange rate and currency black market at decision-making time." He acknowledges that "We have to be very careful when increasing prices, because we see that the elasticity of the market is nearing its breaking point, where higher prices would mean severely lower sales."

Egypt's 90-million-strong population is growing at a steady pace of 2 percent per year, and with 70 percent of its citizens under 30 and more than half below or near the poverty line, Egypt is considered a high-growth market for frozen foods, beverages and other such packaged products. As of 2013, Egyptians were the second-highest spenders in Africa on fast-moving consumer goods after Nigeria.

Global urbanization has fed the packaged food industry worldwide, as people eat less home-grown food.
 
Emerging markets are particularly ripe for growth. In 2015, American cereal giant Kellogg bought a majority stake in Bisco Misr, Egypt's number one cookie company, earning some $125 million for the local firm's shareholders.

The IPOs of Domty, Juhayna and Edita, which all went public in the last 12 months, were well received by the bourse. The IPO of Domty was covered 10.7 times over, raising LE 1.13 billion, Juhayna's LE 192 million market debut was oversubscribed 6.8 times, and Edita's 4.5 times, raising nearly LE 23 million.

"The coverage was solely because these companies work in the packaged and manufacturing food business, which is highly resilient and its profits have a very good track record," says Essam Khalifa, managing director and board member of the National Fund Management Co. In 2015, Domty net profits were up 9 percent, Juhayna's 65 percent and Edita's 30.7 percent. Obour Land, another white cheese maker, announced in July that it will go public before the end of the year. All four companies said they need the money to expand their domestic operations and build new factories as well as diversify into new food and beverage categories.

However, a factor that could potentially slow this growth is these firms' heavy dependence on imported ingredients and materials, according to Moawad Omran, a member of the FMCG division of the Union of Trade Chambers. Egyptian packaged-food and beverage producers import an average of between 40 and 50 percent of their raw materials, from fruit concentrate to packaging supplies. The fact that such materials have to be paid for in hard currency--which has become increasingly rare and expensive in Egypt--could expose such companies to the same pressures experienced by other local manufacturers recently. In the last three months alone, costs for packaged foods producers are up an estimated 20 to 25 percent. "They will have the option to determine whether or not, and by how much, to pass on these cost increases," says Omran.

Domty, for one, plans to build its exports--which traditionally benefit from a cheap local currency--to help counteract this growing cost pressure. Domty already exports its other products to 35 countries.

But Damaty acknowledges that there is a lot of competition. "A lot of our Egypt-based competitors have the same idea," she says.

Juhayna, which already exports to Europe, the United States and elsewhere in the Middle East, is thinking about expanding to East African markets like Kenya and Tanzania. Moreover, Thabet, who took over the helm of Juhayna this year from his father, the company's founder, presided over a June deal signing with Fawry, Egypt's electronic payment leader, to speed collections for Juhayna vendors. He told the Daily News Egypt that the company needs a "different and balanced vision" to cope with Egypt's difficult economic circumstances. According to analysts, Juhayna has overstocked its raw materials and intermediate goods inventory since the end of last year, anticipating a further devaluation of the pound. "The rising inventory is hedging them against local price increase," says Nancy Ghabriel, a researcher at Beltone Financial.

Not everyone believes raising prices is inevitable. Hassan Ghaly, the chairman of the Hassan & Hussein Group, which sells inexpensive frozen meat and vegetables locally and abroad, believes that keeping prices low is critical to maintaining sales. "In our market, our sales are very dependent on the consumer price," says Ghaly, who stresses that his company refuses to compromise on quality. So in order to keep prices stable, Ghaly says the firm's strategy is instead to upgrade production facilities to lower operations costs to compensate for the rising expense of raw materials. He acknowledges that keeping prices low will be a challenge if costs continue to rise, since the company already has very tight margins. "That is something we accept," says Ghaly. "The way we see it is that we can't let poor people be the victim of prices spiraling out of control."

Analysts point out that some of the government's moves to offer discounted food to Egyptian citizens to compensate for price hikes have effectively hurt one of the country's most profitable industries at a time when the economy needs the private sector. Last year, Army discount food outlets that traditionally offered cheap frozen food and beverages exclusively to military personnel were opened up to the public, undercutting market prices by as much as 25 percent. "I think the underlying message they wanted to get across is that packaged and frozen foods and beverages can be sold at much lower prices," says Ashraf Hosney, a member of the food products division at the Cairo Chamber of Commerce.
 
While it might provide some relief to the poor to offer food and beverages at cost, the discount outlets have contributed to Egyptian consumers' belief that products are cheaper than they actually are. "Input costs for the Army are lower than for private firms," says Amr el Alfy, an analyst at MubasherTrade, who points out that the military enjoys tax-free status and a free workforce, among other advantages. 

Meanwhile, even more cost increases may lie ahead for the packaged-foods industry. Egypt's long proposed value-added tax, currently under review by parliament, is likely to raise costs for such companies, analysts agree. Alfy explains that the VAT, which Prime Minister Sherif Ismail has said is likely to be implemented by October, would tax previously untaxed parts of the production chain.

Moreover, a new food safety law that was passed recently following a national scandal about donkey meat being passed off by local butchers has shown a spotlight on the lax oversight of food production, despite there being some 17 food safety monitoring bodies in Egypt. "There will be producers who will have to increase their prices to meet the standards," says Damaty.

Nonetheless, Egypt's packaged-foods sector is likely to weather these challenges in the long term, according to Alfy, who says that as long as locally produced snacks remain cheaper than imported ones, their producers will stay in the black. Companies will raise prices gradually, and ultimately, consumers will absorb them. "Prices have gone up throughout history," he says.

© Business Monthly 2016