Consumer potential: For those willing and able to work around market challenges, big rewards are up for grabs

With the largest population in Africa and one of the continent’s fastest-growing economies, Nigeria has emerged as a prime market for international retailers targeting its 168.8m citizens as potential consumers of processed foods, mobile phones and cars. While almost all retail is currently conducted in informal markets, international chains are betting that rising incomes will change shopping habits. Foreign investment in Nigerian retail reached $1.3bn in the last two years.

OPENING UP: Shoprite, Africa’s largest retailer, plans to open 55 additional Nigerian outlets over the next five to six years, and will add three new stores to the six already operating by the end of 2013. South Africa’s Massmart, now 51% owned by Walmart, operates two Game outlets in the country and has plans to open 10 to 20 stores across five or six Nigerian cities. Europe’s largest retail network SPAR, in partnership with Nigerian-based Artee, plans to grow beyond their Abuja and Lagos stores, ultimately adopting a franchise model.

Automotive retailers are popping up across the country, focused largely on commercial sales and large urban markets. Victoria Island, the upscale Lagos neighbourhood, hosts a Porsche dealership along with outlets selling Aston Martin and Lamborghini. Luxury brands such as LVMH’s Hennessy and Cartier’s Polo are establishing standalone retail outlets in Nigeria’s wealthy enclaves.

When retailers discuss Nigeria’s potential, they point to its expanding population, rising incomes and low market penetration. As the economy grew an average of 7% over the last decade, average GDP per capita rose from $390 in 2001 to $1541 in 2011, according to IMF estimates. The IMF forecasts per capita GDP to reach $2000 by 2016, even as the population continues to increase toward 184m. Reliable statistics on income distribution are harder to find, and in this stratified society the consumer market remains highly segmented.

SPENDING POWER: The small pool of high-income Nigerians is ripe for luxury retailers. For instance, Nigeria rivals China as the fastest-growing market for private jets, while Lagos was identified as a potential African hub for luxury retail at the 2012 International Herald Tribune Luxury conference focused on Africa.

The Nigerian middle class, defined as those earning an annual income of $6000-7000, stood around 37m in 2011, according to African Development Bank estimates. Haresh Keswani, group managing director of Artee Industries, SPAR’s local partner, looks to the number of mobile phone users in Nigeria as a proxy for the consumer base. The 25-30% of the population who can afford phones and top-up minutes makes up the customer group for Artee’s low-cost grocery stores, he told OBG. These consumers are prime targets for fast-moving consumer goods, electronics and durables.

But this segment does not have the purchasing power associated with the middle class in more developed markets. A 2011 survey from Russian investment bank Renaissance Capital found only a third of the Nigerian middle class owns cars newer than five years old. Indeed, estimates of the size of the middle class vary. Standard Bank’s 2011 study is less optimistic about the size of the consumer group, and found that 93% of Lagosians, Nigeria’s largest retail market, earn less than $4000 a year. But the Standard Bank report shows that the bottom of the pyramid spends 52% of their income on food, emphasising the potential of price-sensitive segments.

CONSUMER CULTURE: Retail and wholesale trade totalled N7.23trn ($45.55bn) in 2012, or 17% of GDP, according to the Central Bank of Nigeria. The challenge is to woo a clientele long accustomed to buying at informal markets. Most mass retailers say that currently less than 1% of retail occurs in formal outlets. Christos Giannopoulos, CEO of consumer goods manufacturer PZ Cussons Nigeria, says that less than 0.01% of his current distributors are formal retailers.

“To change the culture is becoming a big problem,” Keswani told OBG when describing Artee’s development of the Park ‘n’ Shop grocery chain. In a country where side-deals abound, Keswani says it took a long time to convince customers that the alcohol and perfume on sale at the Park ‘n’ Shop were not counterfeit.

The same challenges exist in higher-end markets. “Less than 20% of car sales are done through formal retailers,” estimated David Edwards, managing director of Mandilas Group, which runs 11 Toyota dealerships in the country. Most Nigerians buy from the grey market, where imported used vehicles are sold at two-thirds of the price. The informal market even contains luxury goods, which are purchased abroad, imported in suitcases, and distributed through direct sales. However for early entrants like Shoprite and SPAR, long-term retail potential far outweighs these initial challenges.

MALL MANIA: Retail outlets seeking to expand in a market with little adequate commercial real estate have prompted the development of shopping malls. Anchored by the country’s first Shoprite, The Palms Mall in Lekki became Nigeria’s first shopping mall when it opened its doors in 2005. Large malls now extend beyond the commercial capital to Kwara and Enugu. Malls in Kano and Ibadan are due to open before the end of 2013.

The nascent retail real estate sector offers its share of difficulties. Shoprite’s The Palms store took six years to open and Ikeja City, Lagos’s other mall, took five years, with two of these used for negotiations to secure the land for development. Each mall required capital of $5m-10m and local interest rates hover around 24%.

High-end fashion retailers face various constraints entering the market. “In the absence of specified retail centres in Nigeria, existing brands carefully scout locations that are most suitable for their brand identity, and in some cases have built outlets from scratch, like Ermenegildo Zegna, while Hugo Boss found a home in The Palms Shopping Mall Lekki,” said Omoyemi Akerele, creative director of Style House Files and founder of Lagos Fashion and Design Week. However, once these luxury retailers set up shop, they generally thrive, she told OBG. Zegna is following up its Nigeria outlet, its first in sub-Saharan Africa, with openings in Angola and Mozambique in 2014, and South Africa in 2015.

OPERATING ENVIRONMENT: Once retailers secure space, operating in Nigeria can prove to be expensive. The need to generate power independently, which necessitates the purchase of both generators and diesel fuel, increases operating costs, but retailers also face challenges all along the supply chain, at Customs, in transport and distribution, and in human resources.

Securing local and imported inventory can be difficult for retailers ranging from grocers to fashion outlets and car dealerships. Fast-moving consumer goods manufacturers accustomed to selling to informal markets produce limited varieties locally. Unilever and Nestlé, for example, each offer smaller product variety in Nigeria compared with their global lines. Artee has worked with global brands to display select imported products and test the market for future distribution.

Retailers also struggle with the government’s import taxes and Customs regime. The list of banned imports has shifted in recent years, seemingly arbitrarily, according to retailers. Legal imports can also languish in Customs, where stock takes an average of 70-80 days to clear. The process eats up 25% of the shelf life for food products. Fashion outlets can miss a whole retail season with their trend-dependent inventory stuck in ports.

Nigeria’s notoriously poor transportation infrastructure constrains distribution. Trucking goods from Lagos to Abuja, a 600-km journey, can take an entire week round trip, Keswani told OBG. Between 30% and 50% of fresh produce spoils during transport. Inadequate roads keep retailers confined to markets near Nigeria’s ports. Artee is only looking to develop hypermarkets within a tight radius of Lagos and Port Harcourt.

Low productivity on the part of the Nigerian workforce is another constraint. In most countries, retailers employ one person for every 35 sq metres of retail space, Keswani told OBG. In Nigeria, Artee needs one person for every 20 sq metres of space. However, low wages keep payroll in line, and training programmes on the part of retailers are closing the skills gap. Artee’s business model also includes a plan to franchise Park ‘n’ Shops to high-performing employees, increasing Artee’s growth and Nigeria’s management capital.

GOVERNMENT REGULATIONS: The Central Bank of Nigeria’s new cashless programme has hit retailers hard. To reduce the circulation of paper money and boost electronic transactions, the central bank introduced a 3% fee on all cash deposits and withdrawals over the daily limit of N500,000 ($3150) for individuals and N3m ($18,900) for corporations. The policy is problematic for consumer outlets where most transactions are cash-based and profit margins hover around 4-5%. Financing tools are weak and have long constrained purchases of big-ticket items like cars or refrigerators. At Park ‘n’ Shop stores, fewer than 3% of customers used bankcards before the implementation of the cashless policy in March 2013. Now 7% of customers use cards, but the policy has also pushed shoppers back into the informal retail market, Keswani said.

Nigeria’s retailers have complained that they were not consulted by the government before the policy was enacted and that the cashless programme is just the latest example of how the government doesn’t understand the value of retail in the wider economy. “They think of retail as shop-keeping,” said Keswani.

To highlight the role of retailers in boosting Nigeria’s economic growth, Keswani formed the Retail Council of Nigeria in 2012. As the government tries to promote agribusiness, retailers note that large-scale grocers have been able to work with small-scale farmers to improve and increase production. Shoprite, for example, recently opened a logistic centre, where small-scale farmers can deliver their produce for the chain to clean, package and distribute to stores around the country. Furthermore, formal retail offers taxable revenue and skills training whereas open markets do not.

ONLINE: Online shopping sites give retailers an opportunity to outsource the challenges of operating in Nigeria to local companies. With the number of internet users in the country at 43m in 2012, surpassing South Africa’s total, shopping websites are attracting international investment. Jumia, the nation’s top e-commerce site, is funded by Rocket, a German e-commerce firm, and JP Morgan, Summit Partners and Millicon all bought stakes. Jumia is the fourth-most visited local site in Nigeria and continues to post strong month-on-month increases in viewership, according to Tunde Kehinde, managing director of Jumia Nigeria. Swedish investment firm Kinnevik and South Africa media company Naspers own pieces of Konga, the number two site. Founded by Sim Shagaya in July 2012, the company grew from a staff of 20 to 150 in less than a year.

The payoff in Nigeria has the potential to be huge. “We offer retailers the opportunity to be nationwide from day one,” said Kehinde. Jumia sells everything from refrigerators to beauty products. In some cases, Jumia is the sole Nigerian distributor for international companies including English Laundry and Penguin.

Like formal retail, for e-commerce to take-off will require a cultural change. Few first-time customers trust online payment systems, and Jumia allows customers to pay on delivery, at one of its numerous cash-on-delivery centres. The customer can place the order without payment and go to a pick up site (there are more than 20 in Lagos alone) to see the purchase in person before turning over their cash. Both Konga and Jumia distribute to every state, but in some cases the shipping costs are prohibitive, said Konga. “Delivery is challenging, and will be what differentiates the online retailers,” Kehinde told OBG. Skills shortages in marketing and IT services are also a challenge for online firms.

OUTLOOK: International retailers entering Nigeria require the resources to overcome the country’s structural challenges and wait out a shift in shopping culture. But early entrants have already had some success in changing the retail landscape. To establish their market in Eastern Nigeria, Shoprite, Massmart and Woolworths opened outlets in the second-tier city of Enugu in 2011. Sales were slow as the community acclimated to the mall, but the outlet is now thriving.

Even informal markets are increasingly regulated by local governments. For example, the governor of Lagos State has cracked down on street hawkers while encouraging more formal facilities. Using public-private partnerships, the government has transformed informal markets like Lagos’s Oluwole Market with modern buildings with parking lots. As these changes take root and the middle class continues to grow, Nigeria’s marketplace offers significant opportunities for retailers.

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The Report: Nigeria 2013

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