Mixed realities of African retail
On the face of it, the African retail opportunity seems huge. After all, about 60% of the population in African countries may be living in cities by 2050. And urbanisation is increasingly a major driver of consumption. Besides, half the current headcount in at least 15 sub-Saharan African countries is below the age of 18, pointing to even more working age potential down the line. In 2050, it is estimated the median age of the African population would be about 25 years. As most young Africans prefer to live in cities, the retail potential on demographics and urbanisation alone, is quite significant.
But to look at the African retail opportunity with a continent-wide lens would be to mask what are really disparate markets, each with its own unique characteristics. Incidentally, depending on whether a retailer is multinational, regional or local, the experience tends to differ from country-to-country as well. Moreover, the economic downturn of 2015-16 in key African countries has unravelled some of the dreamy suppositions about the supposed rise of the African consumer. Weaker currencies have made imported goods expensive for locals. Power supply shortages in countries like Ghana and Zambia, also added to costs, as businesses had to resort to standby generators. Authorities’ temporary solutions to narrow the electricity supply gaps were also relatively expensive.
Besides, the reckoning of a sizeable African middle class is now largely in doubt: it is smaller than earlier thought. Nestlé, the global foods manufacturer, asserts as much. In June 2015, it announced plans to cut 15% of its workforce in 21 African countries because of this supposed underestimation. The controversy about the African middle class is partly one of definition. For instance, the African Development Bank (AfDB) defines the middle-class African to be one who spends about US$2-$20 a day, and numbers about 350 million, 34% of the population. At least 55 million are able to spend $20 a day, the AfDB also posits. A more conservative estimation puts the current size of the African middle class ($5,000 – $7,300 yearly expenditure) at 15 million, rising to 40 million by 2030. Another reckoning is that it could be as much as 128 million in about three years’ time.
Is this sizeable enough though? That depends on the ambitions, products and strategies of the subject firms. In any case, the retail market is more advanced in some African countries (e.g., South Africa, Kenya and Botswana) than in others. And in some, Ethiopia for instance, the potential size is significant, but may require some time to tap optimally via shopping malls and the like. The Nigerian retail market is in-between: it is large, already being tapped, but could yet realise its full potential. Thus, the African retail opportunity is varied and should not be seen as a homogenous whole.
South African players dominate the field
The top 3 African retailers by revenue – Shoprite, Massmart, and Pick n Pay – are South African. More than half of the top 25 African retailers are also headquartered in South Africa. Shoprite Holdings Ltd, according to a 2016 report, has 1,855 corporate stores under varied brands in 15 African countries, but has 1,519 of them in South Africa alone. Specifically for the Shoprite brand, there are 577 stores spread across the continent, with 439 of them in South Africa.
Massmart, in which Walmart, the American retail giant, has a controlling stake, has a decent African footprint as well, with 38 stores spread across 13 African countries; however, about 90% of its 405 stores are in South Africa. Massmart plans to open five new stores outside of South Africa in just over a year. The third retailer, Pick n Pay, has 1,410 stores in total, with 130 of them outside South Africa. Although it has announced plans for stores in Nigeria and Ghana, most of Pick n Pay’s African footprint is in the southern Africa region.
|Retail Revenue Rank||Company Name||Headquarter Country||Core Segment|
|1||Shoprite Holdings Ltd||South Africa||Food & Beverage|
|2||Massmart Holdings Ltd||South Africa||General Merchandise|
|3||Pick n Pay Ltd||South Africa||Food & Beverage|
|4||The SPAR Group Ltd||South Africa||Food & Beverage|
|5||Woolworths Holdings Ltd||South Africa||Clothing & Accessories|
Some African retailers, even as they have some heft, are mostly regionally focused. For instance, Nakumatt, the leading Kenyan retailer, is the dominant player in the east African region, with stores in Uganda, Tanzania and Rwanda. The second largest Kenyan retailer, Tuskys, has outlets in Uganda as well. Choppies, the dominant retail chain in Botswana, also has outlets in four countries outside of its home country. Choppies is trying to extend its reach beyond the southern Africa region, however, with plans for stores in Tanzania, though, according to a 2016 report, it currently has eight in Kenya. Outside of its 80 stores in Botswana, 100 of Choppies’ 109 stores in the rest of Africa are spread across South Africa, Zimbabwe and Zambia.
Strategy matters, but local challenges do overwhelm
Truworths, a South African clothing retailer, exited Nigeria in early 2016. High costs, a clampdown on imports by Nigerian authorities and scarce foreign exchange were some of the underlying reasons. Truworths’ business model required that its goods be produced in South Africa and then shipped to its outlets. That model worked just fine in its home and neighbouring markets. Further afield, the same strategy was fraught with risks. Often erratic currency policies of African countries, most of which barely have enough foreign exchange, meant its import-based strategy could be potentially overwhelmed upon a sudden currency devaluation, currency scarcity or both.
In Nigeria, as it turned out, both happened. Truworths also complained about high rental costs. Poor management may partly be blamed for this: other South African retailers managed to get by. Although most of Truworths’ stores are in the southern Africa region, where its business model is easier to replicate, it opened a couple in Kenya in its 2016 financial year. But it is too early to tell whether the Kenyan venture would succeed. Still, because Kenya operates a market-driven economy, and is not known for the kind of regulatory shocks – foreign exchange restrictions and import bans, for example – that stymied its operations in Nigeria. There is a high probability Truworths could do well there.
Clover, a dairy producer from South Africa, blamed foreign exchange scarcity for its exit from Nigeria as well. In both the Truworths and Clover cases, the companies could have chosen to adapt to the Nigerian authorities’ policies of promoting locally-made goods. However, this would have required a change in strategy with a costly backward-integration programme.
Appropriate pricing can also be an issue. Even though Woolworths also attributed its failed Nigerian venture to high rental costs and import duties, as well as supply chain difficulties, its pricing strategy probably had poor fit. Nigerian consumers considered Woolworths’ prices too high relative to even better known brands. But that does not seem to have been a problem with its Kenyan operations, which it chose to control fully in January 2016, having hitherto been a joint venture partner with a local retailer.
The ease with which a foreign retailer is able to adapt to some of these local constraints and abrupt changes, also depends on its focus segment. For example, it is easier for food retailers to adapt to import restrictions by a foreign government if substitutes can be procured with relative ease. Besides, backward integrating a food retail value chain is not as difficult as those for clothing and accessories. It may explain why food retailer Shoprite has been resilient to the same challenges that supposedly overwhelmed its compatriots, Truworths and Woolworths, in Nigeria.
But then why didn’t its ventures in Tanzania and Uganda succeed? In Uganda, Shoprite found it difficult to compete with informal traders. And in one case at least, its store was badly located. Shoprite also had to contend with aggressive regional giants, like Nakumatt, Uchumi and Tuskys. It did not face opposition as strong in Nigeria. In Tanzania, pushback from local authorities, who riled against the flooding of their markets with South African goods, was also a factor.
Local know-how and flexibility are keys to success
Dogged retail firms with African ambitions can take lessons from these experiences. It pays to have a flexible business model. Companies should check for strategic fit before deciding to venture outside of their home markets. And local know-how can be hugely differential. Joint ventures with established local retailers seem like a best first step. This enables the foreign firm to learn about the market first-hand, without making the types of costly mistakes that going it alone tends to engender.
Additionally, firms are better able to navigate the often erratic regulatory environments in African countries if they have well-regarded local partners. For instance, Pick n Pay has chosen to partner with an established local retailer, A.G. Leventis for its Nigerian venture.
Also, there are economies that established local players tend to have garnered over long years of operations that are often difficult to replicate by foreign firms at first. That is, even when they take over erstwhile attractive local operations. For example, Tiger Brands’ (a South African consumer goods company) venture into Nigeria in 2012 turned out to be a flop. Eventually, it sold back its stake in loss-making Dangote Flour Mills, the Nigerian flour business it bought, to its original owner for $1, taking a R2.7bn knock. Tiger Brands’ experience is instructive: now back in Nigerian hands, Dangote Flour Mills returned to profitability in the nine months to June 2016.
The retail segment also matters: it is easier to adapt to changing constraints in the food retail segment than that of clothing, for instance. Truworths was not likely to build cloth-making factories in Nigeria just to satisfy the authorities. On the other hand, Shoprite was able to source local substitutes for its imported foods and beverages. And even within a supposedly adaptable food retail segment, the technology, inputs and know-how locally might be so grossly insufficient that an exit would be best. So, considering the Nigerian dairy industry is still largely rudimentary – there are not enough milking cows and yields are about half the international norm, Clover would have needed to invest a great deal to backward integrate its dairy operations there.
Firms should also make sure to find out what the optimal strategic mix for each market is. For instance, if Woolworths did proper benchmarking of its goods against other relatively cheaper, but more popular, foreign brands, it might not have chosen a brand differentiation strategy for its Nigerian venture. It is possible to implement a low cost strategy with products that target the mass segment without necessarily depreciating the value of pricier brands in a firm’s product portfolio. And in some cases, the scale does, over time, compensate for the reduced margins.
But this depends on the retail segment as well. New lower cost brands do not necessarily need to be created for certain consumer goods. Firms could break bulk instead, selling in smaller packs and so on. But this approach is hardly feasible in some segments, in clothing and accessories retail for instance. Price discrimination could be deployed in this regard though. Goods sold at malls or shopping centres in highbrow locations could be priced higher. And even within the same shopping location, a myriad low margin goods could be priced so cheap that customers might not mind purchasing pricier items with the savings. So instead of seeking margins on a product-by-product basis, a business-wide approach could be adopted. More importantly, quality should never be compromised. For to think cheap means a compromise on quality, would be to misconstrue what in this technological age, is now a very discerning African consumer.
Is the African retail opportunity over-hyped? Not necessarily. But the huge potential envisaged is still a long way out. Thus, multinational retailers considering the opportunity must see it as setting themselves up for that eventual boom. That is, if they choose to take the plunge. The African youth bulge still requires a couple of years to join the workforce – or more time in it to attain middle class status. But without a doubt, to succeed, intending international firms must give serious consideration to partnering with established local players. Without a well-connected partner, economies and efficiencies that more experienced foreign retailers potentially bring can be all too quickly diminished by the still opaque regulatory environment.
The fuzziness is not necessarily related to ethical issues. There are genuine concerns by local businesses and authorities about being run out of town by foreign players with deep pockets. Even when prospective investors have good intentions, communicating them in a way that persuades local stakeholders can be tricky. And most definitely, it is important for strategies to be tailored for each country’s peculiarities. As the examples highlighted show, what works in one jurisdiction may not necessarily work in another. More fundamentally, managers must first ask whether their business models are adaptable to some of the harsh realities they may face in not a few African countries. Besides, a city-by-city strategy might be more optimal. So instead of a Nigerian, South African or Kenyan strategy, a Lagos, Johannesburg or Nairobi strategy might be more ideal. The retail opportunities are in the cities.
The author, Dr Rafiq Raji, is an adjunct researcher of the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation.