RETAIL STORE DIAGNOSTIC: PRIVATIZATION PACKAGING

RETAIL STORE DIAGNOSTIC: PRIVATIZATION PACKAGING RECOMMENDATIONS Final Report

September 20, 2007

This publication is made possible by the support of the American People through the U.S. Agency for International Development (USAID). The contents of this report are the sole responsibility of BearingPoint, Inc and/or its implementing partners and do not necessarily reflect the views of USAID or the United States Government.

RETAIL STORE DIAGNOSTIC: PRIVATIZATION PACKAGING RECOMMENDATIONS FINAL REPORT

TECHNICAL ASSISTANCE FOR POLICY REFORM II

CONTRACT NUMBER: 263-C-00-05-00063-00

BEARINGPOINT, INC.

USAID/EGYPT POLICY AND PRIVATE SECTOR OFFICE

SEPTMEBER 20, 2007

AUTHOR: BRUCE MACQUEEN, BRENDA STERNQUIST, AND DAVID NEVEN

SO 16 < RETAIL STORE DIAGNOSTIC>

DISCLAIMER:

This report is made possible by the support of the American people through the U.S. Agency for International Development (USAID). The contents of this report are the sole responsibility of BearingPoint, Inc and / or its implementing partners and do not necessarily reflect the views of USAID or the United States Government.

TECHNICAL ASSISTANCE FOR POLICY REFORM II i

FORWARD ACKNOWLEDGMENTS

This study owes acknowledgements to many people who helped to ensure its completion

within the timeline.

Assistant Minister Ahmad Abou Zeid and his associates Emad Moursy and Hany Farahat,

provided us with the clear definition of their needs that was the essential foundation for the

Retail Diagnostic Assessment Team’s work.

Kamal Selim and Noran El-Sherif made invaluable contributions to the study as members of

the Team. Kamal provided the coordination and oversight of the work of the firm that

conducted the field survey. The unmitigated success of the field survey owes much to

Kamal’s diligent efforts. Noran played the key role in managing, compiling, and reconciling

the master database, which comprises some 40,000 data points, as well as contributing to

many other aspects of the study.

The survey firm, El-Zanaty & Associates, visited, assessed, and filmed 207 outlets during the

course of its one-month assignment. The performance, efficiency, and professionalism of

Fatma El-Zanaty, Rashad Hamad, and their associates far surpassed the Team’s

expectations.

The study also profited at its outset from the experience, insights, and time of Mr. Hady

Fahmy, Chairman of the Trade Holding Company, his staff, and the executives and staff of

the five retail chains addressed by the study; and of Mr. Jameel Al-Gnaibit of Anwal Trading,

the acquirer earlier this year of Omar Effendi pursuant to its privatization.

Scott Jazynka, Ann Ruengsorn, and Sherif Korayem, Equity & Venture Capital Specialist, of

the USAID ICT Entrepreneurship Program were instrumental in identifying a supplier, NAT

Software House, to implement a Geographical Information System (GIS) solution to manage

the vast amount of geographically sensitive data that the Team needed to convey efficiently

to the Ministry of Investment. The professionalism, technical knowledge and action

orientation Hakim Amir and Osama El-Zeftawy of NAT are exemplary.

And certainly the Team thanks and appreciate the oversight, guidance, and consistent

support of the its efforts by Mark Gellerson, Ali Kamel, and Mervat Fikry of USAID in Egypt;

and of Tham V. Truong, Team Leader of the TAPR II Program Support Component and his

staff, among whom thanks in particular Shereen Abdelaaty, Doris Solomon, Ghada

Mahmoud, and David Sims for their valuable contributions to the success the effort.

TECHNICAL ASSISTANCE FOR POLICY REFORM II ii

USE OF DATA CAUTIONARY NOTE

TAPR II relied upon various third-party sources for its data and therefore is not responsible

for its accuracy.

In particular, the following is noted:

� data from various sources was not always consistent;

� some stores may have been omitted, others may no longer be in operation or may

have been disposed of;

� non-retail properties under the control of the chains are not addressed by study; and

� statistical analyses that may be valid for groups of stores, such as the estimation of

average market rents, cannot be applied to individual outlets.

When conflicts in data from different sources were noticed, the TAPR II Team made an effort

to reconcile the differences and to ascertain the more accurate source.

While the observations above are not material to the principal conclusions of the study, they do dictate that the data should not be considered as precise or without error. If cases arise where precise data on a particular outlet may be required to support decisions other than those addressed in this report – whether decisions by the ministry of investment and its agents, the relevant public enterprise holding companies, or, eventually, potential investors –TAPR II recommends that additional verification be undertaken.

TECHNICAL ASSISTANCE FOR POLICY REFORM II iii

CONTENTS FORWARD............................................................................................................ I

USE OF DATA ..................................................................................................... II

I EXECUTIVE SUMMARY.............................................................................. 1 I.1 Core Conclusion and Recommendation..................................................... 1 I.2 Recommendations for the Disposition of Non-Viable

Outlets ........................................................................................................ 3 I.3 Presentation of Data and Videos with Geographic

Information System (GIS) ........................................................................... 4 I.4 Next Steps .................................................................................................. 4

II BACKGROUND AND OBJECTIVE ............................................................. 5 II.1 Background................................................................................................. 5 II.2 Objective..................................................................................................... 5

III OUTLET ASSESSMENT AND SELECTION OF PACKAGES OF VIABLE OUTLETS................................................................................. 7

III.1 Introduction ................................................................................................. 7 III.2 Outlet Selection Criteria and Outlet Viability .............................................. 7 III.3 Viable Privatization Packages .................................................................... 9 III.4 Three Recommended Packages .............................................................. 10 III.5 Bata – Recommendations in Context....................................................... 15

IV LEASED OUTLETS – SPECIAL ISSUES.................................................. 16 IV.1 Lease Assessment ................................................................................... 16 IV.2 Lease Assessment Reflecting Outlet Viability Judgments ....................... 17 IV.3 Implication for Outlet Packaging............................................................... 18 IV.4 Disposition of Non-viable Owned Stores.................................................. 19 IV.5 Employment Considerations..................................................................... 19 IV.6 Recommendations for Disposition of Non-viable Outlets......................... 19 IV.7 Proper Use of Below-market Rent Valuations.......................................... 20

V PRIVATIZATION OF THE THREE VIABLE PACKAGES ......................... 22 V.1 Sale vs. Long-term Operational Contract ................................................. 22 V.2 Linking Outlets and Packages to Map, Database and

Videos....................................................................................................... 23

VI NEXT STEPS............................................................................................. 25 VI.1 Valuations ................................................................................................. 25 VI.2 Disposition of Non-Viable Stores and Sale of the Bata

Chain ........................................................................................................ 25 VI.3 Identification of Potential Investors for Three Viable Chains.................... 25 VI.4 Preparation of Information Memoranda.................................................... 25 VI.5 Design and Launch Tenders for Recommended

Privatization Packages ............................................................................. 26

VII ANNEXES.................................................................................................. 27

TECHNICAL ASSISTANCE FOR POLICY REFORM II iv

LIST OF TABLES

Table 1: Summary of Outlet Assessments by Current Chain ................................................................. 2

Table 2: Number of Outlets by Recommended Viable Packages........................................................... 3

Table 3: Descriptive Information on the Three Retail Privatization Packages...................................... 10

Table 4: Geographic Distribution of the Outlets by Retail Privatization Package ................................. 11

Table 5: Present Value of Projected Amount of Below-Market Rents if all Leased Outlets Continue to be Operated by the Current Retail Chain Lessees (All Outlets Viable) LE millions.............................. 16

Table 6: Projected Key Money Receipts if all Leased Outlets are Disposed through Negotiations with Lessors (All Outlets Non-Viable) LE millions ........................................................................................ 16

Table 7: Present Value of Below-Market Rents [LE millions] ............................................................... 17

Table 8: Number of Leased Outlets Prior to 1996 ................................................................................ 18

Table 8: Number of Non-viable Leases with a Government Entity as Lessor ...................................... 20


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I EXECUTIVE SUMMARY The Government of Egypt is contemplating the privatization of the following department store

chains:

1. Hannaux

2. Banzayoun

3. Sednaoui

4. Shirkat Beea Al Masnouat (Manufactured Goods Company)

5. Bata Shoes

These chains are Public Enterprises organized under Law 203 of 1992 and comprise well

over 400 outlets distributed among 26 Governorates.

The Ministry of Investment (MOI) has requested the review of these retail chains to formulate

recommendations for packaging the enterprises for privatization. Specifically, the MOI is

interested in an analytical process that will examine the commercial viability of five chains

and their respective outlets.

I.1 Core Conclusion and Recommendation

The Retail Diagnostic Team assessed 438 retail outlets, currently allocated among five

Public Enterprise chains. 82 of the outlets examined have been judged to be suitable for

inclusion in three packages of outlets, each centered on a common viable commercial

strategy. The definition of “viability” is important. By a broad definition of viability, most

outlets could become commercially “viable” as individual shops with new investment, the

right owner, the right products, or the right strategy. Applying a narrower concept of viability

consistent with the objective of the study, the Team judged that only 82 outlets are viable as

elements in packages that are expected to have greater value to potential investors than if

the outlets were disposed of individually.

The main classification criteria to judge outlets according to this concept of viability were

size, physical environment, location and strategic fit:

� Size and the Distribution of Size

� Physical Environment and Layout

� Location

� Strategic Fit

Whether outlets are owned or leased is also quite relevant. Almost all of the outlet leases

are non-transferable. Re-negotiation of the leases to permit transfers to another of the retail

chains would entail the loss of the substantial below-market rents that the current lessee

chain can otherwise enjoy for the foreseeable future as a result of rent controls.

Consequently, the grouping of outlets into viable packages was constrained by the fact that

70% of the viable outlets are leased.


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Table 1: Summary of Outlet Assessments by Current Chain Chain Viable Non-Viable

Owned Leased Owned Leased Totals

Banzayoun 7 11 7 49 74

Hannaux 10 12 8 32 62

Sednaoui 9 19 3 38 69

Shirkat Beea al Masnouat 1 13 1 113 128

Subtotal, Four Chains 27 55 19 232 333

Viable & Non-Viable

82 251

Bata 0 0 10 95 105

Total 27 55 29 327 438

Total Viable & Non-Viable

82 356

The following three recommended commercially coherent packages of viable outlets are

each centered upon existing chains, although in all cases outlets have been moved from

other chains when such moves were judged to add value or to avoid duplication in another

package:

A. Hannaux Package: 23 viable outlets in ten governorates, suitable as department

stores. The main classification criteria are related to size, physical environment,

location and strategic fit. The median area of the stores in this package is 1500

square meters.

B. Sednaoui/ Beea Al Masnouat Package: 44 viable outlets in seventeen

governorates, suitable as department stores. The two existing chains in this package

would be consolidated under a new company while maintaining their current legal

identity. The median area of the stores in this package is also 1500 square meters.

Grouping all the viable department outlets into one package would result in too many

outlets in the same package located too close to each other. It is not realistic to think

that having three or four stores in the same package located in the same area would

be attractive to a purchaser.

C. Banzayoun Package: 16 viable outlets in ten governorates, suitable as

supermarkets or perhaps as specialty stores. In most cases, these are stores with

500 square meters or more on the ground floor and located near residential areas.

The median total area of the stores in this package is 900 square meters.

The Bata chain was treated as a special case. All of the stores are small, mostly under 500

square meters, and the chain has already disposed of approximately 200 non-viable outlets.

The Team had earlier recommended that Bata be offered for sale as is, leaving it to the


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buyer to determine whether it should remain a shoe store chain or whether the outlets

should be converted to another concept (such as convenience stores).

Table 2: Number of Outlets by Recommended Viable Packages

Viable Total Non-Viable Total Grand Total

Owned Leased Owned Leased

Department Store 1: “Hannaux”

10 12 22 8 32 40 62

Department Store 2: Sednaoui/ Shirkat Beea al Masnouat

12 32 44 4 151 155 199

Supermarket/ Specialty Store: “Banzayoun”

5 11 16 7 49 56 72

Total 27 55 82 19 232 251 333

Each of these packages would be privatized as a separate legal entity. In the case of the

combined Sednaoui and Shirkat Beea al Masnouat, that legal entity would be a new

company to which the two existing chains would be transferred without affecting their

corporate identity.

I.2 Recommendations for the Disposition of Non-Viable Outlets

The remaining 251 outlets were assessed as not adding value to strategically coherent

chains and therefore were judged, in this respect, to be “non-viable.” Nevertheless, they

have considerable value in aggregate as individual properties, and this value can be realized

by a combination of several means:

� 19 non-viable owned outlets: sell as soon as possible;

� 227 non-viable outlets with non-transferable leases subject to rent controls:

negotiations with lessors and potential new lessees with the objective of splitting

equally key money between the lessor and the lessee chain, as specified by law;

� 5 non-viable leased outlets not subject to rent controls: termination of leases in

accordance with the contracts or transfer to third parties with agreement of lessors;

and

� For leased outlets that have not been disposed by the time of privatization of the

respective packages, inclusion in the package as a “non-core” outlet. Such non-core

outlets should be promoted in the packages for their revenue potential as real estate

and clearly distinguished from the viable core stores in the package. (In the

information system described in the following section, viable and non-viable outlets

are referred to as “core” and “non-core” outlets respectively. This will avoid

inaccurate implications that may be conveyed by the words “viable” and “non-viable”

when dealing with third parties not familiar with this study.)


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I.3 Presentation of Data and Videos with Geographic Information System (GIS)

In the course of its work on the ongoing Retail Diagnostic Assessment, TAPR II has

collected a large amount of information from various sources – about 40,000 data points and

200 videos. After a considerable amount of effort spent consolidating, verifying, and

correcting the data, as well as tabulating it for various purposes, TAPR II has built a master

database and various sub-databases. Such information and the videos must be conveyed to

the Ministry in a clear and unambiguous form to ensure its efficient application to decisions

on privatization packages and on the disposition of individual outlets, whether viable or non-

viable.

It will later be important to convey information to prospective investors. The burden to an

investor of visiting store sites all over Egypt with an uncertain outcome may well be a

deterrent to that investor's decision to proceed with due diligence and to participate in the

tender. In Cairo and Alexandria in particular, the precise locations of stores and their relative

locations convey valuable information, while locations of outlying cities will not be familiar to

many prospective investors. When the commercial attributes are likely more positive than a

typical investor might expect – as it is in the case of the carefully culled outlets in the

proposed privatization packages – a borderline investor will be pleasantly surprised by what

he learns from a well organized information system.

To convey effectively the large volume of information, while simultaneously addressing the

importance of store locations, TAPR II engaged a software firm that has linked the master

database and videos to store locations on detailed maps through a GIS in a user friendly

format. This system is an electronic Annex (E) to this report.

I.4 Next Steps

The following next steps are suggested as next steps to proceed with rapid privatization:

1. Valuations of the three recommended privatization packages;

2. Disposition of non-viable stores and sale of the Bata chain;

3. Identification of potential investors for the three viable chains;

4. Preparation of information memoranda; and

5. Design and launch of tenders for recommended privatization packages.


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II BACKGROUND AND OBJECTIVE

II.1 Background

The Government of Egypt is contemplating the privatization of the following department store

chains:

1. Hannaux

2. Banzayoun

3. Sednaoui

4. Shirkat Beea Al Masnouaat (Manufactured Goods Company)

5. Bata Shoes

These chains are Public Enterprises organized under Law 203 of 1992 and comprise well

over 400 outlets distributed among 26 Governorates.

The Ministry of Investment (MOI) has requested the review of these retail chains to formulate

recommendations for privatizing the enterprises. Specifically, the MOI is interested in an

analytical process that will examine the commercial viability of five chains and their

respective outlets.

The Diagnostic was expressly intended not to use financial and accounting data produced by

the department stores. Rather, it was designed to focus on store characteristics that affect

productivity, profitability and, ultimately, commercial viability; as well as on customer bases

and demographic indicators, such as location, customer income, commercial environments,

population density, etc. That is, the Diagnostic addresses the economic potential rather than

the past performance of the outlets.

The first stage of the analytical process was to carry out a Desk Study (Annex H) to identify

those outlets that are deemed to be: 1) non-commercially viable; 2) commercially viable; and

3) potentially viable. The Desk Study was completed in June 2007 and concluded:

Based on the criteria listed in the previous section [principally size], our definitions of

commercial viability, and some initial store visits, 224 stores were classified as non-viable,

206 stores as potentially viable, and 7 stores as viable. More detailed information on the 206

potentially viable stores needs to be collected in order to classify them as either viable or

non-viable in the Final Report.

The second stage of the analytical process has focused on assessing the potentially viable

outlets to judge which of those are viable as elements of value-added privatization packages

and culminates in the Final Report.

II.2 Objective

The guiding objective of the Retail Store Diagnostic is to provide an independent

assessment of the designated department store chains in order to identify privatization

packages – each with its own commercially viable outlets – that will facilitate eventual

privatization decisions and enhance the attractiveness of the chains to potential investors.


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The objectives of this Final Report are to:

1. Explain the empirical assessment of five department store chains and the criteria by

which commercially viable outlets have been identified;

2. Recommend privatization packages of viable outlets, while identifying characteristics of

those packages that will make them attractive to investors; and

3. Address the disposition of non-viable outlets in terms of the implications for

privatization packaging.


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III OUTLET ASSESSMENT AND SELECTION OF PACKAGES OF VIABLE OUTLETS

III.1 Introduction

The task entailed the examination of 438 outlets under the five retail banners with the object

of grouping them into attractive packages that are the most likely to attract the highest bids

in a privatization effort. The overriding objective here was to assure that the outlets in a

given package fit a coherent retail chain strategy.

Such a strategy is not present among the existing state-owned retailers. For example, these

firms frequently leased outlets, not because it fit within their strategic plan, but simply

because they were available and cheap for the chain. Therefore the store groupings lack any

kind of consistency in the size and configuration of their outlets.

Furthermore, these retail firms lack centralized systems. Chain store strategy requires that

for groupings of stores to qualify as retail chains, they need to have: (1) central

management; (2) central buying; and (3) central warehousing. Without these three elements

a chain store strategy cannot be developed. Accordingly, the four state-owned retailer firms

are not chains, but merely groupings of business outlets.

Inventory in these outlets was not selected with a target consumer in mind. Instead,

merchandise was allocated to them by state-owned manufacturers or consignment

merchandise selected by a manufacturer. Consignment merchandise is primarily selected

not to meet consumers’ needs, but rather to enhance revenue to the manufacturer. The

strategic vision for a department store chain requires professional buyers who select

merchandise offerings to meet a target customer group’s needs.

Taking the above factors into account, the TAPR II Team packaged the outlets for

privatization into groups according to a strategic business focus. This means that the Team

bundled outlets that are similar in size, configuration and the potential customers they can

target with a product offering tailored to the demand of these customers.

III.2 Outlet Selection Criteria and Outlet Viability

Two principal rounds of elimination were conducted to arrive at a commercially coherent and

marketable mix of retail properties for the privatization packages.

III.2.1 Phase 1: First Cut

The main initial selection criterion was size. The Team decided to solely focus on the larger

outlets as these are rarer commodities in the commercial real estate market and therefore

expected to attract higher bids. For this reason the Team decided to classify all stores below

500m2 as “non-viable” for its purposes. 1

The definition of “viability” is important. Most outlets could become viable with new

investment, the right owner, the right products and the right strategy. For example, a small

1 MacQueen, Sternquist and Neven 2007, Retail Diagnostic Assessment: Desk Study. Report Prepared for USAID under the

TAPR II Project, June 2007.


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outlet of 100 m2 in a residential neighborhood is likely not viable as a part of the packages

being composed here, however it may be viable if sold to a local proprietor as a small food

shop or a convenience store.

Information on outlet size was made available by the five retailers. Using these data, the

Team eliminated 231 outlets that were less than 500m2 in total size. This left 207 outlets that

were potentially viable, depending on other factors.2 For these 207 outlets, survey data

were collected in phase 2.

III.2.2 Phase 2: Survey and Final Cut

To address limitations in the outlet level data that were available from the chains

themselves, a detailed survey form and survey training manual were developed, in part

based on some exploratory outlet visits in Cairo and Alexandria (see Annex A). Next, a

survey firm was competitively selected and hired to do the work. The survey also included

measuring floor space and recording five minutes of video for each observed outlet that

shows the store front, the inside of the outlet and the direct environment around the store.

The TAPR II Team carefully reviewed the videos and the tabulated survey data for each of

the 207 outlets. For illustrative purposes, the Team will occasionally refer to outlets by their

ID number (1 to 207), which also links to both the dataset and the video clips. Based on the

collected data, the Team eliminated 125 of the 207 surveyed outlets, leaving 82 viable

outlets for packaging.

The main classification criteria are related to size, physical environment, location and

strategic fit:

� Size and the Distribution of Size. Some outlets were found to be smaller than

500m2 in overall size, despite earlier information to the contrary. For other outlets the

Team found that the ground floor space was considered too small for the objective of

this study. The assumption is that ground footage is more desirable than footage on

upper floors.

� Physical Environment. The outlet may have too many obstructions (e.g., pillars) or

ceilings that are too low. The outlet may have an unpractical lay-out, such as a U-

shape, or it may be very deep and narrow. The outlet may be broken up in smaller

units that cannot be reunited into a single store at a reasonable cost. For example,

one outlet was completely reformed into a mini-mall (outlet 77, Sednaoui Chemla in

Cairo) and seems to be operating satisfactorily in its present form.

� Location. An outlet may be located in a city that is too isolated or in a neighborhood

where customer traffic outside the store is too low. Or it may be located in a city that

is too small or an area that is commercially less attractive. Socio-economic data used

in this context are presented in Annex F. Alternatively; the direct environment around

the store may reveal an unsuitable location, such as a department store located in a

residential environment or an outlet located in an area with streets or neighboring

buildings in a state of disrepair.

2 The figures reflect a net addition of one outlet as compared to the number in the Desk Study due to adjustments to the outlet

data by the chains.


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� Strategic Fit. Some outlets were dropped because they did not strategically fit in a

privatization package. For example, a store may be well-suited as a supermarket

outlet but has to be dropped because it cannot be moved into a supermarket (or

similar store) package due to the lease terms. This is explained in greater detail later

in this report.

III.3 Viable Privatization Packages

The remaining 82 viable outlets needed to be grouped in packages that are attractive to

potential buyers. The privatization packages have been grouped to be strategically viable

chains, as discussed in the introduction of this section. Two additional criteria influenced the

final grouping.

III.3.1 Central Place Theory

The Team found that the outlets of the four retail chains were frequently located in the same

commercial areas. There are two main reasons why it is important to separate outlets

located in close vicinity to each other into different commercial groups.

First, potential buyers of the retail packages offered for sale would likely not be interested in

having two outlets very close together, or have two outlets in one smaller town, as one outlet

would compete with the other. On occasion however, when two outlets are adjacent, a

privatization package may contain both outlets. The reason is that in those cases these

outlets can be combined in a strategically meaningful way. A prominent example of this is

Galeries Lafayette on Boulevard Hausmann in Paris, where a department store and store for

home furnishings belonging to the same retail chain are located adjacent to each other.

Second, department stores generally thrive when located near to competitors. In economic

geography this is explained by central place theory which postulates that centralization is a

natural principle of order and that human settlements follow it. Firms recognize the benefit of

centrality that results from adjacent location. In the case of retail firms, this benefit relates

mostly to the fact that many consumers will find it desirable to shop at multiple locations on a

single trip. The emergence of shopping malls for example fits into this theory. Therefore, by

grouping different nearby outlets in different privatization packages, the Team created a

cluster of stores that will attract more customers to an area and thus increase the strategic

value of each outlet and of each package.

III.3.2 The Lease Constraint

The fact that 70% of the viable outlets are leased, severely constrained the grouping of

outlets into viable packages. In each of the four state-owned retail firms, some outlets are

owned by the firm and some are leased. Leased properties cannot be moved between firms

(or packages) without the lease being terminated or renegotiated, thereby eliminating the

benefits of rent control. Leased properties in Egypt have great commercial value because of

rent control laws (see section IV) that have forced rents far below market levels. As a result

of this lease constraint, the four state-owned chains remained largely intact in developing the

packages. Nevertheless, outlets in properties owned by the retail firm, could be moved from

one package to another. This was done for five of the 82 outlets.


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III.4 Three Recommended Packages

Three retail packages have been identified as viable for privatization. One package can be

viewed as a supermarket or specialty store offering, the other two packages can be viewed

as department store offerings. Enhancing their attractiveness, both department store

packages contain landmark properties that can house the new chains’ flagship stores. These

properties are buildings of great historic significance, with interesting architecture, attractive

staircases and elevators, high ceilings, and so on. Examples here are the Main Branch of

Hanneaux in Alexandria (outlet 3) for package 2 and Sednaoui El Khazendar in Cairo for

package 3 (outlet 76). Most other stores, like branch stores throughout the world, are more

modest properties.

Why three packages? In order to maximize the efficiency of the (1) privatization process and

(2) economies of scale associated with the retail chain offered for sale, the Team wanted

fewer and larger retail packages. Grouping all 82 viable outlets into one package was not an

option for two reasons. First, some outlets were suitable as supermarket outlets or specialty

stores, but not as department stores, and vice versa. Hence the Team needed at least two

packages. Second, grouping all the viable department outlets into one package would result

in too many outlets in the same package to be located too close to each other (duplication of

market offerings). As discussed above, it is not realistic to think that having three or four

stores in the same package located in the same area would be attractive to a purchaser.

Therefore, the smallest number of retail privatization packages that would make sense from

a retail strategy point of view is three.

Table 3 below provides an overview of the three privatization packages. Lists of the specific

outlets in each of the three packages with some of their key characteristics can be found in

Annex C.

Table 3: Descriptive Information on the Three Retail Privatization Packages

Characteristic

Department Store Package 1: “Hannaux”

Department Store Package 2: “Sednaoui & Beea Al-Masnouat”

Supermarket Specialty Store Package 3: “Banzayoun”

Viable Outlets Sub-Package

No. of viable outlets 22 44 16

No. owned (%) 10 (45%) 12 (27%) 6 (38%)

No. leased (%) 12 (55%) 32 (73%) 10 (62%)

No. from Banzayoun 0 3 15

No. from Hannaux 22 0 0

No. from Sednaoui 0 14 1

No. from Beaa Al-Masnouat 0 27 0

Stores in Cairo & Alexandria 13 (59%) 12 (27%) 4 (25%)

Total floor space (m2) 42,900 73,700 18,700

Total ground floor space (m

2)

17,900 29,400 9,500

Mean outlet area (m2) 1,950 1,700 1,200

Median outlet area (m2) 1500 1500 900

Mean ground floor area (m2) 800 700 600


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Table 4 details the geographic distribution of the outlets by package. The geographic

distribution of all the outlets (with links to basic descriptive data and to the video material) is

provided though the interactive electronic map that was developed as part of this study (DVD

based). For more detail on this map, see section V.2.

Table 4: Geographic Distribution of the Outlets by Retail Privatization Package

Governorate

Department Store Package 1: “Hannaux”

Department Store Package 2: “Sednaoui & Beaa Al-Masnouat”

Supermarket Specialty Store

Package 3: “Banzayoun”

Total

Alexandria 4 2 2 8

Assiut 1 2 1 4

Aswan 2 1 3

Beheira 1 1 2

Beni Suef 1 1 2

Cairo 9 10 2 21

Dakahlia 2 2

Fayoum 2 2

Gharbia 2 4 1 7

Giza 1 1 2

Ismailia 1 1

Qalyubiya 2 4 6

Minia 2 2 4

Monoufia 6 1 7

Port Said 1 1

Qena 1 1 2

Red Sea 1 1

Sharkia 1 3 4

Sohag 2 2

Suez 1 1

TOTAL 22 44 16 82


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Package 1 – “Hannaux Package” – Department Stores

These department stores are located in

commercial areas. The Team calls this the

Hannaux package, after the chain that

provides all of the outlets. There are 23 stores

that meet the viability criteria. Stores are

located in 10 governorates. This group’s

stores have a mean area of 800m2 on the

ground floor and 1,900m2 in total, with a

median total area of 1,500 m2. The estimated

income of shoppers in the area around these

stores is the highest of the three groups.

Package 2 – “Sednaoui & Shirkat Beea Al Masnouat Package” – Department Stores

The second department store group

consists of outlets in commercial areas

primarily drawn from a combination of two

chains – Sednaoui and Shirkat Beea Al

Masnouat. There are 44 viable stores in this

group, located in 17 governorates. This

group’s ground floors have a mean area of

700m2, with a mean total size of 1,700m2

and a median of 1,500 m2.

Package 3 – “Banzayoun Package” – Supermarket/Specialty Stores

This package can be envisioned as a supermarket or specialty store package. These stores

generally have 500m2 or more on the ground floor. In some cases, outlets with less than

500m2 on the ground floor were still considered as super markets viable if there was a good

strategic fit. They are in residential, mixed or commercial locations. There are 16 stores in

this package with a median area of 900m2, located in ten governorates.

This group is associated primarily with Banzayoun outlets. Even though Banzayoun has not

operated them as supermarkets, the lay-out and location of the outlets made them suitable

for this type of retailing. The outlets in the package are geographically widely dispersed. This

makes them less suitable as a purchase target for a new entrant in the supermarket sector in

Egypt because supermarkets generally prefer to expand concentrically from established

distribution centers. They prefer this because the low margins and the perishable nature of

food items in the supermarket sector make efficiency in distribution absolutely critical.

Nevertheless, the outlets in this package could provide a good complementary set to an

existing supermarket chain in Egypt, or a new entrant to the market could consider these

outlets as a base to which it would add outlets over time. Egypt does not have any laws

Hannaux main branch in Alexandria

Sednaoui main branch in Cairo


13

restricting direct foreign investment in retailing. Alternatively, the outlets could be suitable for

a variety of specialty store outlets such as home improvement, since many of them are

located in residential areas. They might not be the location of choice for specialty stores

such as electronics or clothing shops because they focus on a more targeted clientele, and a

residential location might not be considered optimal.

III.4.1 Competitive Assessment & Comparative Data

The Egyptian retail environment consists largely of traditional markets, small shops and

neighborhood stores. Supermarkets are on the rise in urban areas. The market share of the

top five retailers in all areas is estimated at 2%3.

III.4.1.1 Department Store Packages - Strategic Vision

The strategic vision for these two department store privatization packages is to move their offerings up-market and re-earn their reputation as shopping emporiums. In their prime (1920s, 1930s) the stores in these packages were shopping emporiums that rivaled Paris, Milan and London. The names of the chains once had romantic appeal as those in their fifties and older still remember shopping as children with their mothers and marveling at the luxurious items presented for purchase. Department stores throughout the world have had this historic designation. The department store was one of society’s most innovative and influential institutions and it helped change the business world by giving birth to a culture of consumption. The introduction of department stores during the 1800s to the 1930s represented shopping freedom, with stores for the first time encouraging touching and examining merchandise.

These Egyptian department stores were nationalized in the 1960s. They became and still are captive consumers of the government procurement system, not because they are still required to only purchase from state-owned manufacturers, but because they can receive credit from these suppliers. Most stores are physically deteriorated and have very little inventory. Their target market is low to lower-middle class consumers. There is almost no customer traffic in the stores, and many stores have unused upper floors. However, they occupy some of the best located real estate in Egypt.

III.4.1.2 Department Store Competition

There are only two other department store chains of note in Egypt: Omar Effendi and Tawheed & Nour. Omar Effendi was privatized in 2006. The strategic vision for Omar Effendi is to bring it up-market with renovations and upscale inventory. Tawheed & Nour is a down-scale private department store chain, but one that is well managed. Assuming the department stores in the proposed packages move up-market, this retailer will not be a significant competitor.

Specialty stores in shopping centers and malls are probably the most significant competition for these department store chains. City Stars is a large complex of specialty stores selling high quality merchandise. Other shopping centers throughout the city represent competition. However, the locations of the department stores in these packages are downtown locations with attractive commercial viability. Assuming that the Egyptian economy will continue to grow and that market liberalization continues, the downtown locations of the stores in this package will benefit from Egypt’s economic development.

3 Planet Retail, 2006, http://www.planetretail.net


14

III.4.1.3 Supermarket Strategic Vision

Egypt’s grocery retailing is expected to remain the major contributor to total retail sales.4 As

a country becomes more economically developed and time pressures mount, consumers

move toward prepared meals and the type of food that can be conveniently purchased in

supermarkets. There are an estimated five million unlicensed street vendors in Egypt;

however food sales at wet markets (informal fresh food markets without refrigeration) and

other traditional markets decline as standards of hygiene become a bigger sales driver than

price. Egypt’s supermarket sector is expected to grow at 7% a year for the foreseeable

future.5

The strategic vision for this package is a modern supermarket with fresh, refrigerated and

frozen food offerings.

III.4.1.4 Supermarket Competition

The number of supermarket outlets in Egypt is estimated at 500, and growing fast. There are

three major, modern supermarket chains in Egypt: Alfa, Seoudi, and Metro. Shoprite, a

supermarket chain from South Africa entered the Egypt market in 2002, but exited in 2006.

They cited ongoing structural and bureaucratic difficulties, and their stores were sold to

competitors. Alfa has five stores, Seoudi has eight, and Metro has 25 stores. The industry is

fragmented.

Part of the grocery retailing competition will come from hypermarkets. Hypermarkets have

shown the most dynamic growth within Egyptian grocery store retailers. It is expected that

this segment will have 15% growth over the next few years.6 The main advantage of

hypermarkets over smaller grocery outlets is their ability to offer wider product assortments

at the lowest possible prices. Carrefour, Spinneys and Hyper 1 are the main hypermarkets.

Although delivering excellent price and selection, these hypermarket chains have very few

locations at this point (Carrefour has three, two in Cairo and one in Alexandria, while

Spinneys and Hyper 1 have one store each in Cairo). For many, especially lower-income,

Egyptian households, hypermarkets are likely the preferred “stock-up choice”, rather than a

daily or weekly shopping alternative.

Locally owned discounters – another source of competition – find themselves in a highly

concentrated, yet competitive environment. The top four account for a combined share of

72% of the discount market. Al Mahmal is first (28%), Abou Zekry is second (20%) followed

by Ragab Sons and Awlad Ghanem with 15% and 9% respectively.7 Supermarkets generally

target a high value-added customer while discounters target low-middle class customers. So

assuming that the supermarket chain maintains a value-added positioning, it should not be

too negatively affected by the discounters’ price competition.

Additional details on supermarket competition in Egypt are provided in Annex G.

4 Euromonitor, 2006, http://www.euromonitor.com

5 Ibid.

6 Ibid.

7 Ibid.


15

III.5 Bata – Recommendations in Context

As explained in greater detail in the Desk Study, the set of retail outlets operated by Bata

represents a special case.8 Since each of the Bata outlets is less than 500m2 in size, all of

them are considered ‘non-viable’ for the purpose of this exercise. Interviews with Bata

management indicated that the number of outlets has already decreased dramatically (from

312 in 2001 to 105 by June 2007) though outlet sales and disposition of leased outlets).

Further reductions are in progress to reach 50 stores for the whole of Egypt.

Given the above, Bata is considered a special case to be treated separately from the other

four chains. More specifically, the Team makes the following three recommendations:

A. Bata can be targeted for privatization in its current state.

B. Store closing and negotiations of lease terminations can continue pending preparation

for privatization. As this process necessarily takes time, privatization need not be

delayed until all non-viable outlets are disposed. There are currently 105 active shops,

plus ten owned shops and 42 rented shops that are closed.

C. It is reasonable to include the shoe factory as part of the sale, leaving its use or

disposition to the decision of the new owner in consideration of its chosen strategy.

D. The continued use of the Bata trade name and logo is a major uncertainty, and the Team

recommends that it be resolved with Bata International prior to privatization. The easiest

solution may simply be to relinquish use of the Bata name just prior to privatization,

leaving the buyer to impose its own trade name. This is certainly a viable alternative,

particularly given that the Bata name in Egypt has come to be associated with low

quality. Nevertheless, measures should be taken – presumably an agreement with Bata

International – to ensure that the new buyer is not subject to claims for the past

unremunerated use of the name by the legal entity that would be acquired.

8 MacQueen, Sternquist and Neven 2007, Retail Diagnostic Assessment: Desk Study.


16

IV LEASED OUTLETS – SPECIAL ISSUES

IV.1 Lease Assessment

Law 4 of 1996 ended some 35 years of rent control for future leases, but controls were

maintained for leases prior to the date of the new law. All but five of the outlet leases are

prior to 1996 and therefore remain subject to severe rent controls, which are explained in

TAPR II’s Lease Assessment Report (Annex I).9 As noted in the previous section, the non-

transferability of leased outlets, from one lessee to another, was a constraint on packaging

recommendations. Re-negotiation of the leases to permit transfers to another of the retail

chains would entail the loss of the substantial below-market rents that the current lessee

chain can otherwise enjoy for the foreseeable future as a result of rent controls.

Were the economic value of these below-market rents modest, they could have been

ignored. But the Lease Assessment Report estimates that rents paid are on average only

about 10% of market rents and that aggregate present value of the rent savings is in the

hundreds of millions of Egyptian pounds.

Case I: Excluding Bata’s 105 total outlets, 287 or 86% of the remaining 333 outlets in the

four chains are leased rather than owned. If these outlets continue to be operated by the

chains – i.e. if all are considered viable and retained in the respective portfolios – the present

value of the rent savings is approximately LE 500 million, assuming a ten-year time horizon

in the base case analysis.

Table 5: Present Value of Projected Amount of Below-Market Rents if all Leased Outlets Continue to be Operated by the Current Retail Chain Lessees (All Outlets Viable) LE millions

Hannaux Banzayoun Sednaoui Beea al Masnouat

Total

152 75 110 163 499

Case II: If, on the other hand, all of the leased outlets were considered non-viable and

disposed through negotiations with the lessors, the total amount of up-front payments (“key

money”) that would be received by the current lessees is estimated to be on the order of LE

285 million, or 57% of the LE 500 million of the present value of below market rents. The

following key money receipts were estimated by reference to the results of about 100 lease

terminations throughout Egypt, as negotiated by Bata in the past few years:

Table 6: Projected Key Money Receipts if all Leased Outlets are Disposed through Negotiations with Lessors (All Outlets Non-Viable) LE millions

Hannaux Banzayoun Sednaoui Beea al Masnouat

Total

78 45 65 96 284

9 MacQueen, Retail Diagnostic Lease Assessment Report, Report Prepared for USAID under the TAPR II Project, August 2007.


17

In theory, the total key money paid by a lessor to terminate a lease – or by a third party to

which the lease with its below-market rents would be transferred –should equal 100% of the

present value of anticipated below-market rent payments. So why, in the case of negotiated

lease dispositions, are the predicted receipts only about half (57%) of the present value of

the below-market rents?

This is a consequence of Law 136 of 1981 by which the former lessor (retail chain) and the

lessee are to split 50%-50% any key money received from a new lessee to which the lease

is transferred. Because the leases are non-transferable by the lessees, any such transfer to

a new lessee of course requires the consent of the lessors.

One might also envision a two-party negotiation between lessor and lessee as an alternative

means of lease termination. The lessee would be pleased to accept from the lessor up to

100% of the present value of the below-market rent as an inducement to leave the premises,

and then the lessor would be able to rent the property at market rates. But given Law 131 of

1981, the lessor’s incentive normally is to cooperate in negotiations with the current lessee

only if he can share equally the key money in accordance with Law. Instead of absorbing

himself the full (or nearly full) burden of the present value of below market rents in the form

of a key money payment to the lessee, the lessor recovers 50%.

On the other hand, why is the lessee normally willing to accept less than he might

theoretically receive in a direct negotiation with the lessor? Probably because he realizes

that the lessor usually does not have the resources to make a key money payment in the

same order of magnitude as a new lessee that could be identified in a tender. The result is

that in most cases – as evidenced by the Bata experience – it is in the interest of both

parties to tender for a new lessee willing to pay the highest amount of key money. This is

why leases are normally transferred with their below-market rents to third parties, rather than

terminated.

Therefore, as would be predicted, the lease termination benefits to the retail chains are

about half (57%) of their benefit were the chains to continue to operate the outlets. Were the

costs of lease termination negotiations with lessors and new lessees considered, the result

would be even closer to 50%. That this predicted relationship between the two cases is

reflected in the analysis tends to substantiate the reasonableness of the assumptions.

IV.2 Lease Assessment Reflecting Outlet Viability Judgments

Given that the Lease Assessment Report calculated the below-market lease assessments

according to two pure cases – all stores viable and all stores non-viable – the Team has

used the same model to reflect the Team’s subsequent viability judgments of the leased

outlets. The resulting estimated present value benefit of LE 358 million is broken down as

follows:

Table 7: Present Value of Below-Market Rents [LE millions]

Hannaux Banzayoun Sednaoui Beea al

Masnouat Total

Viable 83 18 39 31 171

Non-viable 34 33 44 76 187

Total 117 52 83 107 358


18

The totals for the non-viable outlets represent the estimate of the amount of key money that

would be received from new lessees to whom the leases would be transferred with the

consent of the lessors.

The following table shows the allocation of leased outlets, excluding the five outlets leased

after the 1996 lease law and therefore not affected by the rent control regime.

Table 8: Number of Leased Outlets Prior to 1996

Hannaux Banzayoun Sednaoui Beea al

Masnouat Total

Viable 12 11 19 13 55

Non-viable 31 49 36 111 227

Total 43 60 55 124 282

IV.3 Implication for Outlet Packaging

The key implication of these results is that there are 227 non-viable outlets, with a revenue

potential estimated at LE 187 million that cannot be moved from their current chains

because the leases are non-transferable.

Given that substantial value is embedded in the leases of non-viable outlets, and given that

the leases cannot be transferred to another chain or Public Enterprise without destroying

that value, the MOI and Trade Holding Company face these choices for the disposition of

any given outlet:

1. Leases of non-viable outlets to be terminated prior to privatization. This has the

advantage of limiting the recommended privatization packages to viable outlets, but it

has the concomitant disadvantage of delaying the privatization of the chains, almost

certainly for well over a year while termination negotiations proceed for a large number

of properties. While it does make sense to dispose quickly of outlets where feasible, it

seems hard to justify such delay and the concomitant prolongation of the economic

burden on government. (Note: partnerships, as explained above, do not constitute a

termination of a lease.)

2. Non-viable leased outlets to be offered in the same packages as the viable

stores, while taking care to make clear to prospective investors the distinction between

the two groups of stores in a given package. That is, there would be a group of outlets

selected for their value added characteristics as retail premises, and there would be a

“real estate sub-package” that would be presented as a supplemental profit opportunity

as the leases are disengaged. It would of course be expected that the prices offered

by the prospective investors would reasonably reflect the profit potential of those

leases, less the costs of disposition. It follows that the new owner may elect to retain

certain non-viable premises and offer them to partners, depending on his economic

assessment of that alternative for a given outlet.

3. Leases of non-viable outlets to be relinquished without an effort to realize a

profit from the lessee’s willingness to withdraw. While this approach would allow

privatization to proceed rapidly and without mixing non-viable and viable stores in a

privatization package, the Team believes that the magnitude of revenues that would be


19

foregone precludes this as a general solution. Nevertheless, the Team can envisage

two circumstances where outlets might be disbanded without negotiation:

a. Small outlets, particularly in less attractive or distant locations, where the costs of

negotiation would impose a burden that is not justified by the modest and uncertain

profit.

b. Outlets where the lessor is a government entity. It may be deemed unreasonable,

at least in the cases of some governmental lessors, that one government entity

profits at the expense of another.

IV.4 Disposition of Non-viable Owned Stores

There are 19 owned outlets in the four chains assessed as non-viable. Again, productive

uses will almost certainly be found for all of these properties. They are simply not viable

among the outlets that the Team has judged to offer added value when associated with a

coherent retail chain.

The non-viable owned outlets can be disposed of more rapidly than leased outlets given that

they can be tendered for sale without any prior agreement by a third party (i.e. a lessor).

IV.5 Employment Considerations

The disposition of non-viable outlets, whether leased or owned, need not entail the dismissal

of employees. The Team anticipates that all or nearly all would continue to be operated as

retail shops and therefore will continue to offer employment to experienced staff. Therefore,

it is quite reasonable that a condition of the sale of the outlets be that the new lessees or the

new buyers, as the case may be, assume existing employment contracts.

This will only have a material effect on purchase price if the acquirer must assume

employees that he judges to be unqualified or that are in excess of his requirements. Given

that each prospective employer will make different judgments, the Team suggests that the

risk of a modest diminution in purchase price is acceptable. Only in the cases of identified

“phantom employees” – those that draw salaries but do not report to work – does the Team

recommend staff reductions prior to sale.

IV.6 Recommendations for Disposition of Non-viable Outlets

A combination of all three means of disposing of non-viable leased stores is in order. The

Team recommends a three-part process:

1. Consider relinquishing some of the 65 leases of non-viable outlets where, according to

information provided by the chains, Government or a Public Enterprise is the lessor.

Following is the breakdown of those 65 leases.


20

Table 8: Number of Non-viable Leases with a Government Entity as Lessor

Total Hannaux Banzayoun Sednaoui Beea al

Masnouat

Public Enterprise

22 8 2 5 7

Other government

43 2 12 7 22

Total 65 10 14 12 29

2. For all other non-viable outlets, initiate as soon as possible negotiations with lessors.

Normally this will entail a mutually-agreed competitive tender of the existing lease in

order to identify a new lessee. The amount of key money offered would be the

principal tender criterion.

3. Realistically, it will take some considerable time for the respective chains to negotiate

the termination of more than 200 leases. Therefore, in order to proceed quickly with

privatization, many of the non-viable leased properties will have to be added to the

respective privatization packages. Again, these outlets should be marketed for their

real estate value, clearly distinguishing them from the viable outlets in the package.

For the 19 non-viable owned outlets, the Team recommends that sales be initiated as soon

as possible. Given that only two parties are involved – in contrast to the three parties in

lease terminations – these sales should proceed relatively rapidly.

The Team recommends that the general rule be that the assumption of existing employment

contracts by new buyers or new lessees be a condition of disposition of the respective

outlets.

IV.7 Proper Use of Below-market Rent Valuations

To avoid mis-interpretation of the valuations of the below market rents, as cited above and

as explained in the Lease Assessment Report, some cautionary notes are in order:

1. While the valuations of below-market rents have been estimated on a property-by-

property basis, the Lease Assessment is intended as a reasonable estimation of the

value of groups of leases but not as a reliable valuation for individual properties. For

individual properties, the estimates of market rents may diverge significantly, in either

direction, from reality. These differences can be expected to counterbalance one

another for groups of leases.

2. Each potential acquirer of a lease will value the property differently according to his

own subjective assessments and according to his present commercial and financial

circumstances. For example, the amount of investment required to upgrade a property

will be an important consideration in an investor’s assessment of the key money that

he would offer to assume the lease, and this investment will in turn be a function of the

purpose for which the investor intends to use the property. Similarly, the number and

quality of the employees that are transferred with the property may either add or

detract from the investor’s valuation.


21

In summary, while the Team considers its LE 187 million estimate of key money to be

received for non-viable leased outlets to be a defensible estimate, it should not be

interpreted either as a minimum or a maximum, and the assessment should not be used to

estimate the appropriate amount of key money for individual outlets.

The best way to identify and engage the investor who values the property most highly is a

well-publicized competitive tender.


22

V PRIVATIZATION OF THE THREE VIABLE PACKAGES

V.1 Sale vs. Long-term Operational Contract

If the recommendations of this Report are accepted, three legal entities would be sold to

private investors or consortia of investors, presumably via a well-advertised public tender:

1. Hannaux would be sold as a legal entity with its designated complement of viable

stores and, to the extent they are not disposed of earlier, non-viable Hannaux stores

offered for their attributes as real estate. This is similar to the method by which Omar

Effendi was sold, except that there was no distinction made in the offering between

viable and non-viable outlets.

2. Similarly, Banzayoun as a legal entity would be sold with its designated complement of

viable stores and any remaining non-viable stores.

3. The package that consists of both Sednaoui and Beea al Masnouat chains would be

sold as a new company (“newco”) with the two chains as subsidiaries. That is, the

legal identity of the two chains would not change, but their shares would be transferred

to a new state-owned company, the shares of which would be offered to investors.

It is important that the legal entities be preserved so as not to violate the conditions of most

of the outlet leases that do not permit transfers.

While privatization literally means the sales of the chains and their proposed packages of

outlets to private investors, quasi-privatizations – in the form of long-term agreements with

private entities to operate the chains10 – are also conceivable. With terms and conditions

such as the following, a long-term operating agreement could, economically, come quite

close to ownership:

1. A long lease term, such as 99 years.

The longer the lease term, the more the new capital investment in the chains and their

operation will resemble that of outright ownership. Nevertheless, as the end of the

lease term approaches, particularly in the last fifteen years, the more the operation of

the chains will be characterized by the objective to maximize short-term cash flow and

to minimize investment, whether in physical facilities, staff development, or product

development.

2. Operator has right to dispose of outlets, either through sale or lease terminations, and

to acquire new outlets.

There would nevertheless need to be incorporated into the agreement a requirement

for the operator to remit to the government the proceeds from such dispositions, less

the amount of new investment in outlets that would be added to the owner’s portfolio.

3. Operator can, at its sole discretion, sell its rights under the operating agreement to a

third party for the remainder of the lease term.

10

These long-term operating agreements are often referred to as leases of the chains, as opposed to leases of the outlets


23

The operator would be able to retain the proceeds, which represent the consideration

for the future income that he would relinquish, as reflected in negotiations with the

transferee.

4. Payment for the lease would be 100% in advance.

Such payment, subject to competitive tender, would in principle be equivalent to the

present value of future lease payments were such payments specified instead.

Nevertheless, because a single up-front payment entails less uncertainty – and less

potential political complications of future public controversy over the appropriateness of

annual rents – investor interest in the transaction and the terms proposed in the tender

would likely be more attractive to the government than they would be were an annual

lease payment or a lease formula specified in the agreement. Moreover, treating the

payment as a present value provides an easy measure for comparison of the tender

bids.

5. Responsibility for liabilities must be resolved.

The liabilities would rest with the chains, not with the management companies. This is

a major disadvantage of a long-term management contract, unless proceeds from the

tender of such contract are sufficient to settle the excess liabilities that may be found in

any given chain.

Implications of Decision on Means of Disposition

The Team predicts that the more that the conditions of the operating agreement deviate from

quasi-ownership, a) the fewer the bidders will participate in the tender; b) the more high

quality bidders will, in particular, be deterred; and c) the less attractive will be the terms

received by the government. For example, reducing the term of the operating agreement to

35 years instead of 99 would be far less attractive to government and would be far less

conducive to revival of the enterprises.

To put this discussion in context, the four retail chains included in the privatization packages

can be expected to continue to be a cash drain on the government if public ownership

continues. As detailed above in Section III.1 (Outlet Assessment and Selection of Packages

of Viable Outlets; Introduction), the chains demonstrate no coherent, value-adding strategy.

As most government-owned or “publicly-owned” enterprises, they have been managed for

short-term objectives, with minimal capital investment. The consequence is that they have

been a cash drain on the government and government-related entities.

Ownership indeed matters, and the stores will continue to fail to meet their potential if private

ownership (or quasi-ownership nearly equivalent thereto) is not introduced.

V.2 Linking Outlets and Packages to Map, Database and Videos

The master data file for this assignment can be represented as a matrix of nearly 40,000

cells (438 outlets x 89 observations). A DVD containing the videos of the outlets includes

207 video files totaling over 2.2 gigabyte of material. While interested parties can study this

extensive data collection in its raw form, it is a rather unwieldy and not a user-friendly way of

presenting the information.

For this reason, the Team integrated all the information in one convenient computer

application, developed by a local GIS firm (Nat House) based on instructions from the TAPR


24

II team. This application package allows users to see maps with all 438 outlets marked on

them. Each privatization package can be explored separately and videos can be accessed

by directly clicking on a specific outlet marker on the map. Information can be searched,

filtered, displayed and printed in various convenient formats.

This customized software package is developed in the most user-friendly way and only

requires a computer with DVD drive and good internet connection (to download maps from

Google Earth and proprietary maps from Nat House). It is anticipated that this efficient and

effective way of making the data available to all stakeholders (including the Ministry of

Investments and potential bidders) will guarantee a high level of usage. In fact the Team

believes this type of application will prove its worth quickly and become a sustainable

analysis and marketing tool for the GOE.

A DVD containing the above GIS software application, the master data file (in SPPS and

Excel format) and the video files of surveyed outlets are appended to this report in electronic

format.


25

VI NEXT STEPS The objective of the Retail Diagnostic has been to propose viable privatization packages for

the more than 400 outlets that the Team was asked to assess. The foundation has now

been laid for actions that can lead to a rapid disposition of the five retail chains. Such action,

which the Team recommends proceed immediately given the poor state of the retail chains,

should consist at least of the following:

VI.1 Valuations

The Team recommends that discounted cash flow valuations of the three privatization

packages be undertaken from two perspectives:

1. Estimate the value to the government as seller if the chains continue to operate as Public

Enterprises and does not privatize them. This “seller’s value” represents the seller’s

indifference point, below which he would be worse off by privatization. Recent past

performance represents a reasonable starting point for this analysis.11

2. Estimate the value to a hypothetical buyer pursuing a realistic value-added strategy,

including new investment. This “buyer’s value” represents the maximum price that such

hypothetical buyer would pay and serves to define the upper end of the range of prices

that investors can reasonably be expected to propose. This will be useful in judging the

appropriateness of offers and in guiding any eventual negotiations. Of course such

valuations must be viewed with some modesty and be subjected to sensitivity analyses

because value is subjective and every buyer will attribute a different value to an

acquisition opportunity.

Such valuations are for the use of the seller and not to be revealed to potential investors.

VI.2 Disposition of Non-Viable Stores and Sale of the Bata Chain

As recommended above, the disposition of these outlets, whether leased or owned, can

commence almost immediately. The examination of the terms of the lease is a pre-requisite

to the commencement of negotiations with the lessor.

VI.3 Identification of Potential Investors for Three Viable Chains

Certainly some important investor candidates can be readily identified, as suggested

elsewhere in this Report, but effective advertising of the opportunity will also reveal

unanticipated interest. The GIS information system described in Section V.2 can be a

powerful tool in inducing investor interest and reducing their due diligence costs.

VI.4 Preparation of Information Memoranda

As usual, the memoranda would describe in detail what is being sold and suggest some

potential value-adding strategies that a new owner may wish to pursue.

11

For more detailed guidance on estimating the value of the status quo strategy, see King, MacQueen, Ott, The Cost of Not Privatizing: An Assessment for Egypt, 2004. Prepared for USAID by IBM Business Consulting Services.


26

VI.5 Design and Launch Tenders for Recommended Privatization Packages

While the Banzayoun package and one of the department store packages could be in the

market at the same time, on balance the Team recommends that the two department store

packages (Hannaux and Sednaoui/Beea al Masnouat) be launched sequentially. This will

entail less investor uncertainty than launching the two at the same time in that the bidders in

the second tender will know the identity of the winner of the first tender. Assuming that

uncertainty (as opposed to risk) is over-discounted, the extent to which we can reduce

uncertainty should serve to increase tender bids.


27

VII ANNEXES

Annex A: Outlet Survey Form

Annex B: Survey Training Manual

Annex C: Packages of Viable Outlets -- Key Observations

Annex D: Non-viable Outlets, By Chain

Annex E: Geographic Information System (GIS) for Retail Outlets

Annex F: Key Demographic Data

Annex G: Competitors in the Egyptian Grocery Industry

Annex H: Desk Study, June 2007

Annex I: Lease Assessment Report, August 2007

Technical Assistance for Policy Reform II BearingPoint, Inc,

8 El Sad El Aali Street, 18th Floor, Dokki, Giza

Egypt Country Code: 12311

Phone: +2 02 3335 5507 Fax: +2 02 3337 7684

Web address: www.usaideconomic.org.eg

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RETAIL STORE DIAGNOSTIC: PRIVATIZATION PACKAGING