With a huge consumer market, growing economy and increasingly urbanised population base, Nigeria represents one of the biggest opportunities for the retail sector in Africa. However lingering concerns over select risk factors, including tariffs imposed on the industry, may affect investment in the near to medium term.
Currently, more than 80m of Nigeria’s 170m citizens live in or close to urban areas, a figure that is set to rise in coming years as the economy moves away from its traditional rural base. This shift to the cities, and the rise of a broader middle class, represents a vast pool of customers for retailers.
According to a report released in July by research firm McKinsey Global Institute, Nigeria’s consumption could rise to $1.4trn a year by 2030, from its present level of $388bn a year, an average annual increase of 8%.
This rise in consumption will be driven by higher income levels, with the report forecasting 35m households to be earning more than $7500 a year by 2030, greatly expanding the middle-income bracket. This increased affluence is expected to result in 7.1% annual growth in sales of food and non-food consumer goods. The rise of non-food goods such as personal care products will record an even sharper rate of growth, with sales rising by 10.6% a year through to 2030, compared to 6.8% for food.
Another report prepared by international management consultancy A T Kearney earlier this year tipped Nigeria, along with Gabon, as offering the best retail investment opportunities in Africa. Kearney’s African Retail Development Index ranked Nigeria second overall for retail potential, saying it had rapidly evolving retail dynamics and demographics, with many other global retailers planning to set up shop.
“There is no time to spare entering these markets before these first movers gain an advantage as they establish their brands early and secure loyal customer bases,” said the report.
The opportunities in Africa more broadly have prompted multinational brands such as Walmart and Carrefour to expand their presence on the continent in recent years. Walmart acquired a 51% stake in South African wholesaler Massmart in 2011, which operates two stores in Nigeria under the Game brand.
Last year, French retail giant Carrefour partnered with the French distributor CFAO, which specialises in African sales and distribution, and plans to open stores in eight countries across the continent by 2015, including in Nigeria.
Challenges to growth
Concerns over domestic security could be an issue for local and foreign retail investors in the short to medium term, especially in the north of the country where interest has stalled due to militant activity. Continued unrest may also slow larger retailers moving into smaller cities, in particular those in or close to potential areas of instability.
Nigeria faces other challenges endemic to most emerging markets on the continent. Expansion in Africa can be slowed by a lack of infrastructure and difficulties in securing property, said Massmart’s CEO, Grant Pattison. Those hurdles, as well as problems with corruption, an unreliable legal system and currency stability in some countries have to be assessed when planning stores, he said, quoted by Bloomberg last year.
Another factor which may impact retailers in Nigeria is related to the fees charged on bank deposits of more than $15,000, a move by the state to promote a cashless economy and also rein in money-laundering. With many customers of retail chains spending less than $5 per transaction – purchases that tend to be made in cash – retailers have a high cash turnover that incurs bank fees. While some chains such as supermarket group Shoprite have seen electronic sales rise steadily, with the retailer reporting debit card purchases representing about 32% of total sales, cash remains king for the time being, though at a cost due to mandated fees.
While supporting the cashless economy programme, Haresh Keswani, managing director of the Artee Group - which operates a number of retail brands in Nigeria - says there are still hurdles to be overcome.
“As the retail sector develops, cashless transactions will grow. Cashless is a great idea, however the Central Bank of Nigeria must restrict cash transactions and create incentives for cashless payments,” Keswani told OBG.
Changing shopping patterns
As in most African markets, at present around 70% of all retail sales are conducted at small shops or informal outlets, however this will likely shift increasingly in favour of larger retailers in the years to come. McKinsey estimates the rate of sales expansion by modern format stores at 28% a year, a rate of growth that will gain pace as urbanisation increases.
Nigeria had attracted more than N205.4bn ($1.26bn) worth of investments into the retail sector in 2012 and 2013, the minister of industry, trade and investment, Olusegun Aganga, said at the end of last year. This is a reflection of growing demand for formal shopping options, with further floor space due to come on-line by the end of 2014, both in the form of stand-alone outlets and shopping malls.