Nigeria's retail players demonstrate impressive e-commerce potential

 

Given Nigeria’s demographics, the country’s retail sector holds significant potential. However, in line with many other African economies, formal retailing remains nascent and accounts for just 5% of all shopping. With 180m consumers in the country, there is ample room for growth, but navigating domestic hurdles has proven difficult. Currency depreciation and rising inflation, combined with a recession in 2016 and an increase in parallel market activity, have made the future of the retail industry difficult to predict.

Nielsen’s inaugural “Africa Prospects” report in 2015, a survey of macroeconomics, consumer sentiment and retail prospects, ranked Nigeria as the most promising country on the continent at the time. In 2016 the country’s ranking slipped to fourth, and in 2017 it was ranked seventh. Despite this decrease in ranking, Nigeria remains on the minds of foreign retailers, and with a push by the government to increase local production of manufactured goods – aided in part by import substitution policies and supply chain improvements – the potential for sustained recovery has grown.

Clearing Hurdles

The need for this is clear, given the impact the broader macroeconomic headwinds have had on retailers. The lack of foreign reserves, for example, resulted in the Central Bank of Nigeria (CBN) drawing up a list of 41 types of items for which no foreign exchange (forex) will be made available when imported. The list includes clothing, a mainstay of mall sales. Retailers have also been forced to get the dollars or euros they need to import products from informal markets, which are far costlier. At times the gap between rates charged by informal markets and the CBN’s official rate has widened beyond N200 ($0.71), some two-thirds of the central bank’s rate.

Inflation has also pushed up prices for the goods retailers need to stock, rising to 18.22% in November 2016, the highest it had been since 2007. As a result, household consumption as a percentage of real GDP slumped from 67.3% in 2013 to 58.7% in the first half of 2016, according to the CBN. The results of these factors can be seen on the high street. The average vacancy rate in the country’s shopping malls reached 47% in the second quarter of 2016 across core and secondary markets, according to a report by property service firm Broll. This reflected low take-up rates and lower trading densities, with tenants also pushing to pay their rents in naira rather than in dollars.

These challenges have affected vendors. For example, clothing retailer Truworths of South Africa, which had four locations in Nigeria at one point, closed its remaining two stores in January 2016. The retailer had struggled to get stock into and get cash out of Nigeria.

Positive Indicators

Retailers are, however, optimistic that the tide is set to turn, particularly as the naira bounced back in informal markets in 2017, from a low of N520:$1 in March to around N356:$1 as of September. Monetary policy has also evolved to provide a series of windows at the central bank, making forex available at differing rates depending on economic activity.

According to Sajan Suvarna, the director of operations for the retail arm of Persianas – a mall developer, operator and tenant – the discrepancy between the goods that retailers can purchase on the formal market versus the informal market has narrowed to a more manageable level. “Retailers are getting optimistic now that the naira is going up,” Suvarna said. “You still need to source foreign currency in the informal market, but a gap of N50 ($0.18) is manageable.”

Inflation has also been decreasing throughout 2017: in May it fell to 16.25%, from 17.2% the previous month. Inflation was further reduced in August, to 16%, which was the lowest level it had been since May 2016, according to the National Bureau of Statistics. The core inflation rate, which excludes farm produce, also fell to 13% – the lowest rate since March 2016.

Although overall vacancy rates in the sector are high, there is regional variation. Conditions appear to be noticeably more robust in Lagos and Abuja, where most of the country’s middle-class consumers reside. Vacancy rates were 8% and 9% in Lagos and Abuja, respectively, as of mid-2016, and rents for retail spaces were the highest in these areas – $68 per month per sq metre in Lagos and $55 in Abuja, according to Broll.

In secondary markets, malls are more likely to have a gross leasable area (GLA) of between 8000 sq metres and 12,000 sq metres, as opposed to the typical size of 20,000 sq metres or greater found in larger cities. Broll data for mid-2016 shows rental prices in secondary markets averaged $50 per sq metre in Port Harcourt, $38 in Enugu, $37 in Warri and $35 in Kano.

Size & Scope

Retail sales are difficult to accurately gauge in Nigeria, given the large size of the informal sector, which accounts for as much as 95% of total sales. By comparison, estimates of informal sales rates in South Africa are less than half of that, and in Kenya this figure hovers between 60% and 70%. As a result, the government’s official measure of wholesale and retail trade activity, which was estimated to account for 16.4% of GDP in 2016, is likely to fall short of the actual figure. Exclusive distribution deals for official retailers are the primary advantage that formal shops have over their informal counterparts.

In 2017 the country’s retail sales totalled $109bn, according to US management consulting firm AT Kearney’s 2017 Global Retail Development Index (GRDI) report. In its 2016 GRDI they estimated that retail sales grew by a compound annual growth rate (CAGR) of 1% between 2013 and 2015. While this rate was below the GRDI’s top-ranked country, China, with a 9.7% CAGR, as well as Côte d’Ivoire, with 1.2% growth, Nigeria outperformed several countries, including Ghana, which saw negative growth of 12.2% in this period.

Foreign Retailers

A number of foreign retailers have set up shop in Nigeria over the past several decades, led largely by South African chains, such as Shoprite, one of the largest foreign retailers in the country. Since opening its first store in December 2005 in Lagos, Shoprite has launched an additional 22 stores across 12 states. Entrants are also coming from further afield – for example, local media reported in 2017 that the Spanish discount grocery chain Distribuidora Internacional de Alimentación is planning to open 100 stores, branded as Citydia, by 2020.

There have also been joint ventures (JV) undertaken by local and foreign investors to develop retail properties: in 2010, for example, the Netherlands’ SPAR and local player the Artee Group created a partnership which has seen the latter company rebrand its existing network of Park ‘n’ Shop stores to SPAR. These include standalone stores and anchors in malls, such as in Port Harcourt. SPAR operates 10 stores across Lagos, Abuja, Port Harcourt and Calabar, with a combined retail space of more than 34,000 sq metres. In 2016 Lagos-based retailer Leventis also announced a JV with South African supermarket and clothing chain Pick n Pay, which is looking to further expand its African business. Pick n Pay will hold a 51% share in the JV, and Broll expects its entry to reinvigorate the food and beverage and fast-moving consumer goods segments of the market.

Local media reported in 2015 that South Africa’s clothing retailer Pepkor, which opened its first store in Nigeria in 2012, was also planning to double its presence in Nigeria by opening 10 stores per year until 2018.

Making Space

The ability of foreign retailers to expand will be, in many ways, tied to the availability of retail space. Shoprite announced in early 2017 that it was scaling back its plans for expansion because developers are building fewer malls. It had planned to open 13 stores in 2017 and early 2018, but reduced that number to two. Pieter Engelbrecht, CEO of Shoprite, told local media that his company’s curtailed ambitions are not a function of sales – which grew by 60% in 2016 – but rather a result of lower demand from other retailers. Developers are building fewer malls because there are fewer small retailers interested in renting, meaning there are correspondingly fewer facilities in which Shoprite can serve as an anchor tenant. Introducing some competition to Shoprite’s ubiquity, Carrefour is slated to be the anchor tenant of the Twin Lakes Mall, currently under construction in Lagos.

The decrease in the construction of malls is unsurprising, particularly given the challenges developers face in inaugurating a new greenfield facility. As is the case for many sectors in Nigeria, land acquisition can be an obstacle for retailers. A March 2017 report from the US International Trade Commission found that acquiring land was the main obstacle to retail growth in Nigeria.

This has prompted innovative solutions. In some cases, developers work with state governments through public-private partnerships to build malls, because, according to Nigerian law, urban land is controlled at the state level. State governments are often granted an equity stake in a mall in exchange for providing land.

Mall Development

Nigeria has an estimated 227,000 sq metres of retail space, according to accountancy firm KPMG, and 10 cities have at least one modern shopping mall. Local media reported that, as of mid-2017, the country had a total of 24 malls. Real estate research firm Knight Frank estimated that, as of 2016, Lagos and Abuja had 121,000 sq metres and 81,000 sq metres of shopping centre GLA, respectively.

The oldest mall in the country is the Palms Mall in Lagos, which opened in 2005 and has over 20,000 sq metres of GLA. The $50m mall was developed by UK private equity firm Actis and local developer Persianas Group. Actis sold its stake in 2007, leaving Persianas the sole owner. Persianas is currently expanding the mall.

Actis went on to invest in other retail projects in Nigeria, opening the 25,000-sq-metre Jabi Lake Mall in the capital, Abuja, in 2016, for example. Persianas has also emerged as a major developer and operator of malls in Nigeria, investing in four malls: Palms Ibadan, Palms Lekki, Palms Polo Park and Palms Ilorin.

Other foreign investors in the sector include South Africa’s RMB Westport, which is entering Abuja’s retail market with the development of the 27,300-sq-metre Asokoro City Mall; Novare Real Estate Africa, which is looking to develop the $68m Novare Gateway mall in Abuja, a development with an estimated GLA of 25,000 sq metres; Hyprop Investments, which owns 75% of Ikeja City Mall in Lagos; and real estate capital fund Attacq, which holds the remaining 25% of Ikeja City Mall.

Opened in 2015, Nigeria’s largest mall is the $300m Aba Mega Mall in the city of Osisioma Ngwa. Developed by Greenfield Assets and comprising 100,000 sq metres of GLA, the mall includes a cinema, restaurants and a dry dock for wholesale distribution.

A number of mixed-use developments will also help expand the volume of dedicated retail space, including local developer Churchgate Group’s Capital Mall World Trade Centre in Abuja. The mall will be the first building in the country to offer mixed-use development consisting of high-end residential dwellings, offices, a hotel and 40,000 sq metres of retail space. Momentum Africa Real Estate Fund and Eris Property also have projects under way in Lagos, while South Africa’s Resilient Group has begun four mall developments.

In total, Lagos and Abuja had 240,000 sq metres and 170,000 sq metres of retail GLA in the pipeline as of 2016, according to Knight Frank.

Fast Food

Quick-service restaurants (QSRs) have seen a significant increase in activity in recent years. The Association of Fast Food and Confectioners of Nigeria estimated in 2016 that the domestic food industry was worth over N1trn ($3.5bn), with the fast-food segment accounting for more than N250bn ($883.5m) of this. The segment has a variety of both foreign and local brands, with the largest being Mr Bigg’s, which has more than 200 restaurants in Nigeria and in Ghana. The chain, owned by local conglomerate UAC, serves a mix of foreign and local fast-food dishes, from hamburgers to jollof rice. UAC also recently introduced Village Kitchen, a QSR chain promoting local cuisines and ingredients.

Foreign investment in the segment involves a range of not only corporate-owned outlets, such as US fried chicken vendor KFC, and South Africa’s Debonairs Pizza and hamburger vendor Steers, but also franchises, including Domino’s Pizza and Coldstone Creamery, both of which are operated by Lagos-based Eat‘n’Go. JeanClaude Mayer, CEO of Eat‘n’Go, told media in May 2017 that the company planned to expand its two brands to have 100-150 locations in the next five years, a strategy that would entail going beyond the major cities and into secondary and tertiary markets.

As with other retailers, the capital controls and currency challenges in 2015-17 have affected the QSR segment, given the extent to which it is dependent on imports. KFC, for instance, had to temporarily suspend sales of chips due to a lack of dollars to import potatoes.

Automotive

Sales of cars, trucks, rickshaws and motorcycles mirror trends of the wider retail market – only a small fraction of sales take place in the formal economy. According to a report by Deloitte, one-tenth of all vehicle purchases are new cars, with the remainder being made up of second-hand vehicles.

The high number of informal vehicle sales makes it difficult to gauge the size of the vehicle fleet in the country. The country’s Federal Road Safety Corps said in mid-2016 that Nigeria had an estimated 10.6m registered vehicles on the road. There are still only 61 vehicles per 1000 people, just one-third of the global average. South Africa, by comparison, has 180 vehicles per 1000 people. Regardless, there is clear potential for new growth. According to Deloitte, Toyota was the market leader in new car sales, with a 29% share in 2014, followed by Hyundai (12%) and Kia (9%).

The country has hiked tariffs on the importation of new and used cars in hopes of strengthening the domestic manufacturing and assembly sector. This has had some success, with Ford beginning production of its Ranger light pickup on a new site near Lagos in November 2015. However, these higher duties resulted in a 55% decline in the number of new car sales, from 42,000 in 2014 to 18,800 in 2015.

Deloitte estimates that 250,000-300,000 second-hand cars are imported into the country annually, suggesting much higher levels of retail activity in the used and informal sector. According to Boulos AG Boulos, CEO of Boulos Group Nigeria, the illegal importation of vehicles in Nigeria is a major problem for the automotive industry. “While there have been serious efforts by Customs and security authorities to tackle the issue, much still needs to be done,” he told OBG.

To help stoke new car sales, dealers are looking to expand credit offerings. Commercial banks offer vehicle finance, but at interest rates above 20% per annum. Given that cars degrade particularly fast in Nigeria due to the tropical climate and poor road conditions, borrowing at high interest rates is unappealing.

Thus, retailers are looking for alternatives. “We might try a leasing agency,” said Julian Hardy, managing director of Boulos Enterprises, a dealer and assembler of Suzuki products. “We would lease out a vehicle, take it back and refurbish it for resale or another lease. But we would need a tie-in with a bank to do this.”

E-Commerce

Nigeria’s e-commerce spending was $550m in 2014, and could grow to an estimated $10bn by 2025, according to McKinsey Global Institute. The two market leaders are Jumia and Konga, both of which are Nigerian firms with a continental presence and a combined $400m in external investment from Europe and the US. Jumia, owned by Germany’s Rocket Internet, boosted its market value to over $1bn,thanks to a round of funding in 2016 that included investments from Goldman Sachs, French firm AXA and South Africa’s MTN. Additionally, online marketplaces have grown in popularity, as evidenced by the early success of Jiji.ng, which has over 4.6m visits per month.

Founded in 2014, the site serves as a platform for buyers and sellers via free online classified advertisements. Online grocery shopping is also expected to hold potential for investment, due to a lack of access to formal supermarkets in many areas. “The potential of e-commerce in Nigeria is enormous and, given the sheer size of the population, it is without parallel in Africa,” Juliet Anammah, CEO of Jumia, told OBG.

According to Adrian Naidoo, country manager for Nigeria at mill operations supplier Bühler Group, with the economy improving, many Nigerians in the diaspora are returning. “They are bringing with them their international experience and fresh ideas,” Naidoo told OBG. This could result in innovative new start-ups, as demand for online retail platforms grows.

Online retailing in Nigeria requires overcoming payment issues, as credit card penetration is limited and consumers are unlikely to pay in advance on faith. This means providers must offer cash-on-delivery options. “Digitalisation has not yet reached its full potential in the country, but there has been a significant proliferation of online delivery services,” Tunde Ogunrinde, managing director of Just Foods, told OBG.

Outlook

Nigeria’s recent economic troubles have had an impact on the immediate prospects for retailers, but these challenges do not weaken the long-term potential of the sector thanks to the country’s tantalising demographics. While projections may be difficult given the inherent challenges of measuring the informal sector and predicting currency movements, the opportunity for significant growth remains clear.

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The Report: Nigeria 2017

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