The turnover of the retail industry in Iran is 63.7 bn USD, 10% of which is attributed to modern chain stores and the rest is provided by traditional and small retailers, or groceries. The retail industry has only 2 to 5% profit margin in Iran. The industry’s 8 to 9% contribution in national income reflects the size and, consequently, the key role of this industry in the supply chain of many industries. According to the latest statistics, the distribution sector has about 25.5 bn USD turnovers in Iran economy. At present, 100% of drugs and 70% of food, cosmetics, detergents etc. are distributed by distribution companies throughout Iran.
With a population of 79.9 million, Iran ranks 17 in the world in terms of population and is the most populous country in the Middle East after Egypt. There is now a large middle class with increased income distribution equality and changing consumption patterns, with annual family net expenditure increasing rapidly.
The average annual expenditure of an urban household is 12,520.5 USD, of which 23.2% is dedicated for food and tobacco and 76.8% for non-food costs.
Distribution network agents
In Iran, distribution networks are diversified so that guilds units, large chain stores and distribution companies are the most important actors of it. In addition, Government Trading Corporation of Iran, as a government agent, as well as Cooperatives (consumer cooperatives) plays an essential role in the distribution network. Following are some of distribution network agents: 1. Cooperative companies include: urban, employee, worker, local, free and rural etc 2. The guilds include distribution, service, production and technical services 3. Affiliated stores include: Martyr Foundation, Panzdah-e Khordad Foundation, Relief Foundation (Komit-e Emdad)
4. Fruit and vegetables marketplace
5. Government Trading Corporation of Iran
6. Chain stores
In large cities approximately 29% and about 23% of the major purchases are made on street, markets and chain stores, respectively.
According to statistics, there are 2.48 mn guild units, of which 48.95% are in distribution, 15.01% in services, 16.34% in technical services and 19.71% in manufacturing guilds. The number of guild units is more than 7 times the global standard, as there are 34 units for each 1,000 people.
In Iran, there is a guild unit for every 7 households, which there is a guild unit for 37 to 42 households based on world standards. Iran guild units have not grown normally and as a result, with the increase of all the guild units, which are mostly as service and distribution, Iran has turned to a consuming society.
Iranian chain stores turnover reached 4.8 bn USD. So far, more than 1.6 bn USD have been invested by the private and public sector in this field. Chain store union composed of 70 companies or natural persons which owns 2,500 branches in total chain stores. At present, 25,000 people are directly working in chain stores. The share of chain stores is about 7% to 10% in the distribution sector.
Chain stores is common in the world and more than 85% of retail activities are carried out in industrial countries.
The licensing of department stores is issued by organization of industry, mining and trade of provinces and Iran Chamber of Guilds (for chain stores). According to the instructions for issuing a license for the establishment of department stores, the net space area of sales for hyper markets should not be less than 1,000 sq m and for hyper market 200 sq m.
Wet market is one of the main players in the retail and distribution industry. These retail units are responsible for low-income households’ food needs provision. Wet markets have important approaches in regulating the agricultural products market. On the one hand, these fields have a supportive role as a market for agricultural products and on the other hand, these markets can cause reach the balance between prices and products supply and lead to reasonable prices for consumers. Currently, 230 wet markets provide services in Tehran and 6% of fruits and vegetables and protein distribution centers are owned by Tehran municipality management of fruit and vegetable which provides 35-40% of fruits and vegetables and 20% of protein needs. Roughly 80% of Tehran population major and daily needs are provided at wet markets.
The formation of cooperative companies in Iran dates back 80 years ago and its extensive activities began after the Islamic revolution, especially during the war, with the establishment of institutions such as the Rural cooperative and Central Organization for Rural Cooperatives and Central Organization for Rural Cooperatives. Roughly, 98,600 cooperative companies are active in 112 different job categories in the three main sectors such as service, distribution and production cooperatives. Production cooperatives include industrial, public and agricultural cooperatives, as agricultural sub-cooperatives include livestock, poultry, gardening, fish farming and fisheries. 60 to 70% of road transport is carried out by cooperative companies.
90% of the islands shipping is done by the cooperatives of cross-islands and launch boat owners. In fact, cooperatives play a great role in different areas.Women are managed about 10% of all cooperatives.
The advantages of cooperative companies
Under the law, cooperative companies are exempted from paying 25% of taxes and all consumption cooperatives are exempted other than value added tax. In addition, there is Guarantee Fund of Cooperation to support the collateralization of cooperatives and 70% of the Cooperative Development Bank’s facility is provided for cooperatives. Of course, there are other benefits, including a 20% deduction from the employer’s premiums that have not been implemented properly due to the problem of capital constraints and the obligations under the fifth program to raise capital.
Government trading corporation of Iran
Provide and supply of strategic goods, including: wheat, rice, cooking oil and sugar and improving of distribution, storage and maintenance of goods and full supervision, indicates the active presence of Government Trading Corporation of Iran and has turned this company as the arm of the Ministry of Industry, Mining and Trade and the government, to provide Iran’s trade services and market adjustments.
The key programs of Government Trading Corporation are based on the strategies of the Ministry of Industry, Mining and Trade and the Ministry of Agriculture Jihad as follows:
– Buying imported wheat
– Buying imported cooking oil
– Buying imported rice
– Development of re-export of goods selected by government (wheat, flour, rice etc.)
– Guaranteed domestic wheat purchase
– Monitoring wheat distribution to bakeries
After implementation of targeted subsidies law in the year ended March 2011, the government’s distribution of basic goods operated by Government Trading Corporation has been limited to the specific consumption (training, industrial use and others) and the policy in this field is focused on eliminating government monopolies and domination by activating the non-governmental sector.
The distribution is one of the key industries and infrastructures in every country’s economy. The industry’s 8 to 9% share in GDP reflects its extent and key role in the supply chain. The distribution industry has a great mission and can be considered as one of the sources in various fields, including employment. Distribution industry is very wide and complex and deals directly with health-related products that have a direct impact on the community health. At present, 100% of drugs and 70% of food, cosmetics and detergent are distributed by distribution companies.
Similar to many other emerging markets, Iran’s e-commerce sector is quickly gaining popularity. Online retail sales totaled 6,300 bn IRR (218 mn USD) in 2015, chalking up growth of 212% over 2010-2015 in constant value terms, with telecom and electronic products and consumer appliances holding the highest growth rate.
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 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.
Distribution network cost
The gap between the consumer and the producer price index in normal terms can reflect the distribution network cost. The data on the table below shows that the average gap between the consumer and the producer price index is about 22 units in the year ended March 2017. In other words, the average consumer cost of 9% was due to distribution costs in the year ended March 2017, the number of mediators and corruption in some commodity especially agricultural commodity, resulted by inappropriate carriage, warehousing and fridge cost, rental fees or opportunity cost of goods supply.
- The distribution system in Iran has a wide geographic scope with respect to the governmental, private and cooperative sectors, so that people in most parts can obtain their needed goods through distribution agents
- The distribution network compared to other major economic sectors has less dependence on government facilities such as budget, physical facilities, employment, etc.
- High costs of the distribution network (difference between producer and consumer price)
- The high combination of traditional and non-organized-sector in distribution network compare to organized-sector
- Smuggling of similar goods and related problems
- The small size of distribution network scale is one of the biggest challenges in this system ,which has led to less strategic coalitions in this sector. On the one hand,the small firms have made the distribution system ineffective and, on the other hand, it has no export power.
- Lack of modern tools and methods for distribution
- Increasing urban population
- lifting the sanctions
- Upstream documents emphasizing on transparency of distribution system of goods and services
- High potential of developing modern distribution system
- The increasing land price in urban areas as one of the challenges in retail industry. Also, the high cost of buying or renting property in major cities has made more difficult to development chain stores
- Urban infrastructure is neither developed for retail industry nor professionally dealt with. Some commercial towers have not provided space and the ability to develop chain stores or have not been buildup according to the right standards.
- Lack of proper location for production centers
- Increase of transportation costs
- Inflation and, consequently, reduced consumer purchasing power
- Development of distribution information and technological systems
- Creation and development of guild estates
- Creation and development of chain stores (supplier and services)
- Establishing virtual stores (online shopping) and network marketing
- Developing and supporting distribution and logistics companies
– Retailing was one of the most dynamic industries during the last five years in Iran. Modern grocery channels such as hypermarkets expanded rapidly at the expense of traditional independent outlets, internet retailing and direct selling had strong growth and there were rapid changes in shopper purchasing habits. There was also considerable investment in response to high demand from the young population for modernization. Rapid urbanization and population density in key cities such as Tehran make Iran an ideal country for modern chain outlets.
-The return of capital in the distribution sector is more than production and therefore domestic and foreign private sectors enjoy incentives for further investment in this sector.
-Unlike other emerging economy retail industry is still very traditional in nature and is largely controlled by cooperatives and independent retailers that would be an advantage for developing efficient chain stores.
Laws & Regulations
According to Article 6, the rules and regulations for the use of wholesale and retail sales coefficients, the percentage of distributed items by regional and national agents which transfer goods from the central warehouse to the sub-warehouse or representative of the province and to retail store will be the same in all covered areas.
The percentage of profit and provincial, regional and global distribution cost will be based on the approvals of Supreme Board of Supervision and Pricing Standards of the Consumer Protection and Productivity Authority.
Distributive cooperative companies that handle the supply and distribution of goods for their covered stores are considered as wholesalers and can only use ratio of wholesale profits.