How did SI Retail decide to start operations in Kurdistan?
We started to monitor the market in 2011. We looked at different sectors, including the automotive and dairy industries, among others. Finally, we decided to go into retail. In 2012, we signed a franchise agreement with Auchan, which is the second largest hypermarket chain in France and the ninth largest in the world. We opened our first hypermarket in June 2014, and we expect to open the next one in the beginning of 2015 in Erbil as well.
Why did you decide to go into retail?
We saw the very important potential for the retail industry in Kurdistan. Carrefour had just opened when we started the business. City Centre was here with one hypermarket and two small supermarkets. We saw potential in this market for what we would call a “modern grocery concept” involving hypermarkets and supermarkets. Thus, we decided to go for hypermarkets.
How would you define your business model here in Kurdistan?
The typical size for a hypermarket is between 5,000 and 15,000 square meters. Our model is to be in a 10,000 sqm space plus 1500 parking spots where we offer food and non-food products. This is the way that Auchan started its successful business in Eastern Europe, especially in Russia. We decided to duplicate the same business model starting with hypermarkets.
How would you describe the retail business environment in Kurdistan?
First, there is strong GDP growth, which has been 10% on average between 2011 and 2014, which leads to an increasing purchasing power. It is a very positive environment for the retail business. Second, we have a growing population, which is also a positive factor for the hypermarket business. At the same time, it is a young population. Kurdish people know more and more about the development of the hypermarket retail model and shopping concept. Lastly, the growing expat population in the region is also a positive factor for the development of the modern hypermarket concept. If you look at the GCC, growth in hypermarket sales for the last five years has been 10% on average, so we believe this is the type of growth that we can expect for hypermarkets in Kurdistan over the next five years. It could be more, but if we have at least this rate we will be happy.
Where would you place Kurdistan’s retail market in comparison to other markets in the region?
When we studied some of the characteristics of the market in Kurdistan, we saw that the penetration rate (the percentage of sales of food and nonfood products made through the modern grocery formats) was below 5%. If you look at the UAE, for example, 60% of total sales are made through hypermarkets or supermarkets. In Saudi Arabia, it is 45%. In Turkey, it is 20%. We believe that there is the potential for a massive increase in hypermarket and supermarket sales in this country. Even though every country is different, there is a trend towards the development of hypermarkets everywhere in the world. We believe that what has been seen in the Middle East in general in the last 10-15 years is very close to what we see when we look at Kurdistan. We believe that we have a very favorable environment for hypermarkets.
What is your expansion strategy in Kurdistan?
Our target is to open ten hypermarkets in the next five years. We are very positive on this region and we have put a lot of effort into it. We have set up an headquarter and a team of almost 50 people to run this operation. Now we have 200 people working for us in Kurdistan. Every time we open a hypermarket, we will add 150-250 people. We do not know exactly what the speed of expansion will be, but we are planning to have five hypermarkets in Erbil, three is Slemani, and two in Duhok.
If you look at the GCC, growth in hypermarket sales for the last five years has been 10% on average, so we believe this is the type of growth that we can expect for hypermarkets in Kurdistan over the next five years. It could be more, but if we have at least this rate we will be happy.
Are you planning to expand to other sectors?
Real estate is linked to the development of our retail operations, so we will develop some real estate projects, which is the second branch of our business. Every development that we will do in real estate will be to open an Auchan hypermarket. We are not interested in real estate that is not linked to our retail operations. The main driver for us in real estate is to open hypermarkets.
Why did you decide to go for real estate?
The main reason is that we have been working on expansion for almost two years and it is very difficult to find a good location that is suitable for what we want to do. Existing locations are usually too small, do not offer enough parking spaces, accessibility may also be an issue. As I mentioned earlier, we need to go for at least 7,500-10,000 square meters for our hypermarket concept, we have to meet very strict criteria before envisaging a new location. What we want to develop on the real estate side is a different concept than the shopping malls that already exist in Erbil. We want to open what we call a “retail park.”
We want to have ample flat lands, the project will include big parking spaces where we put an Auchan hypermarket as an anchor tenant, and we build a small gallery around it with some shops. We want to attract other retailers like do-it-yourself, furniture, and clothing retailers to create a new concept that is easily accessible and where people can shop in an easy space. We are not inventing anything– we are just replicating models that have been developed in other emerging and developed markets. For the moment, this type of concept does not exist in Kurdistan. People have started with big shopping malls, but we want to go for a different and easier shopping destination.
How would you assess the investment environment in Kurdistan, and how much investment are you anticipating for the retail park project?
This is a very interesting market in terms of investment. The investment laws and the environment are very encouraging in Kurdistan. Compared to other markets, it is easier to set up and start a business in Kurdistan. It is also very important for us that we are able to own 100% of the business. We also appreciate the support of Board of Investments to access lands. We do not need a partner like in other countries in the GCC. Regarding the retail park investment, it really depends on the concept. It can start at $20 million for the first phase of the project and go up to more than $50 million if you go with a bigger project. Initially, we will focus on smaller projects and expand it successful in order to introduce a new shopping concept for people in Kurdistan. This type of project could also be a way of attracting capital to Kurdistan from foreign investors from countries like Turkey, Saudi Arabia, and the UAE.