Iranian businesses are being forced into the modern age. Iran’s old bazaar system is crumbling and a growing number of businesses are looking to management and marketing techniques that increase productivity to keep themselves competitive.
Mohammad Hossein Adib, a risk analyst and university professor, says Iran’s oil revenues have dropped to $89 billion from $268 billion two years ago when crude went for over $100 per barrel. This reduction in revenues led to economic contraction.
“In the new downsized markets, a group of businessmen emerged supreme by dominating markets using new knowhow,” Adib told Hamshahri Economy, a monthly magazine.
He reckons a fifth of Iranian businesses have outdone the other four-fifth by aggressively improving productivity.
Online sales and large malls and supermarkets are taking the market over from traditional shops. Hypermarkets, a term that’s catching on like wildfire in Iran, offer goods 15 to 30% lower than traditional shops because of their business model and wholesale purchase.
A new wave of malls in Tehran is planned for opening from January to March. One of these malls in west Tehran has 15,000 parking spots.
20 Takes on 80
But the wave of modernization is not limited to retail. The 20% of retailers are making the other 80% of businesses obsolete in many areas. As another example, printing presses are moving to Qom as printing in Tehran is too costly. Or, in the past, the northwestern province of Azarbaijan was the center of food processing companies, but their goods were marketed in Tehran.
Now, high costs in Tehran have moved the entire business to Azerbaijan. Tehran is losing its central role.
The winners are also operating with smaller margins (between 3% and 15%) and relying on high turnover, compared to their old school rivals with 15% to 30% margins, so they have a pricing advantage.
The two groups compensate their employees differently as well. The winners pay their staff based on productivity and the ones that are losing out are still paying based on the hours clocked in.
The new group, which Adib calls fourth-wave companies, is also more interested in financing themselves through equity rather than debt. With interest rates still prohibitively high, taking out loans is not economical.
Yet many companies on Tehran Stock Exchange hold too much debt and given current economic circumstances cannot pay the principal or the interest on their loans.
Alien to Crisis Management
Iran has had a closed economy and thus most dodged financial crises that hit the globe in prior years. For example, the 2007 financial crisis and the 2008 oil crash had little effect on Iran as $40 billion from the sovereign wealth fund was used to make up for lost revenue.
Because of this isolation, Iranian managers have had little experience of dealing with crises, the effects of which can be seen today in corporate management.
Adib says in every sector there are businessmen five times the needs of the market.
In this market, with low oil prices, businesses cannot raise prices to cover their inefficiency costs, as consumers’ pockets took huge hits during the crisis and now most consumers in the middle and lower classes can barely buy essentials.
Some businesses have resorted to excessive borrowing to survive, but that does no good. Lending has dried up because banks have most of their assets locked up in bad loans and property they cannot sell, leaving them with little to spare for new loans.
3 Easy Profit Roads Blocked
Up until the Iranian fiscal March 2012-13, companies used inflation, subsidies and bank loans to shore up their profits.
“In my opinion, 80% of corporate profits in the past came from inflation,” he said.
Furthermore, the government was paying lavish subsidies on fuel, reducing prices by around 87%. That subsidy has shrunk to 57% due to lower oil prices, greatly increasing production costs.
Also, as recession hit, some companies borrowed to keep working, instead of closing down and identified the loans as profits and paid handsome dividends. Now all three easy profit roads have been blocked.
The emerging victors of competition over Iran’s downsized market are quickly implementing new marketing techniques and forcing their competitors to close down.
“They are the product of recession and the children of the economic cycle,” said Adib.
Size Matters Not
They garner higher sales volumes, smaller inventories and higher inventory turnovers. During high inflationary periods, holding an inventory worth a quarter of annual sales was the way to do things.
Today, with inflation under 10%, the cost of holding large inventories is unnecessary. Holding smaller inventories also insulate businesses from market volatility and reduce capital requirement.
They are not relying on the size of their shop, rather they are building brands based on trust and they are looking for long–term relationships with their customers. Brand building and creating a distinction with competitors are new in Iran.
The challenge for them is finding skilled workers and getting access to new technologies. Needless to say, the government has been slow in adopting modern technologies or allowing them to thrive.
Regardless, the group Adib calls the 20% are here to dominate business.
