(Bloomberg) — There can’t have been many worse times to start a new business in Iran. Even before officials in the Islamic Republic alerted the public to a major outbreak of the coronavirus, the country started the year in a tense standoff with the U.S. while its economy was being crippled by sanctions.
For a trio of design graduates, a captive market of tens of millions of consumers starved of imports made it worth the risk. Their fashion brand, Koi, has sold thousands of crop tops and striped jeans since July.
“Made in Iran” has emerged as a rare glimmer of hope in the financial destruction from being ostracized from the oil market and global trade while Covid-19 rages. In a country where so many people’s lives have been defined by cycles of Western restrictions, brands like Koi, Zi Shampoo and Bonmano Coffee are among the homespun names that are filling the vacuum for consumer goods.
“We just knew it would work because we ourselves and so many people around us were so desperate for basic, simple things,” said Armita Ghasabi, 30, one of Koi’s founders.
Koi uses fabric spun at a textile mill in Iran’s northwestern city of Khoy, eliminating the need for imported materials. A dearth of competition from global brands and low labor costs keep prices affordable and their margins healthy, according to Ghasabi. For every $18 pair of jeans, they make the local currency equivalent of $11 of profit to spend on new product lines.
Iran for years has prided itself on resilience, something that Supreme Leader Ayatollah Ali Khamenei has tried to expand on and enshrine in policy with his “resistance economy” doctrine. The 2015 accord on reducing its nuclear enrichment promised to bring the nation back into the international fold before President Donald Trump abandoned the deal and started his assault on Iran’s economy.
One of the first things to disappear from Tehran’s streets after sanctions were re-imposed in 2018 were clothing shops. Popular shopping hubs that had for years hosted unofficial versions of Mango and Zara or franchises for Adidas and Benetton are now dominated by empty retail units.
A combination of the sudden crash in the value of the rial, a huge hit to consumer spending power and a government ban on hundreds of non-essential goods, including garments, ripped through the retail industry. Fewer imports led to a scarcity of mundane things like foreign shampoo brands, which have skyrocketed in price.
Nazanin, who co-owns a small marketing firm in Tehran and didn’t want to give her surname because of sensitivity of speaking with foreign media, said she’s started buying Zi shampoo because she can’t afford L’Oreal’s Elvive brand anymore. When she can find one, a bottle is six times more expensive in local currency compared with two years ago.
“The quality is pretty much the same,” said the 51-year old. “I really had no choice, and I don’t want to buy the older, traditional Iranian brands.”
Iranian officials have been told to expand the private sector and export to nearby countries. But the biggest of Iran’s indigenous manufacturing industries, such as carmakers, are still highly sensitive to sanctions and are plagued by corruption. The coronavirus, meanwhile, has hampered cross-border trade. Many smaller companies are doing better, even as gross domestic product contracted 12% since 2018.
“There has been a definite trend in the past two years where more and more people are opening small businesses and selling things they can produce themselves,” said Amir Ali Sabour, director of marketing communications at online retailer Basalam.com.
The website, which puts shoppers in direct touch with producers and suppliers, has seen the number of registrations from small businesses rise to 48,000 so far this year from 4,000 last year, Sabour said.
At Koi, where teams of technicians and machinists in face masks diligently carry-out quality controls and overlock hemlines, sales are strong. Within two months of Koi’s launch, the company had already sold out of their flagship cornflower blue-and-ecru striped balloon jeans and sleeveless tops. The most expensive items in the collection come in at under $20.
For sure, Iran’s economy remains in deep trouble. The daily death toll from Covid-19, meanwhile, rose to a record this week. Travel restrictions were imposed on five cities, including the capital, Tehran.
Many essential goods that are made in Iran are still rising dramatically in price, because they partially rely on imports. Koi had problems sourcing high-quality zips and other metal fasteners from Tokyo-based YKK Group, and it took them two months to get customs to release a shipment of buttons because of the import ban. But sales are strong—at least in the short term.
“Doing any estimations is really hard,” said Fojan Fard, 33, one of the company’s other founders. “On any day we don’t know how much poorer Iranians will be.”
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