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South African companies discover there are no easy pickings in Nigeria

The Ikeja City Mall in Lagos, Nigeria

The Ikeja City Mall in Lagos, Nigeria

This week South African hotel and casino operator Sun International announced it will exit the Nigerian market, citing a difficult economic environment due to the low oil price, a weak naira, the Boko Haram terrorism threat and the lingering effects of the recent Ebola outbreak. Issues with its local Nigerian partners compounded the problems.

In recent years, numerous South African companies have expanded to Nigeria. However, many of these investments didn’t live up to expectations. One of the first high-profile exits from the market was in 2010 when Telkom announced it would quit its loss-making Nigerian Multi-Links business. Then in 2013 retailer Woolworths said it would close its stores in the country, blaming high rental costs, duties and supply chain challenges. Recently fashion chain Truworths also indicated it is pulling out due to difficult regulations and problems getting its money out of the country.

Among of the biggest missteps was food producer Tiger Brands which in 2012 paid just over N30bn (more than US$190m at the time) for a majority stake in Dangote Flour Mills (DFM), founded by Nigerian billionaire Aliko Dangote. The business quickly ran into troubles due to tough competition and weak margins. After incurring massive write-downs, Tiger last year sold its shareholding in the unprofitable company back to Dangote Industries for a nominal $1.

However, there are also success stories. MTN has been active in Nigeria since the turn of the century and the country has delivered significant profits for the mobile telecoms operator. Beverage-can manufacturer Nampak also reports growing market share and operating earnings from its Nigerian operations, although it recently struggled to get its profits out due to foreign-exchange shortages. And despite citing a “demanding” business environment, supermarket group Shoprite is still hanging in – it opened seven outlets in the year to 30 June, with another four planned for the coming 12 months.

South African companies can’t really be faulted for trying their hand at the Nigerian market – after all it is difficult to ignore a population of over 180 million, and an average annual GDP growth rate of above 8% between from 2000 to 2010. No one could have predicted the rapid decline of the oil price, which is the reason for much of Nigeria’s current troubles.

However, some of these mistakes could have been avoided if companies did their homework properly. I also believe that the “at times breathless Africa rising narrative”, to quote Standard Bank economist Simon Freemantle, is to blame for some ill-conceived investments.

Over the past decade, Africa’s image has undergone a dramatic change. While the press historically focused on war, poor governance and corruption, countries like Nigeria were suddenly touted as some of the world’s hottest business destinations by the media and at investment conferences. There must have been significant pressure on South African CEOs to establish a footprint north of the Limpopo – and quickly, before the window of opportunity closed.

Two years ago I attended an event at the University of Cambridge, where well-known Nigerian businessman Hakeem Belo-Osagie highlighted the risks associated with the Africa rising story. He said “over-enthusiasm without careful analysis” could lead to an “exodus” of investors from Africa if something goes badly wrong in one country. This has probably already come to fruition. Having read about the experiences of Sun International and Tiger Brands, international hotel operators or food companies will certainly think twice before opening shop in Nigeria.

Perhaps South African companies looking to enter Nigeria should learn from Pioneer Foods’ game plan. In 2015 it made a small $7m investment (less than 5% of what Tiger Brands paid for DFM) in a Nigerian baked-goods business called Food Concepts Pioneer Limited. According to the company, the transaction is aligned to its low-risk African acquisition strategy, which focuses on smaller yet scalable operations. “We are slowly learning the market, and if that culminates in us building a commercial bakery in a few years’ time to give us real scale, that’s what we’ll do,” said CEO Phil Roux in a recent PwC report. A prudent approach indeed.

Jaco Maritz is CEO of Maritz Africa, and publisher of How we made it in Africa.

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