Africa’s retail sector: Market dynamics and the opportunities available

This article is an excerpt from Knight Frank’s 2020 Africa Retail Report.

As a result of the economic challenges, some stemming from and others exacerbated by Covid-19, we have seen performance in Africa’s retail sector remain subdued.

Across Africa, retail rents have softened by 6% on average in the six months to September 2020. This trend has been underpinned by retailers seeing demand levels soften on the back of a weaker economic climate which has been caused largely by the pandemic and restrictions on mobility.

While footfall in shopping centres saw a sharp decline in early April across the region, we have seen recovery ensure in all markets with current footfall levels being recorded at between 70% and 90% of their pre-Covid traffic as at Q3 2020.

Given lower levels of demand, data from Oxford Economics indicates that resident based retail sales across Africa are expected to contract by 5% on average in 2020. Where economies were already considerably challenged pre-pandemic such as those of Harare and Johannesburg, retail sales are expected to contract more sharply with contractions forecast at 31% and 12% respectively.

Neighbourhood malls recorded a higher rebound in retail sales and footfall in Q3 2020, as consumers moved from enclosed malls to more convenience-based, open air neighbourhood malls. This trend can be attributed to consumers being fearful of excessive human engagement, shopping closer to home due to work-from-home patterns and the closure of entertainment venues, cinemas and gyms that traditionally anchor large enclosed malls.

Africa prime retail rents

Operators in retail markets across Africa have witnessed a range of fragmented perfomance. We have seen notable operators exit major markets such as Shoprite closing outlets in Kenya, Spur exiting the Zambian market and Pep and TFG exiting the East Africa region. Whilst Covid may have played some part in these decisions, this trend has been largely underpinned by these businesses choosing to refocus on their core business or due to existing underlying economic challenges in these markets.

Despite economic and mobility challenges posed by Covid, certain retailers recorded relatively strong perfomance. In Kampala and Nairobi, branded fashion retailers have on average tripled their sales turnover compared to pre-Covid levels. These sharp increases have been underpinned by pent up consumer demand and redirected demand as a result of the international travel ban, with a significant portion of this demand favouring international brands.

Whilst some retailers have scaled down operations, others have used weaker market conditions to expand. Carrefour, for example, has grown its presence in Kenya, Tanzania and Uganda, with further expansion expected in five countries in the near term. Shoprite is also set to expand store numbers in Uganda and Zambia, with LC Waikiki also set to expand into Zambia and Uganda and increase its presence in Kenya.

Due to weaker economic conditions, retail landlords across the continent adopted a range of lease concessions in a bid to retain and attract new tenants. These concessions include rent deferrals and rent discounts. Rent discounts levels varied by the scale of the impact that lockdown periods had on retailers with retailers who were able to continue to operate during lockdown receiving lower discounts levels compared to those who were mandated to cease operations entirely.

Occupancy rates have remained stable despite exits by retailers across different markets, with rates in a majority of the regional shopping centres recorded at approximately 80% as at Q3 2020.

Formal retail occupancy as at Q3 2020

The opportunity

We highlight key influences driving the retail market opportunity in Africa.

Sizing the market

Outside of South Africa,  which has a large and mature shopping centre market, formal retail development in the rest of sub-Saharan Africa has seen a surge over the past ten years.

The transition to a mall culture has been spreading across Africa as offerings in malls adapt to consumer needs and consumers adapt to formalised lifestyle shopping excursions. However, informal retail continues to dominate the retail sector in the majority of markets.

Within the nine countries covered by this study, we estimate shopping centre space per capita at 0.31 square metres on average, which is significantly lower in comparison to developed markets such as the US and Dubai, where retail space per capita stands at 2.4 and 1.2 square metres respectively.

Lagos recorded the lowest shopping centre space per capita at 0.01 square metre while Gaborone recorded the highest ratio at 1.3 square metres.

Africa’s growing population and ever more affluent middle class are set to underpin future demand for formal retail. Therefore, there are considerable development opportunities in this segment. However, developers must understand demand intricacies between countries.

For example, in Harare the number of middle-income households is set to decline by 25% by 2025 due to weakening economic conditions, while middle-income households in Dar es Salaam are set to increase by 32%.

Online retail

There is no doubt that the pandemic has accelerated a change in consumer attitudes towards online retail, resulting in the adoption of online retail platforms by retailers across the continent.

Retailers such as Tuskys and Naivas supermarkets in Kenya have invested in online platforms in a bid to boost their offering to customers, while e-commerce platforms like Jumia reported a spike in both consumer and seller uptake, resulting in gross profit increasing by 38% in the year to Q2 2020.

In South Africa, online retail sales are anticipated to double this year according to Euromonitor and Nigeria’s e-commerce revenue is projected to grow by 42% in 2020.

While this trend is expected to continue to gain momentum across the continent, online retail penetration is still expected to remain low. Globally, online retail accounts for 15% of total retail sales, compared to just 1% in sub-Saharan Africa.

As the market for formalised retail continues to be underserved, we anticipate the requirement for physical space across sub-Saharan Africa markets will continue to be dominant, with online retail expected to compliment it.

Niche differentiation

The outbreak of Covid-19 has certainly slowed down retail development activity across the continent. However, due to localisation of retail demand, convenience and neighbourhood retail sectors have started to see increased levels of development activity and interest.

This trend has been further underpinned by increased relocations of people and businesses from city centres to the suburbs, resulting in increased concentration of retail demand.

This increased economic activity in towns has underpinned the growth of and perfomance in neighbourhood retail centres. Retail activity in malls such as the Mukuba Mall in Kitwe along the Copperbelt in Zambia has continued to be fairly robust despite the pandemic.