FMCG companies just LOVE consumers. The more, the better. So, when a country that has been in structural doldrums for an age finally emerges towards a semblance of normality, the commercial sector takes note. After a four-year gap we decided to take another look at Iraq this year, and Iraq proved us right: just that sort of country – infuriatingly complex, decentralised, dangerous, but home to 33 million people (so, after all, another Saudi Arabia in terms of size), and with a lot of changes in scope, scale and structure since our last look at the market in 2009. 33 million potential consumers – difficult to ignore of course for multinational and regional companies, who are these days rather used to single-digit growth rates elsewhere in their remit.

Business was rather difficult after the First Gulf War, with international sanctions creating a trading environment not for the faint-hearted. After the Second Gulf War and a transition to a new order in Iraq, would-be suppliers took courage and started cross-border trade, but the political and security situation remained complicated and precarious – meaning that the majority of beverage and dairy exporters to Iraq were fairly content in waving their products goodbye right at the border, with a wodge of cash in hand. Nice, uncomplicated business – but of course not something that could be called ‘active business development’. And those who were brave enough to go after the latter seem to have reaped rewards – and not always with the most conventional methods….

Store display, dairy products, Iraq

Apart from carbonates and bottled water, the two star performers with significant domestic output, most other beverage and dairy sectors are woefully undersupplied locally. So certain foreign principals got themselves into gear. Aujan, for example, saw early opportunities in Iraq, and through investment in direct sales structures made Iraq one of its main destination countries – and, to boot, made it the leading JNSD supplier in the country, probably for many years to come. Al Safi Danone has also become strong – but actually the impetus came more from its distributor Al Yasra Group, the same group also behind its belated market entry into neighbouring Kuwait. Kuwaiti Al Yasra, through investment in its larger neighbour, is now the company with the most significant chilled distribution chain in Iraq, no doubt assisted rather heavily by our friends in Danone. Add to that Saudi independents like Gulf Union and Arrow Juice, Iranian suppliers like Kalleh, Teen Dairy or Mihan (exporting chilled dairy products, meat and ice cream. Ice cream! You see, there must be ways…..), and Turks like Mersin or Sutas, and you can see some pattern emerging. Juice products, cultured dairy products and cheese seem to be import hits in Iraq. And ice cream (that one still baffles me!)

Import Substitution?

The multinational soft drinks companies have certainly piled in. A country of the size and complexity of Iraq is of course next to impossible to be serviced through imports alone. But given the chequered history of Iraq importing was, in fact, the start of the new ‘golden age’ for the carbonates sector. Coca-Cola, for example, moved in after the Second Gulf War effects abated with a joint venture between its then Turkish bottling partner Efes Invest and an Iraqi company, Al Bunnia, to form an official company charged with the development of sales, back in 2005. At first serviced through imports from Coke bottlers in neighbouring countries, the JV moved to establishing a filling facility in the Northern town of Erbil, CCBIL. Following a series of rather complicated financial manoeuvres, the ownership structure of CCBIL changed in 2011 to a full shareholding by Coca-Cola Icecek, the multinational’s anchor bottler in Central Asia, and culminated (well, so far – I’m sure there’s more to come….) in the acquisition of a majority stake in Al Waha, a hitherto independent filler of carbonates in the country’s South, with two plants in Hillah and Karbala. 2013 saw the start of Coca-Cola brand production at Al Waha, so watch this space in the South….

Pepsi had its own issues of a slightly different kind – foremostly a fight with probably dozens of independent fillers who happily continued filling Pepsi brands without authorisation during and even after the embargo years. Investment in its main bottler Baghdad Soft Drinks (the facility dates back to the 1950s!) and its distribution systems seems to have finally made a dent into that practice, no doubt assisted by a government that should be hungry for foreign investment.

Entry via Kurdistan – the Way Forward?
Quasi-independent Kurdistan seems to serve as the springboard for market entry for various foreign suppliers, be they companies fancying a steady importing business or suppliers that want to go a step further and introduce domestic production. But the Coke story does serve as an example that there are limitations. Even if a company that should have all the know-how of how to distribute in difficult markets has a plant available in a place like Erbil, can the entire country be serviced from there through a series of warehouses, sub-distributors, agents, whatever? The answer, at least in Iraq, appears to be a resounding ‘No’. Transport routes are long, laborious and, rather sadly increasingly dangerous, and there still seems to be an invisible line roughly towards the Centre of the country beyond which a company’s distribution capabilities just don’t go. So the acquisition of existing facilities has solved this problem somewhat for Coke – now that Al Waha is part of the fold, and filling of Coca-Cola brands has commenced in both Hillah and Karbala, there is far less headache in getting access to regional markets in the country.

But Kurdistan is keeping its appeal. Whatever Turkish, Arab or Iranian company is serious about starting distribution of its products in Iraq, Kurdistan remains the starting point. Erbil and Suleymania are now replete with direct sales subsidiaries of many regional companies who might, for the time being, be happy with good distribution in Kurdistan itself and content with at least a trickle of sales into areas South and West of there. And some companies are so happy with their export volumes to their distribution partners in Kurdistan (a certain Lebanese beverage company comes to mind….) that there are now discussions about a possible conversion into domestic filling, through greenfield investment. Not bad for a country that ten years ago was on its knees!

Dairy needs some work…..

Laban brands, Store Display, Iraq

The hot bet at the moment is on some serious investment in the country’s dairy industry – now that is a sector that is still suffering from lack of activity, with imports dominating by far. If imported chilled product dominates in a traditional market like shanineh or ayran (fermented milk drinks) then you know that there is something seriously amiss in domestic dairy development. Although various regional dairies are looking seriously at setting foot in Iraq to manufacture dairy products locally, it does look for the time being that it will fall to enterprising domestic players to make this step instead. It might be a bit chicken-and-egg I suppose – dairy processing and filling needs serious technology, and technology suppliers most probably still shy away from having their engineers travel to Iraq (just like the case in Libya – see my previous blog). But there are finally signs that local dairy output will receive a boost soon. My lips are sealed, but something’s happening….

Attractive Iraqi Features…
Idiosyncrasies of Iraq may provide a boost to certain groups of suppliers, domestic or otherwise. A large army of a quarter of a million soldiers, for example, needs feeding and watering. The fact that some of Shia Islam’s holiest shrines are based in the country’s South attract a large number of pilgrims every year (and yes, they do travel to Iraq, despite the apparent dangers) – again, all of them need sustenance. And the country even, to this day, has remnants of the old ‘Oil for Food Programme’ – these days a subsidised distribution programme that works with a system of ration cards (with milk powder and baby nutrition the only remaining dairy or beverage products now covered by this scheme). All opportunities to suppliers who might be geared towards that sort of thing. Iraq (well, Kurdistan at least) has also become home to yet another Majid Al Futtaim expansion for its Middle East Carrefour franchise – not sure yet whether this is an oddity, or a sign of things to come…. But I do take it as a very green shoot! And finally – Iraq is a virtual blank sheet as far as marketing activities are concerned. Everything currently revolves around sorting out sales structures. So the first companies with distribution in place should also be the first ones to make a serious push with above-the-line marketing activity. Here’s hoping.

… and not so attractive ones!

The simple biggest challenge for suppliers seems to be the might of the wholesalers in Iraq. Not surprising that, in a fragmented AND unstable market, the wholesalers should hold the key to a brand’s success or failure. Everybody wants a piece of the cake, but the wholesalers know that the only alternative to them is investment in depots, warehouses, long-haul trucks, distribution vans, branded vizicoolers – ie only something for the big boys like Pepsi, Aujan, Al Safi Danone, Al Yasra, Coca-Cola…. The rest need to contend with extraordinarily high wholesale margins and payment terms that would make your eyes water anywhere else in the world….

Dairy products, Store Shelf, Iraq

And finally, there has been a definite change in approach by Iraqi authorities in recent years, attempting to transform the country from everybody’s dumping market to a more organised, and stable, destination for exports. New regulations, especially regarding product and labelling certification at the border, have helped in keeping the more cowboy-ish regional suppliers at bay. So would-be suppliers, take note – market development is definitely up for grabs. But we believe the days of the cash transactions at the Turkish, Jordanian (certainly Syrian!), Kuwaiti and Iranian borders are probably nearing their natural end. A more measured, and serious, approach to sales in Iraq is probably required. Not an easy feat, I grant you – especially with international companies still not happy to ease their travel bans to Iraq – but we do see movement from your competition, so half an eye and half an ear is definitely advised.

With my very best wishes in new ventures and adventures
Thorsten

ManSci’s new 2013 editions of Iraq Beverages and Iraq Dairy reports are now published, along with 2013 updates of our other regular country titles. Please visit us for more information. To place an order, mail us at marketing@mansci.net