* Foreign retailers blocked from Ethiopian market
* Government says it's open to foreigners managing state firms
* "Archaic" distribution networks force prices up
* High public spending squeezing out private sector
By Richard Lough
ADDIS ABABA, May 26 Ethiopia has pushed the door ajar for foreign retailers keen to enter the fast-growing market of 90 million people, welcoming them as managers but keeping the state in control.
It is a tantalising, if limited, offer for firms such as Walmart of the United States and Kenya's Nakumatt supermarket, which already have stores elsewhere on the continent and would like a foothold in sub-Saharan Africa's fifth biggest economy.
"It is a vibrant market. The population is huge, the income is there, they have a lot to go around," Nakumatt's managing director Atul Shah said. "Why are we not there?"
Ethiopia has said it needs to modernise its supply and distribution networks and encourage competition to cut costs and keep down inflation, which leapt to 40 percent in 2011 when food prices surged and government price caps led to hoarding.
On top of that, the arrival of big foreign competitors would hurt locally-owned supermarkets springing up in the country's new malls while the small traders who still dominate retailing fear it would put them out of business altogether.
Instead of following other African countries which have opened up to foreign retailers, the nation that was once run by communists is launching a state-owned cash-and-carry wholesaler called Alle that it promises to run as if a private firm.
"Retail distribution is not competitive, it is archaic," Finance Minister Sufian Ahmed told Reuters when asked about Ethiopia's plans to shake up the retail industry.
"We are looking for outside management just to get international experience. We are open to any option, not only for Alle, but for any other major public enterprise," he added.
It follows a well-trodden route for Ethiopia, one of Africa's fastest growing economies that has spurned the liberalising approach of others by holding onto control of its telecoms monopoly and keeping foreigners out of the banks.
Management contracts have been offered to foreigners outside the retail business in the past, but these have usually been short. France Telecom won a two-year deal in 2010 to run Ethio Telecom, one of Africa's few government monopolies in the sector. Control of management then returned to Ethiopia.
The International Monetary Fund has warned that huge state spending on roads, railways and power could derail economic growth - which is projected at 11 percent a year by the finance ministry but less by the IMF - if it keeps squeezing out private business.
Still, an emerging middle class is enjoying increasing buying power in a country that failed to feed itself just three decades ago. Ethiopia could still meet a target to become a middle-income nation by 2025, the IMF says.
Such prospects elsewhere in Africa - despite huge wealth disparities across the continent - have drawn big retail names to flashy shopping malls serving the middle class.
"Africa is brimming with potential for global retailers with its one billion people and growing economy," consultancy A.T. Kearney said in its 2014 African Retail Index report. "It is easy to see why many retailers consider sub-Saharan Africa the next big thing."
Big brands are prising open the door in some areas. Drinks giant Diageo bought a brewery and fashion retailer Hennes & Mauritz makes garments in Ethiopia. The Ethiopian Investment Agency told Reuters last year that Unilever and Nestle were both sniffing around.
But Ethiopia, whether on its own or with foreign firms, needs to improve its supply and distribution network if it is to keep a lid on costs. Inflation has come down from its 2011 peak, but has still hovered around 8 or 9 percent for months.
"Supply costs have a significant share (of import costs), going up to 50 percent of the overall cost," said Mirko Warschun of A.T. Kearney's Africa leadership team. "That is not sustainable."
A.T. Kearney, which was hired as consultants to help set up Alle, and Ethiopian officials said the new cash-and-carry would be run as a private business, with some Ethiopians returning from the large diaspora to join the management team.
The officials say Alle will bring more competition to the powerful suppliers who dominate the market, thereby forcing down the prices passed on to retailers.
When prices raced out of control in 2011, the then prime minister, Marxist-influenced Meles Zenawi, held talks with Wal-Mart, initially raising speculation it might open up.
Walmart's South African subsidiary Massmart Holdings said Ethiopia was a "compelling growth opportunity" but one it could not yet exploit. "Legally we just can't do it. But I'd love to trade in Ethiopia," Mark Turner, Massmart's Africa director told Reuters. "They'd welcome wholesale operations and that's just not an option for us."
In Addis Ababa, Turner's loss is regarded as a temporary reprieve for the local supermarkets in new city centre malls, without the logistic networks of a big chain.
"We would suffer," said one supermarket manager, barricaded in a pokey office behind piles of imported Chinese furniture in the upmarket Bole district, when asked what it would mean if foreign retailers were allowed in.
Yet in the teeming alleys of Mercato, a hillside maze of ramshackle stores and kiosks, small-time vendors already suffer as the new middle class with more cash turn to mini-markets.
"We used to turn over 60,000 birr (about $3,000) on a good day. Now it's more like 20,000 birr," said Feysel Kidr, 21, sitting under a mountain of deodorants, shampoos and toothpastes.
The fate of his 30-year-old family business would be sealed if foreign firms opened shop, he said: "That would finish us."
But even if foreign firms could open stores, other problems remain. The use of electronic payment systems remains limited. Visa entered Ethiopia a decade ago and is seeking to persuade the authorities to ease regulations.
Ethiopia's massive public spending means private credit is in short supply as the government drains liquidity from the economy. Even so, wider use of cards would help to increase lending, Visa says.
"Electronic payments (mean) more money stays in the banks and banks are able to lend that money back to retailers to do more business," Jabu Basopo, Visa's country manager for Southern and East Africa, told Reuters.
Despite hurdles, Ethiopia remains an enticing market. Experience from emerging markets around the world shows retailing starts to expand significantly when a country's per capital national income reaches $750 and really takes off at $3000, according to McKinsey Global International.
In 2012, Ethiopia's per capita income was $410 and it aims to reach middle income status - defined as $1,430 by the World Bank - in just over a decade.
Ethiopia's middle class is already increasingly brand conscious, even if available cash remains limited, said U.S.-educated Nega Asfaha who manages the Zefmesh Grand Mall, Ethiopia's largest shopping centre.
"The middle class is demanding more convenience, more choice, more brands," said Nega. "But it doesn't have that disposable income to really go out there and shop like you would at Macy's at the weekend." (Additional reporting by Aaron Maasho in Addis Ababa and Tiisetso Motsoeneng in Johannesburg; Writing by Richard Lough; Editing by Edmund Blair and David Stamp)