Technology set to transform the media and advertising industries in Nigeria

Formal retailing is just getting started in Nigeria, and currently accounts for roughly 5% of the whole market. There are a host of obstacles to growth, starting with the difficulty of acquiring land on which to establish a mall, store or restaurant. Sourcing goods locally is difficult, while clearing imports is expensive and time-consuming. Transporting goods to stores, finding staff and winning over a buying public that is either sceptical or cannot afford the products are also challenges.

Yet, with 170m people and counting, sales strategies can be tailored to specific market demographics that are larger than in most countries. Targeting only elites or the middle class still leaves a retailer with a large customer base, and the expectation is that more Nigerians will join the ranks of the consumer class as economic growth lifts people out of poverty. McKinsey Global Institutes estimates that 35m households will earn over $7500 a year by 2030. These factors explain the interest in retailing in recent years, including the arrival of international brands, the growth of franchising and the spread of modern retailing to a handful of cities beyond Lagos, Port Harcourt and Abuja.

Chains

Foreign investors have played a key role in this. One of the most visible examples is Shoprite, the South African supermarket chain that has expanded to become the continent’s largest retailer. Developing markets private equity investor Actis Capital, which focuses on real estate, was a prime mover behind the two major shopping malls in Lagos: it invested $40m along with local property developer Tayo Amusan to build the Palms, which opened in Lekki in 2005. Actis sold its stake two years later to Amusan’s Persianas Group, and has since invested in the Ikeja City Mall and other malls in Africa.

Beyond malls, Kentucky Fried Chicken (KFC), a US quick-service restaurant (QSR), arrived in 2009, and more international names have followed since. Nigeria is also an important destination in the luxury segment. Names like Porsche and Hugo Boss arrived in 2013, and Emenegildo Zegna opened its first location in Africa in Lagos in late 2013. In 2014 French winemaker Martell entered the market, as did Lenovo in the mobile phones segment. Nigeria is also the fastest-growing market for champagne. The chief obstacle to growth is acquiring land. Some retailers repurpose existing structures, rather than waiting for developers to navigate the many obstacles involved in opening new retail space.

Size & Scope

Nigeria’s statisticians include retailing and wholesaling in the trade sector for data-gathering purposes. This sector accounted for 21% of rebased GDP in 2013, according to the National Bureau of Statistics, up from 17.41% in 2008, with overall growth in the double digits in recent years. Retail sales began falling in second-quarter 2014, however, according to market research from Lagos-based investment firm Financial Derivatives Company. An 11% decline in May 2014 was attributed to security concerns, low customer cash flow, heavy rainfall and weak consumer sentiment.

The greatest variety of formal retailing is found in Lagos, with the Palms and Ikeja City Mall as two flagship properties, offering a combination of visibility, size and traffic. They have 20,500 and 28,500 sq metres of leasable space, respectively. The Palms’ owner, developer Persianas Group, is working on an expansion that will add another 40,000 sq metres. Retailers are also found in smaller malls, one- or two-story plazas, purpose-built structures for single stores, converted villas and petrol filling stations. Malls are opening outside Lagos as well, such as Grand Towers Mall in Abuja, Tinapa Shopping Centre in Calabar and the Port Harcourt Mall in Port Harcourt. Persianas has emerged as a leading builder, as it has also built Polo Park Mall in Enugu, Palms Ilorin in Kwara State and Palms Ibadan.

Online retailing has also begun to take hold, with Jumia.com and Konga.com leading the way. These companies allow for cash-on-delivery payment, in part to overcome concerns about the security of online transactions and in part to allow customers to view products before buying. "Because of the ongoing challenges with e-payments and the fact that Nigeria remains a cash-based economy, the Nigeria model for online retailing requires the option of cash on delivery. This is different than most developed markets," Olumide Olusanya, CEO of online supermarket Gloo.ng, told OBG.

New Markets

Ibadan is north-east of Lagos and has emerged as an extended bedroom community for the commercial capital. In the south-east, Enugu’s mall opened in October 2012 with tenants including Massmart, Woolworths and Shoprite, all South African chains with a limited degree of overlap in their offerings and target markets. In an example of the difficulties Nigeria presents as a market for retailers, however, Woolworths pulled out after just over a year in operation. The South African chain also closed two other stores in Nigeria that opened in March 2012. Woolworths’ CEO Ian Moir said the chain struggled with profit margins.

Kano is Nigeria’s second-largest city by population and the centre of economic activity in the north of the country, though it has some specificities that retailers need to take into account. To begin with, the attacks by Boko Haram, typically aimed at northern cities, have complicated security and logistics. In addition, as Kano’s population is almost exclusively Muslim, retailers need to stock halal products and account for the holy month of fasting, Ramadan. In many Muslim markets the month-long event often sees increased food consumption.

Estimating demand adds a wrinkle for supply-chain logistics, particularly as the city is much further from the coastal ports. The poor quality of roads adds to the problem, making it difficult for retailers to move goods around the country quickly and cheaply. However, some development is taking place in the city, with the opening of the Ado Bayero Mall in March 2014.

Promise

While each of these urban markets presents challenges, Nigeria is still the second-most-attractive investment market for retailers in Africa, behind Rwanda, according to the African Retail Development Index put out by management consulting firm A.T. Kearney. The opportunities and challenges in these two countries provides a stark contrast: investors love Rwanda for its ease of doing business and excellent roads, which compensate for being a landlocked market of just 11m people. Nigeria, on the other hand, has the world’s seventh-largest population, and within it a growing middle class, but it is among the most difficult places in which to operate. Nigeria is better penetrated by foreign investors, as Rwanda’s only major foreign participant is Kenyan supermarket chain Nakumatt. Interest in African retailing overall has picked up since the 2011 arrival of Wal-Mart. The world’s largest retailer bought South Africa’s Massmart, which operates several chains, including two locations in Nigeria. Both are department stores called Game, a big-box seller of general merchandise and non-perishable groceries. Along with Nigeria and Rwanda the top 10 markets in A.T. Kearney’s study were Namibia, Ghana, Botswana, South Africa, Tanzania, Mozambique, Ethiopia and Gabon.

Though the case for Nigeria is based on its volume of consumers and in particular its middle class, retailers in the country are developing different definitions of what exactly constitutes middle class. It counts as a much larger segment of the population for local QSR chains such as Mr. Bigg’s or Chicken Republic than it does for the American pizza franchise Domino’s, for example. But positioning for the future is an integral part of the process, so retailers aim their marketing at audiences that are bigger than their current potential customer base. Taxi drivers in Lagos, for example, do not refer to the Palms by its name, but call it Shoprite instead, because the supermarket is an anchor tenant and has its name in a large font on the exterior of the building. One of the country’s two Game locations is in the mall as well, but Shoprite is credited with marketing campaigns that boost awareness.

Market Segments

QSR outlets are the most common type of formal retailing in Nigeria, with roughly 800 outlets spread across the country, according to the Association of Fast Food and Confectioners of Nigeria (AFFCON). There are both home-grown chains and international brands, and the offerings range from Nigerian standards to more expensive items such as Western-style pizzas, hamburgers and fried chicken. KFC and other foreign chains are targeted at middle- and upper-income customers – these are typically people who have had the chance to live or work in Western countries such as the US or UK, and associate these foreign brands with a measure of quality unavailable at domestic chains (see analysis).

Varied Cost

With shopping malls still a fairly new concept, the cost of space varies widely. The Palms opened in 2005, and tenants typically signed long-term leases – up to 10 years – at $60-80 per sq metre. At Ikeja City Mall, which opened to customers in 2011, costs range from $120 to $200 per sq metre. It is widely expected that prices in the Palms will increase significantly when the time comes to renew rental contracts.

Foreign investment has typically been a strong element of the funding mix for malls, including brands and their parent companies, private equity specialists such as Actis, and organisations with dual mandates as well. For example, the International Finance Corporation, the World Bank’s private equity and advisory arm, invested $124m in Persianas Group in 2012.

Land acquisition is primarily an issue for shopping malls rather than other retail spaces on account of the size of property involved. Problems include sellers seeking top dollar – somewhere between $1m and $3m per ha – as well as bureaucracy. Securing deed documents and transferring ownership can be a long and bureaucratic process, as was the case with Ikeja City Mall, for which two of the five years of the project’s development process were spent on land acquisition. One way around this problem is to include the land owner as an equity partner. Another way to bypass this issue is to seek out government land instead, which often entails working with a state governor, because states control all land designated as urban in Nigeria.

Particularly in the fashion segment, retailers in Nigeria have noticed an increase in consumer activity. More recently, internationally recognised names such as Nike, Levi’s, Mango, Benetton, Swatch and H&M have entered the market. Part of the increase in demand is due to policy changes. The federal government had imposed a ban on imported textiles in 2003 with the aim of supporting local textile producers, but the result was a rise in smuggled name-brand apparel. This ban was lifted in 2010, facilitating the entry of major global brands.

Policy decisions to protect domestic industries can have a profound impact in Nigeria, and the auto industry may be the next example – if smugglers can be stopped from flooding the market. The informal market is often supplied by cars shipped through the port at Cotonou, in neighbouring Benin. The dominance of the smuggled cars is significant: some 80% of auto sales are through such channels. Several car importers operate in the market, such as Mandilas Group, which run 11 Toyota dealerships in Nigeria; Stallion Group, the exclusive seller of Nissan vehicles; and Coscharis Motors, which sells Fords but also has pursued the luxury segment by offering vehicles including BMW and Rolls Royce models. Dealers may see a boost to their sales if a new automotive policy can be enforced. In October 2013 the government approved a policy to boost tariffs on imports from a range of 20% to 35% to 70%. The idea is to support a local automotive assembly industry that is currently in its infancy.

The policy environment in Nigeria also presents some challenges for retailers, in particular for high-volume businesses. An effort to promote non-cash sales, using debit or credit cards, is increasing costs and bank fees. Retailers are also complaining of increased operational costs due to a decision by the Central Bank of Nigeria to impose a 3% fee on cash deposits and withdrawals over a daily limit of N3m ($18,300) – a move that is designed to support non-cash transactions.

Retailers that attempt to reflect these increased operational costs in their prices, rather than accepting smaller margins, may end up pushing the poorest customers back into the informal market.

Outlook

Retailers have long expected that the Nigerian market would require a long-term approach, and entering early would mean building brand loyalty among consumers even before they may be able to afford to buy. For now, that means overcoming the obstacles and additional costs associated with the market, in the hope of enjoying significant profits in the future.

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The Report: Nigeria 2015

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