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Iranian Presidential Elections - Impact on Consumer Markets

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The Iranian presidential elections will set the stage for what role the government will play in the fast-changing global economy, with the country’s domestic governance significantly impacting the pace of growth of the various consumer industries. In particular, the finalisation of the nuclear deal in 2016 has opened the country for global trade, offering new opportunities for a country that has been closed to much of the world for too long.

While politics always plays a key role in a country’s economic development, the impact is more profound in emerging markets, which are generally price-sensitive, and changes in economic policies lead to changes in consumer behaviour. In this blog, we examine the likely impact of the presidential election’s outcome on Iran’s key consumer industries.

With a GDP of over USD471.4 billion in 2016, Iran reported real GDP growth of 4.7% during 2016 and 9% growth in total consumer expenditure, at an estimated USD190 billion. Given the economic landscape, the country is set to be the leading economy in the Middle East, surpassing Saudi Arabia by 2020, with an expected GDP of USD757 billion.

The baseline growth forecast for key economic indicators in Iran – assuming a moderate impact of the election on economic growth – depicts continued real GDP growth of 4% until 2021. Inflation declines to 7% in 2021 from 8.5% in 2017, remaining a key challenge for the government due to weaker exchange rates and lower purchasing power.

While the economic outcome is dependent upon the approach of the winning candidate, we look at three scenarios for Iran’s economy over the forecast period:

Major Downturn: The country faces external risks that result in a major downturn, regardless who is elected. These include further deterioration of the US-Iran relationship, increasing the likelihood for new or re-imposing of sanctions on Iran and a revision of the OPEC deal. Following the OPEC Deal in 2016, Iran was allowed to raise its oil production to 3.79 million barrels per day. However, as Saudi Arabia loses market share and oil prices remain low, Iran might need to cut its oil production. This would lead to a major downturn in the real GDP growth of 1.6% predicted for 2017, assuming any of these circumstances occur soon after the election. An election of a hardliner president may aggravate the situation further.

Growth Slowdown: While Rouhani’s re-election as the president would indicate stability and re-enforcement of the current economic plans, the risk of cuts in oil production will dampen economic growth, leading to a slowdown scenario. Still this may result in positive efforts for increasing economic production from other services and sectors, further calling for investment in various industries.

Growth Acceleration: A growth acceleration case is expected if the elected government looks forward to strengthening the current agreements in trade and services, and further acts to develop a stronger financial system. Developing investor confidence through neutral political poise and assurance of good will for economic development will assist foreign investors interested in capitalising on Iran’s large consumer base.

Industry Analysis: Using the Euromonitor International Industry Forecast Model, we can better understand the impact the new political environment may have on the packaged food and drinks industries. The model enables us to study the impact of various macro-economic events as well as country-specific scenarios across all product categories, taking into account various growth drivers in an economy. To depict the impact of the event, the chart below shows the difference in market value results across key food and drink categories, given the three economic scenarios discussed above, when compared with the baseline forecast in value terms by the year 2021.

For the purpose of this blog, we will discuss the major downturn scenario in detail and its impact on consumer behaviour.

The Industry Forecast Model depicts a baseline CAGR of 3.4% for dairy products and 0.5% for baked goods, over the 2016-2021 period, with sales reaching up to USD9.6 billion and USD5.5 billion at constant 2016 prices, respectively. The per capita consumer expenditure on food and non-alcoholic drinks in Iran was estimated at over USD566 per annum in 2016, this is approximately 11% of the average disposable income in the country. With a big majority of the population with lower levels of disposable income, a major downturn scenario may lead to an increase in unemployment rates during the early years of the forecast period, which would impact budget decisions of lower and lower-middle income consumers, further impacting the per capita expenditure on food and non-alcoholic drinks. Considering dairy products are a necessity, in a major downturn scenario, the category would see a CAGR of 3%. The category would lose USD169 million in sales as consumers may forgo complementary utilisation of goods and prefer lower price points. Local players would remain competitive, however, they may look for greater export opportunities to increase revenues. This contrasts with the growth acceleration case, whereby consumers would have a higher tendency to shift to more premium or value added products.

Similarly, baked goods is expected to see a CAGR of 0.5% until 2021, to a market value of USD5.5 billion in a baseline forecast. Considering the downturn scenario, the category is expected to observe a CAGR of 0.2% over the 2016-2021 period due to a difference in sales value of USD85 million over the forecast period.

Among categories in the drinks industry, carbonates, juices and bottled water are the largest in on-trade value terms. Carbonates may expect a CAGR of 4.5% over the forecast period in a major downturn scenario, with a sales decline of USD21.2 million as compared to a CAGR of 5% according to baseline forecast which reports a market value of USD833.9 million in 2021. While consumption may continue to grow, interesting trends may emerge, such as more focus on smaller portion sizes and lower price points.

With a packaged food industry larger than Argentina’s and almost twice the size of Switzerland’s, Iran presents itself as a large untapped market with huge potential for growth in new, as well as existing products and industries, including the services industry. Iran holds the largest population base in the Middle East, with more than 80 million people, the majority of which are both young and internet savvy.

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