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March 25, 2011

BRICs and beyond: Turkey – the gateway to the world

While Turkey is not seeing the same levels of growth as other developing markets like China and Brazil, retailers and manufacturers see potential in the market, not only as a developing market in its own right, but also for its strategic link between Europe, Central Asia and the Middle East. Petah Marian investigates the opportunites Turkey offers.

While Turkey is not seeing the same levels of growth as other developing markets like China and Brazil, retailers and manufacturers see potential in the market, not only as a developing market in its own right, but also for its strategic link between Europe, Central Asia and the Middle East. Petah Marian investigates Turkey’s potential.

Despite not offering the same rapid rates as growth as some other developing countries, Turkey has some key fundamentals that make it an attractive location for development, including a growing middle class, potential for future EU membership, and its position as a gateway from Europe into Central Asia, North Africa and the Middle East.

According to Fadi Hakura, an associate fellow at think-tank Chatham House, there are a number of reasons that make Turkey an attractive market for both retailers and manufacturers, including a large pool of young workers, a growing middle class and an underdeveloped agriculture sector.

Hakura tells just-food that according to the UN, Turkey entered the “demographic window of opportunity” in 2005 and which should not close until 2040. “This means that the working age population is expanding quite dramatically, while the non-working population is at their smallest proportion. So that is important for consumer-driven markets,” he says.

Gross National Income (GNI) per capita has risen sharply since the early 2000s, aside from a slight blip during the recession. According to World Bank figures, GNI rose by 64% to US$13,710 between 2003-2009, a slight drop on the $13,910 high recorded before the economic crisis in 2008.

While the grocery market in the country is valued at some EUR56bn (US$76.3bn) by Verdict Research, hypermarkets, supermarkets and discounters account for only some 30% of the market.

Verdict consultant Simon Chinn says there are some “key fundamentals” that make Turkey quite attractive for retailers looking to expand, highlighting its large population and “long-term trends that GDP per capita and incomes are rising in the country, especially in urban areas”.

He said that international retailers like Carrefour, which holds 3.2% of the market, and Tesco are well positioned for growth as they have focused their store development these urban markets.

“They’re in a good position now to capitalise on growth in that area. So I think that the long term trend are that this is a good market for them,” says Chinn.

Meanwhile, Germany-based Metro Group is also working to develop its footprint in the country. It operates some 18 Metro Cash & Carry outlets and 13 Real stores, and told just-food that it plans to double its store network in Turkey over the next few years.

The spokesperson told just-food that its sales in Turkey, which include its Media Markt electronics stores, were up 27.9% during 2010 to reach EUR1.7bn.

Metro Group highlighted the importance of the market as part of its growth plans, with the spokesperson saying: “Due to its strategic location between Europe, Central Asia and the Middle East, Turkey is an important market for Metro Group. The great potential is evidenced by the country’s exceptional economic growth in recent years. The private consumption has been growing steadily and the this fast-growing market has a young, dynamic, well-educated population.”

Additionally, Chinn highlights the potential upside for European retailers if Turkey joins the EU in the longer term. “Ultimately there is scope in the longer term for Turkey to join the EU, and this isn’t going to happen for the next five, maybe ten years, but that’s a definite pull, especially for the European retailers,” says Chinn.

While Chinn describes the market as “fragmented”, local players hold the two leading market positions in the country, with Migros holding a 5.9% market share and discounter BIM with 5.2%.

Market leader Migros, which operates 1,932 stores, is planning to continue an aggressive growth strategy in the country.

A Migros spokesperson told just-food that it opened some 450 stores during 2010 and intends to continue growing at “similar levels” in 2011.

Working from a more entrenched base, the company recorded 11.45% net sales growth during 2009, to reach TRY6.36bn (US$4.1bn).

While working in a developing market, Migros offers many of the same levels of innovation and sophistication expected from a multi-national retailer. It has a well established loyalty card programme with 8.2m members and initiatives around good agricultural practices and environmentally friendly distribution schemes.

From a food manufacturing perspective, Turkey is an important export market for the Middle East, Central Asia, North Africa, Caucas and Russia says Hakura.

“If you go to Lebanon, you’ll find that all the Nestle [confectionery] products are produced in Turkey and distributed to the Middle East.”

Indeed, Nestle emphasised the importance of this market, announcing yesterday (24 March) that it plans to invest some TRY85m in a new cereals factory. The manufacturer said the plant will become a regional hub for breakfast cereals and export products to North African and Middle Eastern countries.

For all of its potential as a developing economy, the food industry still faces many challenges. Hakura says that despite Turkey’s strong history of food exports, its agricultural industry is underdeveloped, and in some parts corrupt, while its ranking in the World Bank’s Doing Business Index, which ranks the ease of doing business around the world, has fallen since 2007.

“The key reason is that between 2002-2007, the Turkish government undertook some serious structural reforms, but since 2007, those reforms have either stopped or there has been some backsliding,” says Hakura.

However, he suggests that things may start to improve again in the country, following the government revamping its commercial code in January this year.

“They passed a law which covers everything from corporate governance, to competition, to contract law, so this is very important, and may improve the business climate in Turkey.”

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