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efforts continue to offload retail
chains
by magdy samaan
fifty years ago, the government commandeered most
of egypt’s marquee retail department stores in a binge of post-revolution
nationalizations. now, after decades of mismanaging venerable chains
such as omar effendi, sednaoui and benzione, it can’t seem
to get rid of them.
hopes for privatizing the neglected retail outlets have revived
since last fall, when advertisements placed in gulf media for the
sale of omar effendi drew a £e 504 million bid from the saudi
anwal group. it was the fifth time to offer the famous department
store, which has 82 branches, since the government first tried to
offload it in 1993. yet just as the deal looked set to go through,
it hit a snag.
yehia abdel hadi, a member of the assessment committee selected
by the holding company for trade (hct) to put a price on the retail
chain, filed a complaint last month with the public prosecutor accusing
minister of investment mahmoud mohieldin and hct chairman hadi fahmi
of putting fierce pressure on the 17-member assessment committee
to use a discounted cash flow valuation method to lowball the chain.
he alleged that mohieldin and fahmi aimed to squander public funds
by bringing the sale price down almost 50 percent from their initial
£e 1.14 billion estimate.
opposition mp mustafa bakri chimed in, threatening to block the
sale in the people’s assembly and telling a local television
station that the real estate value of omar effendi’s three
largest stores alone was higher than the saudi offer.
fahmi claims his detractors have made several flawed assumptions.
for one, he says critics have failed to take into account the chain’s
estimated £e 300 million liability of severance pay to employees.
and while the initial estimate included the value of the store’s
land and real estate assets, the lower figure is geared toward a
sale that would leave deeds to these assets in government hands.
the public prosecutor seemed satisfied with the explanation and
announced on march 21 that claims of the misappropriation of public
funds by the ministry of investment and hct were “invalid.”
hct owns five retail companies: omar effendi, elegant costume houses,
beit al masnouat, al azia al hadeetha and sednaoui. together, these
companies have more than 400 branches across egypt, many of which
are rented out to private operators. aside from omar effendi, which
turned a £e 2.2 million profit in 2005, the stores in this
roster are predictable net losers, and even omar effendi’s
successful 2005 campaign followed four years in the red.
the original owners of most of the state-owned retail giants, with
the exception of sednaoui, were all jewish. during the first half
of the 20th century, their display windows boasted a selection of
luxury goods on par with their peers in paris and new york –
a far cry from the grimy appliances and legions of hostile clerks
that fill the stores today.
the businesses were nationalized during the decade following the
july 23 revolution. during egypt’s ensuing socialist era under
president gamal abdel nasser, they were the principal outlets for
the sale of public sector products. but with the creeping advent
of economic emancipation and privatization in the 1970s, the market
niche was usurped by private enterprises flexible enough to meet
demand for new kinds of products. the government’s management
policies, outdated merchandise and overstaffing contributed to the
once-distinguished stores’ descent into retail senility.
in an interview with business monthly, fahmi said the value estimates
for these retail stores do not necessarily translate into asking
prices. “the committee’s assessment of the real estate
value of omar effendi branches was based on the concept of closing
down the company, which means disregarding the continuity of business
and laying off laborers,” he said. even if the valuation stays
high, however, a 1998 amendment to law 203 permits the general assemblies
of holding companies to sell at less than the estimated value.
the government has insisted that any buyer will have to deal gently
with the store’s swollen, unskilled labor force and work to
correct problems gradually rather than razing the current operation
and building anew. fahmi says that anwal will have to hold on to
80 percent of the 6,000-member staff for a decade following the
sale, if the deal goes through.
privatization expert farouq nasser feels the government must clearly
identify its objective. “if the target is to close down the
stores and get the best price, the government should sell and offer
a demolition license to the investor. this way the buyer will have
the liberty to handle his property in any way he likes. if the intent
is to keep the business rolling, the laborers employed and to work
toward the development of these chains, the land should not be sold
at its true market price because the buyer... won’t have the
liberty of taking action on his own land.”
and this may be the underlying reason why only a limited number
of potential investors have come forward with bids, none of which
have tickled the government’s fancy. kuwait’s sultan center
offered a mere £e 305 million last year before negotiations
were halted.
while selling omar effendi remains the priority for the government’s
retail privatization push, the other retail chains’ values
are also being assessed, with a mind to their eventual sale. however,
their debt baggage has dogged all attempts to sell them off. fahmi
admitted that mismanagement and excess labor have kept public-run
retail chains from making money. these problems continue to retard
performance.
“[retail] commerce, like any other industry, has its professionals
and its key concepts; we are lacking both of these because most
of the employees are not qualified,” he said. rather than trying
to overhaul the management structure and retrain employees to make
the stores a more attractive commodity, the ministry of investment’s
plan is simply to keep the stores operable until they are sold,
he added.
abdel hadi, as the new head of state-owned al azia al hadeetha,
which owns the retail chain benzione, is no stranger to the issues
hampering the retail chains. “when i came to office in this
company, i held a meeting with the branch managers and asked them
about the substandard conditions of the stores,” he related.
“through this discussion we were able to identify 33 reasons
for this crisis... everyone agreed that liquidity was the main problem.
for instance, i couldn’t buy from a prominent supplier who
had a product that was in demand in the market. suppliers like that
need their money in cash.”
the liquidity issue hamstrings the company’s progress across
the board. a private investor could infuse the necessary capital
to upgrade the stores, yet, to date, the only prospective buyers
for chains such as omar effendi have been arabs.
hisham hasabo, head of the accounting department at ain shams university,
points out that high oil prices have given gulf investors vastly
more leverage on the investment market. western investors, meanwhile,
are leery of egypt’s retail market given the negative experience
of uk retail giant sainsbury’s. “sainsbury’s introduced
new trends that were lacking in the egyptian market. this resulted
in a rumor campaign from the local competitors, who spread [a rumor]
that it was a jewish company. this false rumor resulted in damage
to some of its stores and the withdrawal of the company’s investments
from the egyptian market,” he said.
hussein, however, is optimistic about the future of the retail chains
after privatization. “there won’t be problems for whoever
buys these stores,” he insists. “they’re brand names
in egypt. the investor will have skilled laborers and enjoy the
liberty to conduct business freely, which was not possible for the
state-owned companies.”
undeniably, the state-owned retail stores occupy strategic locations
in egypt’s largest cities, an advantage that no private competitor
will be able to match in the short term. meanwhile, the continued
existence of at least one state-owned store would theoretically
guarantee a balance in prices and prevent monopolies.
“monopoly is absolutely not an issue,” hasabo assures.
“generally speaking, there is an idea that the state will keep
one of the stores, in which cheaper items could be available to
meet the demands of the limited-income layer of egyptian society.”
in the end, the feasibility of running egypt’s arthritic retail
giants on a private basis will come down to management – the
knack for selecting in-demand items, displaying goods with flair
and running creative advertising campaigns. with regard to these
basic business lessons, whoever eventually takes on omar effendi
and its sister stores will do well to inherit more from the store’s
once-glorious past than just a legendary name.
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