RISING CONSUMERISM IN TURKEY

UNCLAS SECTION 01 OF 03 ANKARA 001853

SIPDIS

SENSITIVE

SIPDIS

E.O.12958: N/A
TAGS: ECON EINV EFIN TU
SUBJECT: RISING CONSUMERISM IN TURKEY



1. (SBU) Summary: Recent years have seen a rapid growth in
consumerism in Turkey with private consumption and retail sales more
than doubling between 2002 and 2006. Credit has helped drive this
consumerism trend, as newly-affordable interest rates have increased
the use of consumer loans and credit cards twenty-five-fold and
five-fold, respectively. And as incomes have risen, the growing
number of upper-middle class consumers has driven a retail sector
transformation. High-end shopping malls and retailers have blossomed
and franchised brands have appeared across Turkey. With the days of
economic turmoil and hyperinflation seemingly over, Turkish
consumers are likely to continue to spend their way toward Western
standards. End Summary.

--------------
A Shopping Spree...
--------------


2. (SBU) After decades of economic uncertainty, the combination of
stability, growth and lower inflation in recent years has given rise
to an explosion of consumerism as Turks have unleashed pent-up
consumer demand. From 2002 to 2006, private consumption, which
makes up nearly two-thirds of GDP, increased from $184 billion in
2002 to $383 billion in 2006 and retail sales from $66 billion to
approximately $140 billion. Rising per capita income, from $2,620
to $5,305, has also created a growing class of upper-middle class
consumers. Although the growth of private consumption has stalled
in the first half of 2007, and consumer durable sales fell compared
to 2006, this is attributable to higher interest rates starting in
June 2006. As the Central Bank begins to cut rates later in 2007
or in 2008, the longer-term trend of booming durable sales is likely
to resume.

--------------
...On Credit
--------------


3. (SBU) While economic growth and increasing disposable incomes are
the essential elements, credit has also supported the surge of
consumerism. Inflation has come down dramatically under the
newly-independent Central Bank's tight monetary policy following the
2001 financial crisis. Following a generation of hyper-inflation,
nominal interest rates -- still high by international standards --
fell in 2005 and early 2006 to levels at which some consumers can
afford to borrow. At the same time, banks changed strategy to
target consumers, as banks' earnings from government securities went
into a steady decline. The result has been a boom in personal
credit as consumers use loans to pay for housing and durable goods
and credit cards for everyday purchases. Banking Regulation and
Supervision Agency (BRSA) numbers show that from December 2002 to
April 2007, consumer loans increased over twenty-five-fold, from
less than two billion lira to nearly fifty billion, and credit card
use increased over five-fold, from four billion lira to over twenty
billion. The number of credit card accounts has also increased from
15.7 million in 2002 to 30.6 million in 2006. In addition to
bank-provided consumer credit, retailers are using credit to
stimulate sales by selling items with payment in installments. In
this way retail companies pass on to customers some of the benefit
of their ability to borrow more cheaply than consumers.

--------------
Housing Boom
--------------


4. (SBU) The passage of a mortgage law in February 2007 (due to come
into effect in January 2008) will for the first time allow for long
term and adjustable-rate mortgages. Aspiring home owners previously
had to rely on family borrowing or high-interest relatively
short-term home loans, constraining the growth of the housing
market. While the recent availability of cheaper credit has already
created a housing boom, the new mortgage law is likely to further
expand this boom as extended families living under one roof continue
to break off into smaller households. TUSIAD, the Turkish
Industrialists' and Businessmen's Association, forecasts an increase
of households from the present 15 million to 18.5 million by 2010.

--------------
Non-performing Loans Under Control
--------------


5. (SBU) Despite this surge in credit, non-performing loans and
credit card debt have not increased disproportionately, according to
the BRSA. From December 2002 to April 2007, non-performing consumer
loans increased approximately ten-fold to 573 million liras and
credit card debt delinquency increased nearly eight-fold to 1.8
billion. Credit card regulations have helped curb debt, as rampant
credit card use and debt accumulation led the Turkish parliament to
pass a law in February 2006 to restrict the amount of credit card
debt consumers could take on. The level of consumer credit in

ANKARA 00001853 002 OF 003


Turkey also remains relatively low. Household liabilities are at 10
percent of GDP in Turkey versus an EU-25 average of 61 percent, 15
percent in Poland, 17 percent in Hungary, and 15 percent in the
Czech Republic.

--------------
New Malls
--------------


6. (SBU) The retail sector has benefited greatly from the increases
in income and credit in Turkey, as retail sales have risen from $66
billion in 2002 to $140 billion in 2006. However, as retail sales
have boomed, the traditional face of Turkish retail -- open-air
markets and small shops -- has lost ground to high-end shopping
malls and retail chains owned by companies. While traditional
retailers still control about 65 percent of the retail market,
modern outlets are increasing their market-share. There were 128
shopping malls in Turkey at the end of 2006; 54 were in Istanbul,
including Cevahir, the largest mall in Europe and the second largest
in the world. Year-on-year investment in malls increased threefold
in 2006 to 770 million euros and press report that an additional 60
to 80 new malls are under construction. Much of the retail boom has
occurred in Turkey's principal urban centers of Istanbul, Ankara,
and Izmir -- the three account for 70 percent of gross leasable
space in malls. However, other urban and industrial areas of Turkey
are feeling the retail boom as well, reflecting economic growth and
prosperity in "second tier" cities that would have been unthinkable
even five years ago. Kahramanmaras, a provincial capital in
southeast Turkey, will be the site of a 624,300 square foot mall.
Large, modern malls have opened up at the central Anatolian
crossroads town of Afyon. Denizli, a textile center inland from the
Aegean region sports a large, modern hypermarket. And the French
Carrefour has opened hypermarkets in Mersin, Bursa, Eskisehir and
Adana.


7. (SBU) Retail chains, such as those in the grocery sector operated
by the Turkish conglomerate Koc Group, British Tesco, and Carrefour,
have also expanded and continue to expand. Koc's Migros chain --
the leading retailer in Turkey -- has over 500 stores and the
discount BIM chain has over 1600. Sabanci Holding, a leading
Turkish conglomerate, plans to open an additional 500 of its Teknosa
Cep electronics retail outlets (there are presently 2) by 2010. As
Turkey's economic stability and growth continue, corporate retail
chains -- including major international names -- are likely to gain
more ground against their small-time competition. Ikea has opened
in Istanbul and Izmir and is scheduled to open in Ankara in 2008.
Rumors also persist of Wal-Mart and BestBuy entering the retail fray
in Turkey. The Migros chain was recently put up for sale and may be
the opportunity Wal-Mart has been eyeing to enter the Turkish
market. All of this is to the detriment of the small-scale
shopkeepers. The Chamber of Commerce President in the north-central
Anatolian town of Kastamonu complained that small shopkeepers were
being squeezed out by chains like Migros and Carrefour.

--------------
Starbucks and the Rise of Franchising
--------------


8. (SBU) Also fueled by rising consumerism, and Turkey's increasing
integration with the world economy, brands and franchises have
flourished. Of the 800 leading franchised brands in the Turkish
market, approximately 200 are foreign, including 50 from the U.S.
In addition to assuring the quality of products, brands -- in
particular foreign brands -- have gained in popularity because they
project the wealth and status of the growing Turkish upper-middle
class. No hard numbers exist on the growth of brands and their
franchised establishments, but it can be seen from the proliferation
around Turkey in the past few years of establishments such as
Starbucks, which only opened in Turkey in 2004, and Gloria Jeans
Coffee.


9. (SBU) Much of the growth of foreign brands and franchise has been
confined to wealthier western Turkey, but this is changing.
Carrefour is becoming active in eastern Turkey, both through
acquisitions and greenfield investments and Ford executives joke
that their distributors "guard the southern border." With its
growing economy and 72 million people, 65 percent of whom are under
35, Turkey will continue to support the development of local brands
and attract the attention of foreign brands. A Foreign Commercial
Service report on the franchising market in Turkey estimates the
turnover of franchised brands, excluding franchised "dealerships,"
to increase to $10 billion by 2010 from the current $1.5 billion.
The growing demand for non-food services, including children's
education, training and personal development, and logistics, will
also provide an opening for established foreign brands to enter the
Turkish market.


10. (SBU) Comment: Turkey's growing population and progressive

ANKARA 00001853 003 OF 003


urbanization, up to 67 percent today from 60 percent in 1990, will
continue to fuel the consumerism trend. Economic speed bumps, such
as the mid-2006 drop in the lira's value, can temporarily set back,
but cannot derail, this trend. Consumer credit has room to grow in
Turkey, but regulators will need to monitor the breakneck pace of
expansion in credit. The growth of high-end retail speaks to the
growing population of upper-middle class Turks. This growth is
likely to be at a more modest pace among working-class Turks. And
despite poll data showing increased anti-Americanism, the steady
stream of Turks visiting American-affiliated establishments around
the country suggests that American brands and franchises stand to
benefit from the broader trend.
WILSON