The Will to Consume

Kazakhstan’s economy could shrink by 2% in 2016, according to The Economist Intelligence Unit (EIU), with currency devaluation toward the end of last year resulting in a drop in household consumption. That said, the recent arrival of top international brands and the rapid emergence of a luxury retail sector suggest Kazakhstan has the demographics to carry the sector going forward.

One sign that things aren’t all doom and gloom in Kazakhstan was the arrival, in December 2015, of Starbucks to the country. Choosing to open its first two cafes in Almaty, the American superchain drew crowds that lined up on the street. This was followed in March 2016 by the opening of the first McDonald’s restaurant, which swung open its doors in Astana. According to the chain, 15 more outlets are on their way and ready to compete with already-established favorites including Burger King, Hardee’s, and KFC.

French retailer Carrefour also arrived in Kazakhstan early this year, under UAE franchise operator Majid Al Futtaim Retail. The $14 million Carrefour investment was a boon for the Kazakhstani authorities, representing one of the first major Western supermarket chains to take a bet on the country. It is hoped foreign investment will help the modern grocery retail sector catch up to its traditional equivalent, with sales at the former recorded at a value of KZT1.134 trillion, compared to KZT2.402 billion spent at traditional outlets, in 2015.
And while the sector remains upbeat for the future, in the short to medium term households are being hit due to macroeconomic factors that remain mostly out of Kazakhstan’s control. Back in August 2014, the central bank allowed the tenge to float freely, with the currency subsequently losing over 20% of its value. That pain continued into 2015, when it lost another 30%. Looking at 2015, EIU predicts private consumption to come in at -9.4%, then grow 0.4% in 2017. A weakened currency could also see a fall in the import of goods and services by over 19%, according to EIU, with a recovery of just 0.1% the following year. One way in which this reduced spending power is impacting the sector is the noticeable increase of traffic in large shopping centers compared to traditional street retailing, according to Euro Monitor, as consumers seek out special offers and discounts. The true nemesis of high-street shopping, e-commerce, has also reared its head in Kazakhstan in recent years. According to Euro Monitor, Kazakhstanis mostly shop online for consumer electronics and food and drink, yet total e-commerce sales still only represent 2% of retail sales in the country, compared to around 10% in the UK. A recent report issued by Research and Markets suggests, however, that B2C e-commerce could grow at double-digits over the coming years, owing much to bargain hunting and increasing internet penetration, with over 50% of the population online as of 2014. One barrier to future growth is a lack of trust in terms of transaction security, with almost half of online shoppers opting to pay at the door on delivery. Business Wire does draw attention to the fact that one-fifth of all bank card payments by mid-2015 were attributable to online shopping, though, suggesting an upswing.

On the luxury front, many top brands have already taken the plunge, including Louis Vuitton, Saks Fifth Avenue, Dior, and Prada, which are all located at Esentai Mall in Almaty. “Our guests no longer need to travel abroad to get the luxury goods or services they want. International retailers are realizing the importance of the Kazakhstan market,” said Managing Director Agnieszka Nowak, who also drew attention to the fact that, “For luxury brands, it is important that the market is big enough to accommodate their products,” and that, despite some short-term issues, “Kazakhs have enough purchasing power to afford the products these brands have to offer.” Describing the development of the sector over the last few years, Nowak said just, “It was a complete revolution rather than an evolution.”

Back on fast food, another Gulf retailer, Americana Group, joined the market in 2008, purchasing Rostik’s, which went on to be rebranded to KFC in 2010. Not content with that, the Group, which has over 1,500 restaurants across the region, also brought Pizza Hut to Kazakhstan, as well as Hardee’s and Costa Coffee. Today, it boasts around 50 restaurants and provides work for 2,000 people. And it isn’t just all about Astana and Almaty, with Americana Group also opening in Karaganda and Pavlodar Province, with plans for Aktau and Atyrau in 2016. Speaking on the firm’s rapid expansion in the Central Asian state, Abdalla Hafez,
General Manager of Americana Group Kazakhstan, told TBY that, “There is a huge opportunity for new brands, as Kazakhstan is still a virgin market compared to the Gulf. There are hundreds of international brands in the Emirates now, while there are less than ten global brands operating in Kazakhstan’s food industry.” His words also give hope to other retailers concerned that Kazakhstanis will keep their wallets in their pockets moving forward, suggesting that, “We estimate that the influence of price on a customer’s decision to return to a restaurant is less than 13% in Kazakhstan. In fact, our research indicates that Kazakhstani customers are the least affected by price across all of our market segments.” Hafez suggests that the arrival of foreign players like Starbucks, as well as fashion retailers like Zara and Massimo Dutti, is down somewhat to efforts the government is making to draw in investors. “These incentives include low-rate loans, reproducible returns on investment as high as 30%, and available infrastructure for all companies to utilize,” he concluded.

Moving forward, the Kazakhstani retail landscape is set for big change. The arrival of new brands, as well as an update in e-commerce, will likely put competitive pressure on existing bricks-and-mortar retailers. That said, the very fact that so many are scrambling for a slice of the pie is indicative of Kazakhstan’s long-term attractiveness as an investment destination despite the current pressures of currency devaluation and economic slowdown.