Distribution & retail
Iran almost has an 80 mn population of which 59.1% are young people and 74% are urban. There is a wide spread distribution network in Iran currently, so that trade unions, large chain stores and distribution companies have been the major players of the distribution network. Moreover The Government Trading Corporation of Iran plays a major role as a state factor and collaboration (Collaborative consumption) in the distribution network. According to the latest statistics the distribution industry has nearly 2579 mn USD turnover and it is amounted almost 8% of Iran national income. Today only 7% of the retail market shares are in modern systems including chain stores.
Table 1 Iran’s general information
Source: Statistical Center of Iran and World Bank
The average annual Gross expenditure of an urban household has been equal to 11,921 USD of which 23.9% are related to the food and tobacco expenditure, and 76.1% to the non- food.
Figure 1 Composition of urban household’s expenditure (yr. ended in Mar 2016)
According to the Central Bank statistics, household expenditure has been increased 8.49% in the year ended in March 2016 in comparison to the recent years. It is the lowest consuming growth rate in the last five years. However, the retail’s industry market volume was in the lowest growth in the year ended in March 2016 in comparison to the recent years.
Table 2 Household consumption growth and expenditure
Competition in retail industry has been increased. Considering low quantity of active companies, the competition was not conducted among chain stores before 2014. New players entering in the retail industry during 2010- 2013 shaped competitive environments and the price competition has been emerged since 2014. Foreign company entrance and modern chain stores with the world’s standards caused serious changes in the competitive environment. It caused old company’s market share in the industry to be lost, which due to their antiquity has not been successful in modernizing and updating generally. Nowadays only 7% of the retail market share in Iran is in modern retailers including chain stores.
Figure 2 Household consumption growth and expenditure trends (bn IRR)
Distribution network players
Nowadays distribution network enjoys a wide spread in Iran, so that trade unions, large chain stores and distribution companies has been the major players of distribution network despite The Government Trading Corporation of Iran plays a major role in the distribution network as a state agent as well as cooperatives (consumer cooperatives). Some distribution networks are as follow:
– Cooperation includes urban, employees, workers, local, free and rural, etc.
– Retailers includes distribution, service, manufacturing and technical services sectors
– Institutional stores include Foundation of Martyrs and Veterans Affairs, 15 Khordad, Imam Khomeini Relief Foundation, etc.
– Wet markets
– Government Trading Corporation Of Iran
– Chain stores
According to the latest information, there are about 2.12 mn trade units in Iran, of which 48.74% works in distributive retailers, 31.81% in service retailers, and other 19.45% works in production retailers. However, for each 38 Iranian, a Trade unit works, although standard per capita is 700 to 1,000 in many countries. Hence, too much retailers in Iran, high Density in some areas, and not enough customers caused the downward return, inefficiency and high profit margins.
Figure 3 Productive, distributive and service retailers share of Iran’s total retailers
Source: Ministry of Industries, Mine and Trade
Chain store establishment in Iran started by the first Sepah consumers Cooperative in 1949. Afterwards some other stores have launched including urban and rural consumers’ cooperative stores and Kourosh chain stores in Iran. During 1991- 2001, the chain stores started working by using the modern world features on the agenda of the government and some institutions such as the municipality. Since 2001, considering the advantages of chain stores establishment and the important role that they have in the national distribution system reform, a new wave of chain stores began in Iran.
About 29% of main purchases have done in street markets, 23% in hypermarkets and chain store in major cities however; other purchases are still made in small, local retailers.
Figure 4 Share of the distribution systems from main purchases in big cities
Source: Ministry of Economic Affairs and Finance
The hyper and chain stores share of total is about 5% in Iran, which in comparison to other countries, (which are between 10 to 85%) it is too low.
Table 3 Business issued license of hyper and chain stores status
Source: Supreme Council for the Retailers Agency Secretariat
It is anticipated in 6th development plan, hyper and chain stores having at least 10% growth. Already 2,024 chain store branches are active in various departments such as grocery, clothing, leather and textile, transport services, cosmetic, etc.
Table 4 The chain store branches statistics
Source: Supreme Council for the Retailers Agency Secretariat
Hyper and chain stores issuing license has done by Ministry of Industry, trade and Mine and chamber of guilds. According to the issuing license instruction of hyper and chain stores, pure space area in hyper stores is at least 1000 sq. m and 200 sq. m in large stores.
Wet market is one of the active players in retail and distribution services. These retail units are responsible for household’s provision of food needs in particular low- income groups. Wet market is an important approach in regulating the agricultural products market. In one hand, these fields have supportive role as a market for agricultural products to manufacturers, On the other hand it leads the costs balance and products supply with reasonable prices to consumers.
For instance, 210 wet markets provide services in Tehran. Currently 6% of fruit, vegetable, and protein products distribution centers owned by Tehran municipality wet markets, which provides 35 to 40% of citizen’s fruit and vegetables and 20% of their protein needs. 60% of people purchase major daily needs at wet markets in Tehran.
the cooperatives massive entrance in the distribution system (by virtue of article 44 of the constitution) was so effective that could supply the government regulatory purposes on distribution system and improve goods distribution system after Iran’s revolution. According to the law, the establishment of cooperatives and consumer cooperatives composed as the following to supply part or all of services:
1. Supplying drinking water.
2. Gas Distribution Facilities (equipment)
3. Power Distribution Facilities
4. Health care services.
5. Providing transportation system.
6. Creating clubs and restaurants.
7. Establishment of Institutions
Table 5 Cooperatives statistics
Source: Ministry of Labor and Social Affair
Government Trading Corporation of Iran
Supplying strategic commodities, including wheat, rice, edible oil, raw sugar, improvement of distribution, storage and supervision indicates Iran Government Trading Corporation’s active role.
The key strategies of Iran’s Government Trading Corporation are associated with the Ministry of Industry, Mine and Trade and Ministry of Agriculture as follow:
– purchasing imported wheat
– purchasing imported crude oil
– purchasing imported rice
– Development of commodities re- export (wheat, flour, rice, etc.)
– Guaranteed purchase domestic wheat.
– Monitoring the bakery wheat supply in Iran
After law enforcement subsidies in 2010 the state distributing basic commodities applied in the Government Trading Corporation of Iran, confined by distribution of certain assumptions (including educational, industrial and incidentals, etc.) in Iran. Moreover, government policy in this regard, the complete elimination of state monopolies and state enterprises decreased by activating the non- governmental sector.
Table 6 Distribution of basic commodities designated by the Government Trading Corporation (000 tons)
Source: Government Trading Corporation of Iran
Distribution industry in Iran is rooted in wholesales since 1961- 1971, which controls the distribution of goods among retailers. Distribution companies have come together in the Association of Iranian distribution industry and received their issuing business license from the Food and Drug Administration or the Ministry of Industry, Trade and Mines. Most of drug and imported drugs and nearly 85% of total food products at retailer and chain stores are distributed via distribution companies. Currently, 101 distribution
companies are active across the country and nearly
600 companies are provincial, which, have been allocated nearly 2,579 mn USD turnover in Iran economy according to the latest statistics. The distribution industry devoted almost 8% of national income. Fixed profit margin is the problem of distribution companies during recent 20 years. Rising energy prices and wages, has created problems for distribution companies. In addition to the industry, cost of the distribution average profit margin is 10% and the net profit margin is 2%.
Similar to many other emerging markets, Iran’s e- commerce sector is quickly gaining popularity, online retail sales totaled 218 mn 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, lack of modern payment options remains a major barrier to the further expansion of e- commerce.
Table 7 Consumer and producer price index in Apr 2016- Feb 2017
Distribution network costs
The gap between CPI and PPI in normal circumstances indicates distribution network costs. Statistics in the table below shows that the average gap between CPI and PPI is about 22 units in the year ended in March 2016. In other words, an average about 9% of consumer costs was due to the goods distribution costs in the year ended in March 2016, which are caused by plurality of intermediaries, some corrupted commodities particularly agricultural commodities, vulnerability via goods improper carrying, warehousing and fridge storage rent costs and opportunity cost of delivery.
Figure 5 Consumer and producer price index trend in Apr 2016- Feb 2017
– Credit default
– Destructive and uncontrolled competition especially in pharmaceutical market
– Lack of transparency in legislation of distribution industry
– Development of information and technological systems of distribution
– Development of retailer clusters
– Development of chain stores (goods and services supplier)
– Development of wet markets
– Development of online Shopping and Network Marketing
– Development and organizing of distribution companies and supporting the establishment of logistic companies
– Supporting third party logistic (TPL) systems
Laws & Regulations
The Producers and Customers Protection Organization sets profit margin on regional and national distribution units
IRAN BUSINESS TIME 167
Table 8 Wholesale and retail Profit margin
Source: Regulations and Conditions of Using the coefficients of merchandise wholesale and retail
– Iran distribution system has a broad geographical scope includes public, private and cooperative sectors, so that in most areas of Iran, people are able to receive the required goods from the distribution system.
– In recent years, major equipment and infrastructure in the distribution system have had significant progress. According to the Global Competitiveness Report released by the World Economic Forum each year, Iran infrastructure rank from 69th among 144 countries in 2015 reached to ranks 63th among 140 countries in 2016, also general infrastructure quality reached from 82 to 76.
– The distribution network is less dependent on government rather than other sections of the economy, such as the budget, physical facilities, employment etc.
– A large number of retailers
– High costs of distribution network (The gap between producer costs and consumer costs)
– Inadequate information about agents and distribution statistics
– No economic scale
– Lack of proper and dynamic communication
– Low labor productivity in distribution network
– Remarkable share of traditional systems
– Increasing Iran urbanization.
– Resolve the nuclear issue and sanctions
– Laws emphasis on transparence distribution of goods and services
– Iran’s GDP Growth in recent years
– Decline in Inflation rate
– Highly competitive Pharmaceutical distribution industry market
– Insecurity in the region
– Inadequate distribution of population in Iran
– Unsuitable location of production units
– Increased transportation costs
– High inflation rates and thereby reducing consumer purchasing powerIRAN