LuLu plans to build 5 large hypermarkets in Egypt. Is it too late?

Oct 18, 2018

LuLu Hypermarket, the Abu Dhabi based retailer, has laid out plans to open 5 large hypermarket complexes in Egypt over the next two years. Each will have a floorspace of 20,000m², making them among the largest stores in the country. The key question is whether it has left it too late.

The Abu Dhabi headquartered retailer has more than 155 stores in UAE, Oman, Qatar, Kuwait, Bahrain, Saudi Arabia, India, Indonesia, Malaysia and now the Philippines. It is also considering entering China. It opened what was reported as its first store in Egypt in 2015. Its only Egyptian store has a floorspace of 15,800m² and is the anchor tenant of Cairo’s upmarket Twin Plaza mall. In fact, Lulu opened its first store in Cairo’s Nasr City in October 2010. At the time LuLu outlined plans to spend AED1.7bn ($460m) over the following 2-3 years. The store subsequently closed in the turmoil following the Arab Spring.

LuLu Hypermarket has now signed an agreement with the Egyptian Internal Trade Development Authority (ITDA) to build five outlets totalling 100,000m² in and around Cairo. Initial sites include 6 October City, New Cairo, and Obour (which is 35km northeast of Cairo, and part of Greater Cairo). These new retail sites will cost around EGP10bn ($557m). The company will also establish logistics hubs for the export of Egyptian produce to the Gulf region in Port Said and, perhaps, Alexandria. These hubs are estimated to cost EGP5bn ($278m).

It is not the first time the company has laid out ambitious growth plans for Egypt. When LuLu opened its Twin Plaza store in 2015, it intended to spend EGP3bn ($300m at the time) to establish 10 new hypermarkets in the following 2 years. It didn’t. Instead, the company focused on growing operations outside Egypt, primarily in the GCC countries. However, LuLu did enter Indonesia in June 2016 with its first store in Jakarta. That plan envisaged an investment of $300m over two years and the opening of 10 stores – also reported as 15 stores by end 2017 – in the country by late 2017. LuLu opened its second store in Indonesia in September 2017. That store was announced as part of a $500m investment plan to open 10 stores in the next 3 years.

The point here is not that LuLu cannot deliver expansion. It can. The company opened its first retail outlet in 2000 and has an enviable track record of growth. Rather, we would caution that LuLu habitually uses variations of the $500m/10 hypermarkets/3 years formula in its non-GCC markets.

The main question is whether LuLu has left it too late. According to Trendtype’s analysis, modern retail only accounts for 30% of grocery spend in Egypt – about the same as Kenya. So on the face of it, LuLu has plenty of opportunity to expand into a market full of growth opportunity.

The issue, however, is that LuLu is trying to expand in more than 10 international markets simultaneously. LuLu’s ambitious plans for Egypt come at a time when several international supermarket chains are putting more human resource and capital into building store networks in the country. These include:

  • Majid Al Futtaim (Carrefour) (37 branches)
  • Spinneys (12 branches)
  • Abdullah Al Othaim (38 branches)
  • Turkish discounter BIM (295 branches)

Of these, LuLu competes directly against Majid Al Futtaim and Spinneys, both of whom operate large hypermarkets in Egypt.

Has LuLu left it too late? No. Egyptian consumers have plenty of appetite for shopping in hypermarkets, although growth in the supermarket sector is being driven by smaller, price focused stores from BIM, Kazyon and Majid Al Futtaim’s Carrefour. We believe that LuLu can continue to operate a small network of large hypermarkets in Egypt profitably.

But we question whether it will deliver the 5 stores it plans within the next 2-3 years. If it doesn’t, the grocery retail landscape, especially in Greater Cairo, will continue to have modernised and become substantially more competitive. Independent hypermarket operators (of which there are many) will be squeezed, but so will LuLu. And, finally, we question whether it makes strategic sense for LuLu to be in Egypt when it is trying to expand into so many international markets at once. If it does intend to compete in Egypt long term it needs to deliver its new stores within its target time frames and it also needs to follow Spinneys’ lead and expand out of the congested Cairo market into secondary cities.

 

 

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