Open for business: Despite a low urbanisation rate, rapid economic growth has led to a series of major retail developments

 

While still in its nascent stages, formal retail development in Tanzania holds considerable potential for long-term expansion, with population growth and rising demand for fast-moving consumer goods slated to support the economy over the next decade.

Challenge & Opportunity

As is the case for formal retailers across the continent, however, there are a number of structural challenges, such as high distribution costs. Retailers and local producers in Tanzania have also grappled with rising taxes and inflation, which have driven up overheads and reduced consumer purchasing power. Limited demand for organised retail space outside of select locations in Dar es Salaam is also likely to weigh on near- and mid-term growth, and several projects have already faced significant delays.

At the same time, however, strong recent economic expansion and rising population growth have lent an optimistic long-term outlook to retail development, with US-based consulting firm AT Kearney reporting in September 2015 that the country is one of the most attractive retail markets on the continent, beating many of its regional neighbours thanks to a stable political and economic climate and large population. The firm’s African Retail Development Index 2015 saw Tanzania slide a notch to hit fifth place among the continent’s top-15 retail markets, based on parameters including market size, saturation, country/business risk and time pressure. South Africa and Namibia ranked just below, while Zambia and Mozambique ranked 12th and 15th, respectively. Kenya was not included on the index.

However, the country is starting from a low base, including an urbanisation rate of 32% in 2016, compared to 65% in South Africa, high poverty levels of 47% and low levels of disposable income. World Bank figures show that GDP per capita stood at $879 in 2016, against $472 in 2006, well behind Kenya’s $1444 and South Africa’s $5274. Crucially, however, Tanzania’s market – in contrast to the crowded and competitive Kenyan sector, where larger multinationals must face well-established local firms – is still largely unsaturated, even in the country’s major urban areas.

Formal Retail Space

Formal retail space remains concentrated in Dar es Salaam, the commercial capital, with real estate consultancy JLL reporting that the city’s retail sector, as in the rest of Tanzania, is primarily informal. In its 2016 “Dar es Salaam City Report”, JLL noted that formal retail formats are uncommon, with most of the country’s 153,000 sq metres of retail stock stemming from local supermarket owners who have developed their surrounding landholdings. Informal schemes are often built without professional retail expertise, resulting in unsuitable locations, insufficient parking, inefficient design and limited property management services. Retail rental rates averaged between $261 and $264 per sq metre per year in 2017.

Shopping Malls

The country’s main retail centres include a handful of dedicated shopping malls, such as Dar City Mall, Quality Centre, Mlimani City Mall, Msasani Mall, Oyster Bay Shopping Centre and Sea Cliff Village, as well as the Slipway Shopping Centre.

The two largest are Mkuki House and Mlimani City, both in Dar es Salaam. The former is a 25,000-sq-metre facility completed in 2016, and located off Julius Nyerere Road, the frequently used and often congested corridor that stretches between the central business district (CBD) and the country’s principal international airport. The 19,000-sq-metre Mlimani City shopping mall is now the second-largest retail centre in the country – although it once held the title of first having opened in November 2006. It offers a cinema, restaurants and bars in addition to retail space. The mall has attracted a number of international retailers, including South Africa’s Game and Mr Price, KFC and Dubai’s Landmark Group. JLL reported in 2017 that the mall plans to add two office towers of 5000 sq metres to its development in the coming years.

Upcoming Projects

A number of upcoming developments, including Mzizima Towers, Mbezi Beach Shopping Mall and Peninsula Plaza, are also either under way or being planned, which should significantly increase the volume of dedicated retail property.

The Peninsula Plaza will offer 29,000 sq metres of gross leasable area on completion. Located around six km north of the CBD, the development spreads across 1.8 ha near Haile Selassie Road in Masaki. Developers envision a mix of strong national and international brands targeting expatriates and high-end shoppers. It is expected to offer over 100 brands, 6000 sq metres of office space, a five-screen multiplex cinema and back-up power supply. Construction on the project began in February 2016, although an opening date has not yet been officially announced.

Mzizima Towers, which will include three storeys of retail space, is expected to finish construction in 2018 after launching in 2013, while Mbezi Beach Shopping Mall had not begun construction as of July 2017.

Slow & Steady 

In their 2016 report, JLL cautions retailers to adopt a pragmatic approach, writing that they “have to offer value for money to the broader consumer” – a sentiment that has been borne out time and again in other major African markets, such as Nigeria, where bullish forecasts of retail growth have not always come to fruition as expected.

This is reflected in Tanzania in the more measured approach developers are taking with certain projects, such as the planned 25,000-sq-metre Dar Village. The $33m project, by local firm ZEK Group, has been under development since 2009, and is slated to have Kenya-headquartered grocer Nakumatt as the anchor tenant, with a $29.4m, 2323-sq-metre store.

However, the Kenyan retailer’s parent company has had financing troubles, with gross debt tripling between 2011 and 2015, leading the firm to close branches in both Uganda and Kenya.

While no Tanzanian outlets were mentioned when the firm announced the planned closings, local media reports that consumers have faced sparse shelves due to the parent company’s cash flow issues.

Supermarket Support

Nakumatt has the largest formal retail footprint in Tanzania, after acquiring South African retailer Shoprite’s three supermarket locations for $29.4m in July 2014 and opening a 3160-sq-metre location in Moshi in 2011. Kenya’s Uchumi supermarket chain announced in 2016 that it planned to open its sixth and seventh locations by March 2016, following a 2014 rights issuance that raised $8.8m. Yet financial woes in its regional branches in Tanzania and Uganda have halted expansion as of August 2017.

Food and beverage sales will be a pillar for near-term retail growth, with BMI Research reporting that the food industry is expected to attain a compound annual growth rate (CAGR) of 12.9% between 2015 and 2020, driven by an 18.5% CAGR for bread, rice and cereals, and an 11.2% CAGR for sugar products. The beverage segment is forecast to hit a 10% CAGR over the same period, led by 12.3% CAGR in carbonated beverage sales and a 10.4% CAGR in alcohol consumption.

Cost Management

In spite of the bullish expectations for demand, retailers are also grappling with increasing costs, taxes and fees. Retailers remain under the dual pressures of rising expenses and diminishing consumer purchasing power, with inflation reaching 6.8% in December 2015, before moderating to 5.5% in June 2016 and 4.5% in October 2016 after the central bank implemented monetary tightening to boost price stability. Inflation accelerated again in 2017, however, hitting 6.1% year-onyear (y-o-y) in May before moderating to 5.4% y-o-y in June, with the shilling depreciating significantly against the dollar between 2013 and 2017, rising from around TSh1600:$1 to peak at TSh2260:$1 in January 2017, before moderating to around TSh2240:$1 in mid-July. The fiscal burden has also been rising; tertiary transportation services had been subject to an 18% value-added tax until recently, adding to import costs and straining profit margins.

Outlook

Despite these challenges, the sector retains considerable untapped potential for future expansion, particularly if major energy and infrastructure projects move forward as expected. Although gaining a foothold in Tanzanian retail is still difficult, the long-term growth trajectory for the sector remains largely positive.

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The Report: Tanzania 2018

Industry and Retail chapter from The Report: Tanzania 2018

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