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Iran Unbound: Retail and Consumer Goods Opportunities

Iran is the second-most-populous country in the Middle East, trailing only Egypt. With a population of almost 80 million that includes a large percentage of young people who are interested in imported goods, the country shows great buying potential following the removal of major international sanctions in January 2016.

Iran is slowly being reintegrated into the global trade and financial system following the lifting of sanctions. Along with better access to the credit markets, a substantial amount of frozen assets has also been released to the Iranian government, providing it with the necessary capital to fund major overseas procurements to meet domestic needs and modernise many sectors. While industries such as energy and transport are the ones most likely to directly benefit from an increase in public spending, a spillover from public to private spending is also expected, creating business opportunities in Iran’s retail market in the post-sanctions era.

A Promising Market for Consumer Goods

During the sanctions period, the Iranian government focused on nurturing its domestic industries as major international companies and retail brands left the country. However, while domestic brands still dominate the sales of most consumer goods, especially those targeting the low-to-mid segments, these products often fall short of meeting the quality and standards of international brands, which appeal more to the middle-class and affluent Iranian consumers.

With the lifting of major sanctions, Iran’s retail landscape is expected to undergo rapid changes to meet the increasing pent-up demand for authentic, high-quality imported goods, including electronics, telecom products and parts, watches and clocks, jewellery, clothing and other consumer products. Some of these have mostly found their way into the country through middlemen and informal channels, but more overseas companies will now be able to deal directly with their counterparts in Iran. By 2020, it is estimated that Iran’s total retail market will reach about US$167 billion, from US$95 billion in 2015[1].

Photo: A wide range of imported toys available at a modern shopping outlet in Mashhad.
A wide range of imported toys available at a modern shopping outlet in Mashhad.
Photo: A wide range of imported toys available at a modern shopping outlet in Mashhad.
A wide range of imported toys available at a modern shopping outlet in Mashhad.

The country’s huge business potential has already drawn interest from some well-known consumer-goods companies looking to explore the market, including Italian designer brand Roberto Cavalli, French cosmetics retailer Sephora and German engineering and electronics giant Siemens. Apart from catering to the needs of high-end consumers, Iran’s middle class is equally thirsty for foreign-branded consumer goods. In this regard, Hong Kong companies with a competitive edge in product design and low production costs should find many business opportunities in the country’s medium-segment market.

The top Iranian consumer expenditure categories in 2015, as estimated by Euromonitor International, were housing (30% of the total), food and non-alcoholic beverages (24%), health goods and medical services (9%), transport (9%), clothing and footwear (6%), household goods and services (5%) and communications (5%).

Chart: Iran’s Consumer Expenditures in 2015
Chart: Iran’s Consumer Expenditures in 2015

Non-grocery consumer goods, clothing, electronics and cosmetics are likely to receive a more immediate boost, particularly those of the many popular European brands that already have a presence in Iran. These brands, many of which may have entered into agency agreements with Iranian companies for local distribution, will face fewer hurdles than their United States counterparts in strengthening their business ties, as American companies are still barred from direct trading with Iran due to US primary sanctions.

Table: Projected Retail Sales Growth (%) in Non-Grocery Items
Table: Projected Retail Sales Growth (%) in Non-Grocery Items

Direct Sourcing Opportunity

Despites decades-long sanctions on Iran imposed by the West, the United Arab Emirates has maintained strong trading ties with the country in light of the geographical proximity between them and the huge demand of Iranians, many of whom aspire to lifestyles supplemented by products of imported brands.

When sanctions were in force, Iranian importers primarily sourced their goods from Dubai, concomitantly helping to build a significant Iranian trade community in the UAE, which is reported to support thousands of Iran-originated companies. According to industrial sources, consumer goods such as branded clothing, handbags and electronic items were shipped first across the Persian Gulf from Dubai’s free trade zones (FTZs), such as the Jebel Ali Port, to Iranian free zones along the southern coastline, including Kish Island and Qeshm Island, which were then distributed to Iran’s boutiques across the country. Nevertheless, it remains unclear about the extent to which these goods underwent proper customs and import-duty processing upon importation into the Iranian mainland.

While it is anticipated that Dubai’s middleman role will remain for some time, many Iranian importers are now able to contemplate direct sourcing from overseas manufacturers other than those in Dubai. It should be noted, however, that many goods sourced or re-exported from Dubai originate from China. Owing to the difficulty and cost of travelling far from Iran – and the presence of a versatile and business-savvy Iranian trade community in Dubai, which offers credit and other tailor-made/customised services for buyers – the majority of Iran-based trading houses and importers will not travel to countries such as China, the world’s factory for most fast-moving consumer goods (FMCGs).

In a recent fact-finding trip to Iran, HKTDC Research found that Iranian importers are looking for a greater variety of goods to service market needs, and are increasingly interested in sourcing directly from China and Southeast Asian countries, where prices are lower. They have expressed a keen interest in sourcing stylish and competitively priced high-quality products from Hong Kong. To facilitate business-matching opportunities, the HKTDC has already appointed agents in Tehran and Mashhad to help Iranian companies interested in attending Hong Kong’s trade fairs, such as the Food Expo, the Watch & Clock Fair and the International Jewellery Show.

Young Iranians’ Demand for Fashion Items

Iran’s pent-up demand for imported goods, especially among young Iranians, has created a strong foundation to support rapid growth in the retail market. The country has a favourable demographic structure with 60% of its population aged below 30 and born after the 1979 Iranian revolution. Even before the lifting of sanctions, this new generation of Iranians had been positively embracing Western cultures such as social media and donning branded apparel and accessories from overseas countries. DVDs of many Western movies have been on sale in local stores, although audio-visual products as such are not copyrighted. HKTDC Research was told by locals that even if shopkeepers or manufacturers had wanted to observe the intellectual-property requirements, they would not have had the proper channels to do so.

Photo: Luxury watches and jewellery for sale in Tehran.
Luxury watches and jewellery for sale in Tehran.
Photo: Luxury watches and jewellery for sale in Tehran.
Luxury watches and jewellery for sale in Tehran.

On the other hand, many Iranians have little trouble travelling overseas, including long-haul visits to European Union countries. Besides, many wealthy Iranians travelling short-haul like to spend their shopping holidays in Dubai or Istanbul, where they can be exposed to the latest fashion trends. Nowadays, international fashion brands such as Zara and Nike, as well as luxury brands like Gucci, can be found in Iran’s larger cities, such as Tehran, Mashhad, Isfahan and Shiraz. While many of these stores are run through agency arrangements, where one city can have multiple agencies, others simply cash-and-carry goods from abroad and sell a mix of brands.

In Iran, Islamic dress codes are observed all over the country, particularly those applying to women, who are required to cover their hair, neck, arms and legs in public. Iranian women cover their hair with scarves, usually a hijab; many wear knee-length overcoats known as a manteau, with trousers worn underneath.

Today, many Iranian women have found ways to manoeuvre the dress-code rules and take great care of their appearance. In Tehran, it is common to see fashionable young Iranians with trendy and colourful outfits under their manteaux and wearing loosely draped headscarves.

Photo: A Spanish fashion brand in a modern shopping mall in Mashhad.
A Spanish fashion brand in a modern shopping mall in Mashhad.
Photo: A Spanish fashion brand in a modern shopping mall in Mashhad.
A Spanish fashion brand in a modern shopping mall in Mashhad.
Photo: A Turkish fashion brand in a modern shopping mall in Isfahan.
A Turkish fashion brand in a modern shopping mall in Isfahan.
Photo: A Turkish fashion brand in a modern shopping mall in Isfahan.
A Turkish fashion brand in a modern shopping mall in Isfahan.

As for the cosmetics sector, the market in Iran is reported to be the second-largest in the Middle East, after Saudi Arabia, grossing about US$3.5 billion in 2014. As Iran opens up to the world, awareness of beauty and personal-care products among young Iranians is expected to grow, with such products becoming more available.

Photo: Many Iranian women dress in modern, less traditional, outfits.
Many Iranian women dress in modern, less traditional, outfits.
Photo: Many Iranian women dress in modern, less traditional, outfits.
Many Iranian women dress in modern, less traditional, outfits.

Cheap and low-quality products from China and Turkey currently dominate the Iranian cosmetics market. Western brands, although offering better quality, are much more expensive and so less affordable by the average Iranian consumer. The huge price gap between low-quality and premium-branded items offers opportunities for Hong Kong companies to introduce affordable and quality cosmetics brands and products into the country.

When exporting cosmetics products to Iran, Hong Kong companies should select suitable items that match with their Iranian customers’ style and skin types. Facial makeup products, such as those with sun protection or anti-aging formulae, are popular in the country, while lips and nail products are also in demand, particularly among the younger generation.

Hong Kong’s Telecom Exports to Iran Show Strong Growth

In the first half of 2016, Hong Kong’s exports to Iran increased by 14.4% to US$71 million. Although the absolute trade value was small compared to Hong Kong’s exports to the UAE, which amounted to US$3.5 billion in the same period, it should be noted that Hong Kong’s trade with Iran had not been fully reflected by bilateral trade figures.

Iran’s population is about nine times larger than the UAE’s, and it is presumed that a large amount of exports initially destined for the UAE is re-exported to Iran. In 2015, the UAE’s re-exports represented 58% of its total non-oil exports, of which re-exports to Iran reached AED$37.7 billion (US$10.3 billion), accounting for 17% of the UAE’s total re-exports.

Photo: Foreign electronics brands are popular among Iranian middle-class consumers.
Foreign electronics brands are popular among Iranian middle-class consumers.
Photo: Foreign electronics brands are popular among Iranian middle-class consumers.
Foreign electronics brands are popular among Iranian middle-class consumers.

Not surprisingly, telecom equipment and parts forms the largest group of Hong Kong exports to Iran, accounting for about 30% of the total. During HKTDC Research’s recent visit to Iran's leading commercial districts, many stores were offering smartphones and computers by well-known brands. Genuine Apple and Samsung phones are sold through key retail outlets and specialty stores at a price premium to those available in Hong Kong. This fast-expanding Iranian market is accompanied by a surge in uptake rates of various consumer-electronics products. For example, mobile cellular subscriptions per 100 people in Iran increased to 87.8% in 2014 from 72.6% in 2010, according to the World Bank.

The increasing adoption of smartphones and tablets has also raised demand for accessories, such as screen protectors, earphones and power banks. Hong Kong companies exporting these accessories, both premium and mass, should find Iran to be a market with promising selling potential in the middle- to high-end market segment.

A Modernising Retail Landscape Makes Direct Entry Possible

In Iran, a strong multi-layer distribution network covering importers, wholesalers and retailers creates a fragmented retail market with many small shops, government co-operatives and street markets. Bazaars – or marketplaces where individual retailers get their products from wholesalers – can be found in almost every city in Iran, an arrangement that puts the distribution of many consumer goods under the control of only a small number of key wholesalers.

The situation is showing gradual signs of improvement, however. For example, the UAE-based Majid al Futtaim Group has established a Western-style supermarket chain named Hyperstar in Iran, helping Iranian consumers to familiarise themselves with the concept of modern retailing by offering a wide range of products under one roof.

After experiencing the convenience of shopping in modern outlets – which offer not just a wide variety of products, but also better store layouts and shopping experiences than the traditional, small independent shops – many Iranian consumers are now calling for more modern shopping centres.

In Tehran alone, it is reported that there are more than 50 modern shopping centres, some of which house hundreds of stores, restaurants and coffee shops. Huge shopping complexes can also be found in other major cities, including the Proma Shopping Centre in Mashhad, the Isfahan City Centre in Isfahan and the Persian Gulf Complex in Shiraz.

The rise of modern shopping outlets potentially offers overseas companies new to the Iranian market a useful platform from which to set up their stores directly, even though entering into a franchise agreement with a reliable local partner is still the most common and workable option for overseas companies to tap into the Iranian market, which has become complex due to the business cultures and decades-long economic sanctions.

Land is certainly not cheap in Tehran, especially in the more affluent districts in the north of the city. High-street rents can vary from US$100 to US$220 per square metre per month. However, with more modern shopping outlets popping up, there should be a decent supply of retail space for rent for those interested in establishing a physical presence in the country. Following the lifting of international sanctions, a few Italian fashion brands such as Roberto Cavalli, Versace as well as leather goods maker Piquadro were reported to have established their own stores in Tehran, suggesting that the confidence in doing business in Iran is gradually improving among overseas companies.

Photo: A modern shopping mall in Tehran.
A modern shopping mall in Tehran.
Photo: A modern shopping mall in Tehran.
A modern shopping mall in Tehran.
Photo: A traditional bazaar in Tehran.
A traditional bazaar in Tehran.
Photo: A traditional bazaar in Tehran.
A traditional bazaar in Tehran.

E-commerce Potential

Similar to many other emerging markets, Iran’s e-commerce sector is quickly gaining popularity. According to Euromonitor, online retail sales totalled IRR6,300 billion (US$218 million) in 2015, chalking up growth of 212% over 2010-2015 in constant value terms, with telecom and electronic products and consumer appliances registering the highest growth rates.

In the medium term, e-commerce is expected to gain momentum on the back of higher rates of internet penetration amid the Iranian government’s planned expansion of the country’s 3G and 4G networks. In the short term, however, a lack of modern payment options remains a major barrier to the further expansion of e-commerce.

Nowadays, Iran’s economy is primarily cash-based and major international credit cards such as Visa, MasterCard and American Express are not accepted in the country – a consequence of the now-lifted sanctions. This will certainly change in the future when the normalisation of international banking and financial activities takes place. In the absence of credit cards, debit cards issued by local banks have become a popular alternative for many Iranians and are the most common method for settling online payment, although cash on delivery is also available in some areas. (For more details about Iran’s remaining sanctions and its implications in the banking sector, please refer to Iran Unbound: Balancing Opportunities with Practical Business Risks.)

While selling via online platforms may be a step too far for many in the short term, Hong Kong companies can nevertheless consider promoting their products through digital channels as traditional advertising campaigns, either via television broadcasting or through magazines and newspapers, are also relatively limited in Iran due to tight restrictions by the Iranian government.

As international social-media and internet platforms such as Facebook and YouTube are not available in Iran, the country has established many popular local alternatives in digital services and social-media networks, including the Google-like search engine Yooz and Amazon-lookalikes Bamilo and Digikala.

Awareness of Asian brands is generally low among Iranians and the perception is high that Chinese imports are of low-quality. As such, advertising through digital platforms may be a cost-effective way for Hong Kong companies to differentiate themselves from mainland Chinese firms and gradually build up brand images and advertise their products in the Iranian market.


[1]  Source: All that glitters: Assessing opportunities and risks in post-sanctions Iran, Economist Intelligence Unit

 

Content provided by Picture: Winnie Tsui
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