The demand for consumer goods in Nigeria is expected to more than triple by 2013, according to a recent report by McKinsey Global Institute, Nigeria’s renewal: Delivering inclusive growth in Africa’s largest economy.

The country’s large population of 170m people, coupled with a rising consumer class, is creating significant opportunities for manufacturers and retailers. While consumption is currently estimated at US$388bn a year, McKinsey expects it to rise to $1.4tr by 2030, with 35m households earning over $7,500 a year.

Although this growth is attractive for both foreign and local consumer-facing companies, simply entering the market does not guarantee success, as proved by South African clothing retailer Woolworths that recently closed its three Nigerian stores, a mere year and a half after entering the market.

“Companies need to develop a deeper understanding of this market, potentially more than they usually do for other economies, and develop a set of microplans that target specific customer segments and regions,” states McKinsey’s research.

In its report, McKinsey highlights five strategic areas that consumer companies need to develop for success in the Nigerian market.

1. Find the right route to market

Nigeria’s market is highly fragmented and companies need to think carefully about their distribution network. While the commercial hub Lagos is relatively well served by distribution networks, there is a drop in quality and reach in other cities.

Over 70% of consumer goods sales currently go through informal channels such as small shops, market stalls and street vendors. Nigeria still has one of the higest rates of informality in grocery retailing in Africa at an estimated 74%, compared to 19% in South Africa. However, formal retailers such as Shoprite and Artee/Spar have been expanding in the market and sales in modern stores are growing by 28% a year, although from a low base.

Companies new to the market are generally advised to partner with local distributors with established networks. For example, when KFC launched in Nigeria in late 2009, it partnered with Nigerian group Chellarams which had the local know-how to assist KFC with opening more than 20 stores by 2013.

Another example is Coca-Cola which relies on a large network of independently-owned manual distribution centres that are financed and trained by Coca-Cola. The company also supplies these distributors with pushcarts to make manual distribution easier in areas with poor roads. In this way it has created a capable and loyal distribution network.

2. Set the right price

Setting the right price for products is particularly important in the Nigerian market. According to McKinsey Africa Consumer Insights Centre, Nigerians are among the most price-sensitive in Africa with surveys indicating that 21% would rather shop in a store that has a narrower range of products and a worse shopping environment if it simply offered lower prices.

“To reach a range of Nigerian consumers, companies should develop a portfolio of products that caters to the different income levels,” states the report. “This must be done carefully: products for lower-income consumers must be differentiated to avoid cannibalisation of higher-priced products.”

3. Build strong brands to drive customer loyalty

While Nigerians may be price sensitive, they are significantly more brand loyal than the average African.

According to surveys, 70% of Nigerians say their purchases are based on brand loyalty, compared to 59% of sub-Saharan Africans. Furthermore, just 27% of Nigerians indicate that they choose their products based on promotions, compared to 38% regionally.

“One of the reasons for this is that the Nigerian consumer environment is characterised by low trust, and brands therefore serve as a mechanism to assure the customer of a product’s quality.”

Brand loyalty can be gained through introducing a relevant, affordable product; educating Nigerians on the product and its benefits and then building trust around the product’s brand name; and advertising heavily in local languages.

“Today television is the dominant medium for brand building, but internet use is growing rapidly (half of urban Nigerians access the internet each month, and 58% have internet-capable phones). Already, wealthier consumers use and trust online sources to a large extent.”

4. Take a long term commitment to developing local talent

Despite all its consumer potential and GDP growth, the real rewards for entering the Nigerian market may take years to materialise, and investors and companies require patience, persistence and a long-term commitment.

Companies can expect to encounter human resources challenges, and will likely have to invest in a long-term talent development strategy.

“In Nigeria, as in other parts of Africa, employers say that their top concern is the cost of qualified job candidates. In Nigeria, employers cite an overall lack of job readiness as a major concern, followed by lack of experience and specific skills. The implication is that companies will need to invest in both broad-based and job-specific training,” notes the report

Procter & Gamble, has benefitted from cultivating highly qualified talent through a “Top Development Candidate” programme to identify and train promising graduates.

Another approach to talent acquisition is to recruit Nigerians from the diaspora to fill positions where local talent is scarce.

“To retain top talent, companies should consider differentiated pay schemes that reward top performers. Finally, to reduce costly employee turnover, companies can take overt steps to build loyalty and a sense of firm identity, rather than relying solely on financial incentives.”

5. Manage all stakeholders

Customers and suppliers are not the only relationships that should be invested in. Collaborating with government and other corporations are also necessary for successfully operating in Nigeria.

According to McKinsey’s research, less than 30% of companies have formal mechanisms in place for tracking their reputation with government, regulators and the media.

“To improve its relationships with local stakeholders, the retailer Massmart follows a strategy of understanding the Nigerian culture, hiring and procuring locally, and pursuing corporate social investments to gain the community’s trust.”