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Filling the Basket

The government is determined to cut Iran’s dependency on food items imports by encouraging domestic and foreign manufacturers to produce locally and increase exports. In fact, during the sanctions period, the Islamic Republic showed its potential in the processed food sector by boosting self-reliance in local production, from dairy products such as jam or tomato paste to traditionally imported ones like spaghetti and sugar.

Even under sanctions, Iran saw the highest retail value sales for packaged food in the Middle East, worth USD30 billion in 2015, with growth of 23% over the previous year, according to Euromonitor. Moreover, looking at per capita consumption, Iran had the third highest packaged food sales in 2015, and is expected to achieve the highest growth in the Middle East.

Nonetheless, the post-sanctions environment suggests a fruitful opportunity for multinationals within the food market. Their entrance is likely to widen the brand portfolio in various categories that are currently dominated by domestic manufacturers, particularly for staples such as dairy, confectioneries, and oils and fats. However, baked products will likely continue to be led by domestic companies, with Iran having great agricultural land to grow wheat in its western and northwestern regions. Also, being the world’s largest producer of saffron, pistachios, and spices, Iran’s availability of raw materials gives local producers leverage in their production costs.

But there are some categories where multinationals can dominate, such as baby food milk formula, which is expected to be among the fastest growing categories over the next five years. Still, the high taxes the government imposes on food imports to protect local brands is pushing foreign manufacturers to establish factories in Iran to manufacture their products within the country. Nestlé is an example of that, with Iran being one of its biggest beneficial markets in the Middle East for milk formula and bottled water due to its local production. Such multinationals were able to succeed due to financial investment in production, setting up their own plants, and thereby avoiding tax issues. Furthermore, strong partnerships between domestic and foreign players are expected to continue to leverage multinational expansion to penetrate the rice, nuts, and honey markets, traditionally purely dominated by local brands.

With an expected increase in international brand launches, consumer awareness is likely to increase, as well as the introduction of new products. Obviously, the possible entry of new comers will enhance competition and may pose a threat to existing players. This will definitely widen the basket of products while increasing the quality standards of the market. Forecasting this direction, key domestic players are looking to expand their reach and export finished products especially to neighbors such as Iraq, Afghanistan, and other border countries.

Since the Iranian food industry is operating at 40% of capacity, plans to boost food exports seem to be necessary. According to a report by the Iranian government, food exports have been up 27% over the last two years, while imports of foodstuffs have dropped 9%. Dairy products along with chocolate and confectioneries account for over 50% of food exports, while the local vegetable oil industry meets merely 10% of the domestic needs, with the rest imported from abroad. In light of the good relations between Tehran and Moscow, Russia seems to be the next destination for Iranian food items, as it imports 70% of its food and agricultural raw materials.

As the same time, the arrival of multinational brands could change the channel distribution landscape of the food industry. Currently, traditional grocery stores dominate the stage, representing 90% of the food and beverage sales in the country. As the relief of sanctions is expected to encourage the popularity of hypermarkets, this will definitely challenge domestic manufacturers and benefit multinational brands, as modern retail channels give them a better opportunity to increase their product visibility and brand awareness.
Ultimately, the Iranian food industry is expected to see drastic changes within the coming years. While multinationals will open up local factories to remain price competitive or create relationships with local players, their penetration will also lead domestic players to adopt international standards and look beyond their borders. This could only have a positive impact for the final consumer.

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