This article first appeared in March’s print edition of Business Monthly.
A quick way for a local entrepreneur to establish a brand name and loyal customers from day one is by affiliating with established local or foreign brands. In Egypt, that model has been a winner. “Franchising in Egypt has proved to be [a] successful business system, especially for food and beverage entities aiming to grow and expand in the Egyptian market,” law firm Youssry Saleh and Partners said in a note. “In some cases, it is convenient and more beneficial to purchase a franchise that is already established.”
Despite the successful track record, the Egyptian Franchise Development Association (EFDA), an industry organization, said in a 2022 note that franchising industry figures in Egypt are “modest” given the country’s demographics and large population. Almost 63% of Egypt’s population is under 30, according to data aggregator Statistica, and the country accounts for accounts for 17.2% of the MENA region’s population.
The number one hindrance facing franchising in Egypt is a lack of explicit regulations. “Having multiple laws is challenging for the franchisee,” said a 2021 paper from the Egyptian Regulatory Reform and Development Activity (ERRADA), a government body. That also creates problems for the courts when settling disputes. According to the Andersen Egypt law firm, three general commercial laws passed in 1948, 1999, and 2017 regulate the country’s franchise contracts.
To realize Egypt’s franchise growth potential, Ahmed Shalaby led 60 other members of Parliament in submitting a draft franchise law for discussion in February 2023. Its effectiveness will be critical to building this vital sector.
Franchising in Egypt
The government noted the importance of having a law exclusive to franchise contracts in 2010, almost 37 years after Egypt’s first franchise with a U.S. company opened. The Ministry of Trade and Industry drafted that law mainly to regulate local SMEs seeking international franchises, according to ERRADA’s report.
However, the government sidelined it because of social turmoil in 2011 and 2013, the proliferation of national mega-projects since 2015, including digging the New Suez Canal and constructing the New Administrative Capital, and the 2016 pound devaluation. As of 2021, MTI’s draft franchise law is with the Ministry of Planning and Economic Development.
In the latest 2021 International Franchise Attractiveness Index (IFAI), published by Rosenberg International Franchise Center, Egypt ranked 50th out of 131 in “attractiveness.” It ranked fifth in the “market opportunity” and 89th in “risk.”
That disparity was one factor in limiting most franchises to two sectors — retail (49%) and food and restaurants (22.5%), according to the EFDA — where Egypt’s sizable young population usually spends most of its disposable income. Remaining local franchise agreements include transportation, services and medical services.
Currently, 58% of franchise agreements in Egypt are with foreign companies, according to the EFDA. The rest are local chains seeking domestic expansion with minimal upfront investment and administrative hassles. U.S. companies lead in Egypt with 20% of franchise agreements, accounting for 30% of the country’s franchise sales, ERRADA’s report noted.
According to the Parliament’s portal, there are five types of franchises in Egypt. The most popular are commercial franchises like McDonald’s, Starbucks, H&M and Mothercare. Manufacturing franchises come second, giving the franchisee access to the franchisor’s know-how and patents. Other local franchises are in distribution, services, and investment.
Robust consumption?
With around 71.5% of franchise agreements in Egypt operating in consumption-driven sectors, spending patterns in 2024 and beyond are vital for franchisors and franchisees.
Masterard’s Economics Institute 2024 Economic Outlook for Egypt, published in December, said, “Consumers and businesses will face crucial decisions about spending and investing.”
Those “crucial decisions” stem from persistent annual inflation above 30% since 2022 and interest rates increasing from 8.25% in 2022 to 21.25% at press time. Nonetheless, Mastercard “expects real consumer spending year over year to increase by 1.2% in Egypt … Even with inflation taking a larger chunk of spending on essentials, consumers will prioritize the discretionary spending that matters the most.”
Mastercard’s report noted consumption in general in Egypt this year will be fueled by “increased customer loyalty.” That is good news for the local franchise industry, whose primary success comes from brand reputation and recognition.
In 2024, central banks in emerging countries could fuel consumption by decreasing or maintaining interest rates as the United States sees inflation cool and, therefore, lower their rates. They “are likely at or close to peak rates,” Mastercard said.
Another factor maintaining domestic consumption levels is the proliferation of consumer finance companies offering installment plans outside the formal banking sector with noticeably fewer restrictions. According to the Egyptian Financial Regulatory Authority, the number of people relying on consumer finance reached nearly 280,000 in July, a 25% jump compared to July 2022. Meanwhile, funding increased by 70% in the same time frame to EGP 3.85 billion.
Since July, four of the 43 local consumer finance companies started offering Sharia-compliant services to cater to that previously untapped market segment. Meanwhile, local commercial and Islamic banks issued payment cards in cooperation with domestic consumer finance companies to gain market share in that previously inaccessible market.
A research note from Naeem Holding, a local investment firm, said the consumer finance boom reflects three realities — prices are rising significantly, salaries aren’t keeping pace and consumption hasn’t decreased fast enough. “To satisfy their needs, a growing portion of consumers look to consumer finance firms,” the research note said.
Draft law
The ERRADA’s 2021 report said the plan was to grow Egypt’s franchise industry by 15% to 20% annually until 2030. Additionally, the number of local franchisors would increase from 42% of the total to between 50% and 55% of contracts.
Youm7, a local news agency, reported the draft franchise law would likely give franchisees tax incentives to stimulate that sector’s growth.
However, it also includes restrictions. Franchisees can’t secure a contract with a local or foreign franchisor unless they have worked in the same sector as the franchised product or service for at least one year in the local market. Another is that local franchisees can’t become intermediaries for parent companies in the local market unless they have worked at least one year in Egypt in the former capacity, even if the original franchising company wants a faster shift.
During the presentation of the draft law, Shalaby said the Micro, Small, and Medium Enterprises Development Authority should be tasked with regulating the domestic franchise industry, including all registration requirements. He explained that was because beneficiaries from the franchise law would likely be local SMEs.
The government needs to expedite the review and approval of that law, as franchising could help turn the entire economy around. “Franchises are not only food and drink; they can be suitable solutions to grow many local sectors,” said Shalaby. “Franchising is a global industry. To compete, we need an effective law that promotes that type of investment and regulates its nuances effectively.”
