Nigerian shopping more sophisticated, but consumers under pressure

The Ikeja City Mall in Lagos, Nigeria

The Ikeja City Mall in Lagos, Nigeria

Although Nigeria has experienced high real GDP growth over the past decade, a large share of the growth in income has gone to a small, well-connected group (often political elites) benefiting from oil rents. Consumer goods companies catering to the lower and middle classes have therefore not benefited from high oil prices as much as one would have expected.

The recent sharp decline in the international oil prices is therefore expected to have more of an impact on the rich than the poor. Still, the recent devaluations of the naira will increase the cost of imports and thereby weigh on consumers’ purchasing power. Moreover, tighter monetary policy due to capital flight and a weaker currency has also impeded access to credit. These negative trends will abate over the medium term and should not derail Nigerian economic prosperity over the long run.

Despite these problems, the Nigerian wholesale and retail industry (which accounts for 16.4% of GDP) remains a lucrative investment opportunity on the back of a large and rising population and an increased rate of urbanisation. The retail market in the West African country has become somewhat more sophisticated from its relatively informal origins prior to 2000. The first modern mall developments in the country were the Ceddi Mall in Abuja and the Palms Mall in Lekki, Lagos. The consequent success of these projects due to the voracious appetite of the up and coming middle class has led to further developments such as the Palms Polo Park Mall in Enugu, the Palms Ilorin in Kwara, as well as the Adeniran Ogunsanya Mall in Surulere and Ikeja City Mall in Lagos. Retail space in the country has therefore grown from an initial 30,000m2 to 227,000m2.

The geographical spread of malls has increased over time as well. In 2006, only two Nigerian cities had malls, whereas there now are 10 cities that have functioning malls. In addition to Abuja and Lagos, Port Harcourt, Ibadan, Enugu and Delta now boast modern shopping complexes. Greenfield Assets Limited and the Abia State government are currently developing the first purpose-built Smart Mall in the world and the largest mall in Africa in the city of Osisioma Ngwa. This mall will have an impressive 280,000m2 retail space. In addition, the development will comprise a games arcade, petrol stations, climate-controlled warehouse and state of the art cinemas.

The initial retail landscape was dominated by Nigerian and South African firms. Amongst the major South African players in the West African nation are Game, Nandos, Shoprite, Mr Price, Foschini and Barcelos. Recently, the country has also seen an influx of Middle Eastern, American and European brands such as Swatch. Brand diversity remains limited in many of the newly-developed malls and holds great potential for new business ventures in Africa’s largest and most populous economy.

Nigeria has also seen the development of a market for luxury goods. The country’s burgeoning middle class is expected to have consumer spending in excess of US$25bn by 2020. This is comparable to spending in Mumbai, India’s largest business hub. Furthermore, the West African nation’s demand for champagne is expected to more than double between 2011 and 2016. Nigeria is also the world’s fastest-growing aviation market, with 70 new private jets projected to be delivered in the country over the next four years. However, according to the World Bank, in 2010 about 46% of Nigerians lived on $2 or less a day (at 2010 international prices). These stark contrasts further give credence to the fact that the Nigerian retail and wholesale market is highly polarised.

The e-commerce trend also shows no abatement. Major internet sites such as Jumia and Konga have done well in the fashion and mobile devices markets, whereas and have made inroads in the order and delivery of supermarket goods. According to Disrupt Africa, the site had around 7,000 users per month at the start of 2015, up 800% y-o-y. The formal supermarket landscape remains highly fragmented as a population of 180 million people are serviced by only two supermarket chains with 15 outlets countrywide. Should the problems in infrastructure and the difficult business environment receive more attention from Nigerian authorities, both the off and online grocery shopping markets have massive investor potential.

Despite the wealth of opportunities in the Nigerian retail and wholesale market, certain challenges in the business environment make investment difficult. The West African nation is dominated by both high financing costs and very high construction prices. Infrastructure gaps also inhibit the development of effective retail supply chains. Security concerns like the rising insurgency trend especially in the north, also have a major disruptive impact on the business environment. International investors also seem to have misconceived notions about Nigeria such as the absence of a market for luxury goods.

The Nigerian consumer may well be under pressure over the next few years as low oil prices put pressure on the naira and government infrastructure spending plans. However, the retail sector remains an attractive prospect over the longer term. Informal retail channels will continue to dominate. This is despite some specific measures being implemented by state governments to encourage the formalisation of the sector. The share of modern retail is however expected to continue increasing over the coming years, driven by the development of a number of large-scale modern shopping centres.

The low-income consumer by far dominates the Nigerian retail scene, which will provide a lot of opportunities for FMCG companies. In addition, online grocery shopping is becoming ever more popular due to the limited access to formal grocery supermarkets. Brand diversification will also present a good investment opportunity in the future as average household incomes grow. Despite Nigeria’s rich investment potential, some serious challenges for retailers to set up shop persist. If the country’s infrastructure deficiencies and cumbersome legislative hurdles are not addressed in the near future, the cost of establishment for international brands may remain too high.

This article is an extract from the KPMG ‘The African Consumer and Retail Sector Report’. The full document can be found here.