In a surprisingly bold move, the Central Bank of Egypt freed the pound from its peg to the US dollar and allowed the currency to free-float on November 3. Since then, the pound has depreciated more than 100% from its previous value of EGP 8.8 to US$ 1, reaching EGP 18 to US$ 1. Liberalization of the exchange rate, along with a new 13% VAT, an increase in fuel prices by 30-50%, and a 40-60% increase in tariffs on luxury goods, have created acute challenges for business operations in the country. Most notably, costs are rising significantly, from the cost of importing, to transportation, to pressure for wage increases.
Over the next several months, businesses should anticipate continuing currency volatility, persistently high inflation, and only a slow recovery in the availability of foreign exchange. These issues raise an important question for businesses in Egypt: should they raise their prices?
There is no one-size-fits-all solution, and requires businesses to reassess their pricing strategy by considering not only changes in the market dynamics, but also factors specific to their business and 2017 objectives. Executives must first determine their strategic imperatives and their target customers for Egypt in 2017. They must then adjust their prices considering their relationship with local partners, their ability to cut front end costs, and adapt the rest of their Egypt strategy accordingly, such as their product portfolios and marketing strategies. The following sections outline issues that local and corporate executives must align on to develop a dynamic pricing policy for Egypt operations in 2017 and beyond:
The inevitable tradeoff
In Egypt’s current volatile economic state, business cannot have it all, and a choice between strategic imperatives must be made: should your business focus on maintaining profit margins or market share?
The depreciating pound, soaring operational costs, and price-sensitive consumers make it nearly impossible to maintain all imperatives. Businesses that choose to focus on profit margins will need to make price increases and target specific customer segments that can take on such increases, but this may be done at the expense of some market share. Businesses that choose to maintain market share can only afford to make minimal price increases to avoid losing large segments of their customer base, but will do so at the expense of growing profitability. Meanwhile, the pound’s depreciation will increase translation risk and complicate plans to significantly grow revenue in US dollar terms.
Regardless, businesses can consider if there are certain front end costs that can be cut, such as in changing or reducing their channel partners, planning less but more targeted marketing investments or personnel changes, alongside raising prices.
Target the right customers for your strategy
In addition to identifying strategic imperatives, developing a dynamic pricing policy that can respond to Egypt’s recent challenges also requires businesses to target the right customers for their objectives. This is especially important in Egypt, as most customer segments will exhibit increased price-sensitivity in 2017.
After the first month of a free-floating pound, inflation stood at 19.4% YOY, with food and beverages reaching 21.5% YOY. The severe rise in food prices puts a heavy burden on the budgets of low and middle income consumers, who spend almost 50% of their income on food. High-income consumers are not exempt from the impacts of reform either. They are experiencing higher education costs and higher prices on premium goods that face tariff increases. These factors mean that consumers across all income levels will be cautious with their spending and will likely trade down, especially if there are substitutes available in the market.
Businesses who sell to the public sector will also face softening demand as the government still struggles to significantly increase its fiscal resources. The government remains hesitant to raise some of its fixed prices for its purchases and is already postponing projects, such as a series of electricity projects worth US$ 15 billion that were meant to begin in 2017, but are now postponed until 2022.
Customers in the B2B segment will also feel pressure as they face higher operating costs, including the cost of borrowing after many banks raised their interest rates to 16-20%.
Evaluate your level of support to your local partner
Executives must also consider the relationship with channel partners when determining the necessary changes in pricing policy for Egypt. In Egypt, distributors are struggling with a continuing dollar shortage and confusion over customs fees, which now fluctuate with the value of the pound. In the current environment in which the pound’s depreciation is putting pressure on performance, businesses have three options: they can shift the risk to their local partner, split the risk, or shoulder more of the risk. Each choice is accompanied by consequences on businesses’ relationship with local partners and the partners’ performance, as well as on company finances. Where businesses shift the risk will shape the options available for the changes in their pricing policy.
Be proactive in your Egypt pricing strategy
Egypt is in for a difficult year, with further volatility of the pound expected, high inflation, and consumers struggling with the reforms’ impact on their purchasing power. These factors necessitate clear communication between local teams and corporate to re-examine pricing strategy in Egypt for 2017 and beyond. Businesses must align on their strategic priorities for Egypt and generate pricing shifts accordingly, rather than merely reacting to the market dynamics. More details can be found in FSG’s Adapting Pricing for Emerging Markets Playbook, which suggests a detailed five-step process to creating a dynamic pricing strategy. Clients can access the report by clicking here.