* Egyptian pound has halved in value since floating
* Higher import costs pushing firms to source locally
* Companies also expanding manufacturing in Egypt to export
By Asma Alsharif
CAIRO, April 27 In green fields near Egypt's
Mediterranean coast, PepsiCo is harvesting its first
crop of potatoes produced from local seeds to make a leading
brand of chips.
Like other big manufacturers in Egypt, the global food and
beverage giant is sourcing more of its raw materials locally to
keep a lid on costs and limit price rises as consumers struggle
with food inflation running at above 40 percent.
PepsiCo's Chipsy brand accounts for about 55 percent of the
local potato chip market and requires 360,000 tonnes of potatoes
a year, previously grown exclusively from imported seeds.
The cost of imports has soared in Egypt since the country
abandoned its currency peg of 8.8 pounds to the U.S. dollar in
November, imposed restrictions on imports and increased tariffs
on more than 300 products to curb a gaping trade deficit.
"Localising raw materials is extremely important at this
time. We cannot depend on a dollar-based cost structure with an
Egyptian pound revenue streamline," PepsiCo's North East Africa
General Manager Ahmed El Sheikh told a recent conference.
PepsiCo started developing seeds locally in 2013 and the
2017 potato crop is the first to be use them. It used to import
12-15,000 tonnes of seeds a year for its Chipsy production.
The company still had to import about 40 percent of the
seeds it needed for the 2017 crop but hopes to cut the
proportion of imports to 30 percent next year.
Egypt has long relied on imports, with even local producers
sourcing most components and raw materials abroad. The resulting
trade deficit, coupled with the flight of tourists and investors
following the 2011 uprising, has left the economy perpetually
short of dollars, putting pressure on the Egyptian pound.
It has halved in value since floating last year and
inflation has hit consumers purchasing power, making it
difficult for companies to pass more costs onto the public.
Instead, manufacturers, including several major listed
companies, are looking to replace imports with local supplies.
U.S. candy and pet food conglomerate Mars Inc, which
produces chocolate bars such as Galaxy, Mars, Twix, Bounty and
other popular brands, has been increasing its base of local
packaging suppliers in Egypt over the past three years.
Seventy percent of its packaging is now sourced within the
country and it plans to make that 100 percent by 2018.
Delays in clearing imports as a result of the new rules has
also been a problem for major manufacturers, adding to costs and
creating bottlenecks, encouraging firms to cut back on imports.
"We continue to face an issue with the clearance process in
Egypt," Mars General Manager for North Africa and Levant Ahmed
Seddik told Reuters.
Juhayna Food Industries, Egypt's largest dairy and
juice producer, is among other listed companies to pursue a
Juhayna used to make its mango juices using 50 percent
imported fruit. Since the currency flotation it has switched
exclusively to Egyptian mangoes, Chief Executive Seif Thabet
told a recent industry event.
The trend is not limited to food. Anglo-Dutch food and
personal goods giant Unilever is seeking local
packaging suppliers for its soaps and detergent powders.
"Everyone is squeezed on dollars so you start looking at
your import list to knock off some dollar imports," said Ashraf
Bakry, Managing Director of Unilever in Egypt, whose firm
imports 40 percent of their packaging material but aims to
source it all from Egypt within three years.
The flip side of the currency depreciation for
multinationals, however, is that locally-made products have
become far more competitive abroad and a number are capitalising
by expanding their manufacturing presence in Egypt
PepsiCo, for example, is now looking at exporting its
Egyptian-grown potato seeds to other PepsiCo companies in the
"Right now with the new cost structure, the labour cost, is
considered to be low so you will have much bigger opportunities
to be competitive in terms of pricing versus other relative
PepsiCo entities across the region so we see this as an
opportunity," PepsiCo's Sheikh said.
Mars will invest 750 million pounds ($42 million) over the
next 18 months with the aim of increasing its exports to 80
percent of production from 50 percent to 60 percent now, Seddik
Unilever is also in expansion mode. It plans to double its
asset base with the aim of turning Egypt into a regional export
hub. It expects its export volume to double this year.
"Egypt makes absolute sense because there is very low
skilled labour cost and very low utilities cost as well very
attractive logistics cost because the location is close to many
markets," Unilever's Bakry said.
"This decision has been in discussion for a long period but
now that the devaluation happened things are moving very quickly
... It unlocked the decision-making process."
($1 = 18.0500 Egyptian pounds)
(Editing by Lin Noueihed and David Clarke)