Thursday, April 2, 2015

Ethiopia Bets on State-Owned Wholesaler to Stem Price Rises

Alle, Ethiopia’s government-owned wholesaler, said it’s targeting as much as 30 percent of the country’s household-goods market by 2018 in an effort to stem rising consumer prices in Africa’s fastest-growing economy.
After considering inviting foreign companies such as Wal-Mart Stores Inc. to shake up an uncompetitive industry, the government in 2013 established the Ethiopian Trading Enterprise, known as Alle, to sell mostly imported items directly to licensed retailers.
It now operates three stores in the capital, Addis Ababa, and one in Shashemene town, with more than 3,000 retailers registered as customers and sales of almost 1 million Ethiopian birr ($49,000) a day, General Manager Nuredin Mohammed said in a March 23 interview.
“We want to be one of the best wholesalers in the country so the others can follow the example of us,” he said. Alle is seeking to attain annual sales of as much as 7 billion birr a year by July 2021, Nuredin said.
Consumer inflation was 8 percent in February in Africa’s most populous country after Nigeria, compared with a 5-year peak of 41 percent in August 2011. The economy grew quicker than that of any other African nation, at an average of 10.9 percent, over the past decade, boosted by spending on infrastructure, International Monetary Fund data show. The IMF said in October that authorities had controlled inflation by tightening money supply.

Higher Prices

Alle was set up to compete with eight dominant importers, including Get-As International and Al-Sam Group, Getachew Teklemariam, an Addis Ababa-based business consultant, said by phone on Wednesday.

A 2013 study by AT Kearney Inc. found that prices were as much as 50 percent higher than they should be because of actions by a “small group” of importers and brokers who controlled wholesaling at Merkato, the country’s main market in Addis Ababa, according to Dario Minutella, a manager for the Chicago, Illinois-based research consultancy.
Asnakech Eshete, a government worker shopping at the capital’s Shola market, said the salary increase she got last year hasn’t made life any easier. “Every time you come to the market the prices are going higher and higher,” she said in a Feb. 27 interview. Ethiopia’s lowest-paid civil servants saw their monthly wages raised 46 percent to 615 Ethiopian birr from August, according to the Addis Ababa-based Fortune newspaper.

Mixed Economy

Alle sells over 480 goods including pasta, soap and edible oil, mostly to the owners of small kiosks, Nuredin said. Using AT Kearney’s expertise on sourcing, logistics and inventory management, Alle is targeting a 30 percent reduction in import costs and a 5 to 15 percent price cut for consumers.
Ethiopia’s current government introduced a mixed economy following the overthrow of a military socialist regime in 1991.
Although foreign investment is welcomed in manufacturing and agriculture, industries such as telecommunications, banking and transport are dominated by state enterprises, while retail is mostly reserved for Ethiopians.
International companies that have expressed an interest in Ethiopia over the last three years such as Wal-Mart and Carrefour SA have been told by officials that Ethiopia isn’t ready to open up, Nuredin said. The government wants Alle’s example to help strengthen domestic companies before allowing foreign wholesalers to compete, he said.
A Carrefour spokeswoman declined to comment by phone on Mar. 31. There were no responses to e-mails on March 29 to Wal-Mart’s press office and on March 31 to the company’s senior director of communications and media relations for international corporate affairs, Jo Newbould.

Still Trading

Near Alle’s outlet in Merkato, women selling handfuls of tomatoes cram under a raised stretch of Chinese-built railway, as young men carry building materials.
Elias Adem, a 53-year-old grocer, says he’s happy with prices at Alle, where 20 liters (5.3 gallons) of cooking oil sells for 404 birr against a standard price of about 450 birr, which can rise by more than 50 percent when it’s in short supply. Yet Alle’s arrival hasn’t put price-gouging traders out of business, he said on Feb. 19.
Standing next to boxes of Golden Soya cooking oil, Nuredin, the manager, says Alle has been unable to prevent all illegal trading by its customers.
After buying from the store “they are coming right outside and selling on the street” to traders, he said.

Price Caps

Government inspectors will clamp down on illicit traders and also check that Alle’s customers aren’t selling above a set maximum retail price, Nuredin said. Alle is preparing to open two more wholesalers and wants to have 36 stores nationwide, including nine in Addis Ababa.
The company has borrowed 596 million birr from the state-owned Commercial Bank of Ethiopia to fund its expansion, with another 600 million birr loan under negotiation with the lender, Nuredin said.
The initiative faces a “tough time” to expand operations enough to affect prices, ensure retailers stick to agreed profit margins and convince potential customers that they won’t face larger tax bills because of increased traceability, said Abdulmenan Mohamed Hamza, a London-based independent Ethiopian economist.
Brokers thrive in Ethiopia during frequent commodity shortages caused by patchy supply chains and erratic demand, he said in an e-mailed response to questions in February. “Alle has to make sure there’s a reliable supply at competitive prices,” he said.
The government introduced price caps on basic commodities in January 2011 to try and lower costs, with then Prime Minister Meles Zenawi citing a lack of competition as the cause. They were removed about six months later.
Alle will be sold to private investors at an unspecified time if it succeeds in tackling inflation, while if it’s ineffective, the government will open wholesaling to foreign companies, Nuredin said.