Ways to spend: Rising consumer purchasing power finds an outlet in shopping and helps the sector expand

As of mid-2012 Ghana’s retail sector was characterised by a rosy long-term outlook, thanks to rising purchasing power, improved distribution networks and the arrival of a number of new actors and venues. However, several issues remain that could constrain short-term growth. Those include currency risk for import-reliant retailers, a delay in the pace of oil-fuelled economic expansion and difficulty in building a reliable workforce at a reasonable cost.

These current concerns have not overshadowed the long-term narrative, however, and the various actors that make up Ghana’s young retail sector are gearing up for what they believe will be a period of prolonged expansion. Accra’s first-to-market mall opened in 2008, and now there are five more in various stages of planning or construction.

KEEPING WATCH: While some developers are holding onto their land and waiting to gauge potential, many are going ahead with their expansion plans thanks to a belief that Ghana’s rapid pace of development will soon translate into much greater demand for modern retail space, for which the ask is currently slack. Existing retailers are building up land banks and thinking about how best to use their properties. Distributors are envisioning leveraging Ghana’s political stability to make it a regional import centre, into which goods can be brought and then redirected on to other spots in West Africa.

All this activity puts Ghana at the centre of a trend seen in some of Africa’s other fast-growing economies. Retailers have noted emerging middle classes in spots across the continent, and are picking those markets that are furthest along the development curve to try introducing new methods.

The movement is led by South African retailers such as Shoprite, Game and Woolworths, which are on expansion drives in various African countries. In early 2012 Walmart, the world’s largest retailer, was in the final stages of completing an acquisition of South Africa’s Massmart, which already has a presence in multiple African countries. Walmart’s arrival in Africa has been taken as a sign that retailing on the continent is ready to make significant steps forward.

SIZE & SCOPE: As in other areas of the Ghanaian economy, measuring activity using reliable data is difficult due to a lack of capacity to gather information and produce useful and current statistics. As of 2010, however, according to a report from the US Department of Agriculture (USDA), retail food sales had grown at a 10% annual rate since 1991. The figure includes modern shops and supermarkets, small grocery stores and traditional open-air markets. At the country’s two Woolworths department stores, which have a wide variety of products, sales growth has been between 15% and 17% in the past five years, said director Joe Ofori-Atta.

Modern retail options are not emerging equally across all platforms, however. With the exception of Melcom Group, a nationwide retail chain with 26 outlets of varying sizes, no retailer has more than five locations. Ofori-Atta is aiming for three more Woolworths locations to complement the existing two. He also operates a furniture store called Exbou and is the local franchisee of several Western brands, such as Billabong, the Australian surfwear company. Small pharmacy chains of three or four stores emerged in the early 1980s, according to the USDA report, but that market segment, like most others, remains dominated by independent stores.

ALL IN ONE: Shopping malls and department stores have displayed great potential, but this is less the case for stand-alone supermarkets. According to George Adjei-Ampofo, the finance manager for Accra Mall, Ghana’s emerging shoppers have thus far responded best to an integrated experience in which they can do all their shopping in one setting. That means having a supermarket as an anchor tenant, but also providing the opportunity to shop for fashion, electronics, home goods and other products aimed at those with discretionary income to spend.

In Ghana the stand-alone supermarket model is seen as less likely to succeed, in part because supermarkets are not widely perceived as the best place to buy the freshest produce or meat. “Supermarkets have no fashion element and no food court,” Adjei-Ampofo said, “and people still like the freshness perception of traditional markets.”

Open-air informal markets, which spill over onto the streets in large sections of central Accra, account for about two-thirds of food sales, according to the USDA study. There, produce rules the market, but packaged consumer staples are also sold. In line with what fast-moving consumer goods (FMCG) producers are learning across Africa, the local preference is to buy packaged goods in small quantities – a single serving of Nescafe in a tube-shaped wrapper, for example, or a package of six to eight biscuits. Most shoppers cannot afford to buy in larger quantities.

IMPORTS & SMUGGLING: Importers of processed foods must have their products approved by the Food and Drugs Board of Ghana. The Ministry of Trade and Industry sets policy for the sector; other relevant bodies include the Standards Board, which upholds certification requirements in some areas, and for importers the Customs, Excise and Preventive Service. Over 90% of Ghana’s food imports come from Europe, South Africa and China. In the non-food sectors, compliance with regulations is often spotty. Local retailers frequently seek exclusive supplier arrangements in the domestic market, but smuggled goods frequently undercut formal prices. “Some brands support you in tracking [illicit goods], and others don’t,” said Ramesh Sadhwani, the managing director of Melcom Group.

Smuggling is also a major issue for the country’s auto dealers, in part due to corruption at ports, but also because demand is high for used vehicles. The small minority of Ghanaians who can get a car loan from local banks must pay an interest rate of 25% or higher, making the purchase all the more expensive. Overall, the ratio of sales of used cars compared to new ones is at least six to one, and sometimes even more. However, dealers display confidence that there will be a roughly 10% annual growth rate for new models in the coming years, and they are particularly optimistic about 2012 because sales typically peak ahead of elections. “Election years are always good for car sales because the government contracts work and some projects get accelerated,” said Salem Kalmoni, the managing director of Japan Motors. According to Kalmoni, about 140,000 vehicles were sold in the country in 2011. Most of these were second-hand cars; the number of new vehicle sold was around 15,000.

SPREADING GROWTH: Retail growth, while geographically uneven, is nonetheless spread throughout the country, particularly in urban zones such as Kumasi, Ghana’s second city; Takoradi, a coastal area expected to blossom as the oil and gas centre; and Tamale, the biggest city in the northern region. These cities are right behind Accra in terms of progress towards modern retailing. Kumasi is expecting the opening of Garden City in 2013, a project that will be Ghana’s largest mall when it opens, with the Methodist Church of Ghana as a major shareholder. Takoradi is also considered ripe for mall-based retail, largely on expectations that the expatriate community working in the oil and gas sector will expand rapidly alongside the industry.

PARTICIPATION RULES: Ghana’s government gives preferential treatment to local retailers over foreign ones. Outsiders must have at least $300,000 to invest before they can acquire the necessary permits for what is classified as trading.

Foreigners in retail became something of a populist issue in early 2012, with Chinese, Indian and Nigerian traders singled out as a threat to local competition. The Ghana Union of Traders has said that while it supports foreign retailers whose projects create jobs, small-scale traders competing with locals are unwelcome. Presidential candidate Nana Akufo-Addo of the opposition New Patriotic Party said in May 2012 that the government should enforce existing regulations in order to keep retailing an activity mostly reserved for Ghanaians.

One policy reform under consideration is raising the initial investment capital requirement to $1m for foreigners. Any anti-foreigner regulatory reforms are more likely to directly affect the informal street traders and independent shop owners than modern retail spaces. However, for those who sell wholesale to street vendors there could be a drop in demand for goods if such policies are implemented.

Nevertheless, implementation of directives to better enforce regulations could be difficult due to the challenges associated with comprehensive supervision of the informal economy. As of mid-2012 the plan included sending government inspection teams out to open-air markets to inspect credentials.

CHALLENGES: Times are tough in the retail sector at present in part due to some short-term factors. One of them is currency risk, which is of paramount significance in an industry this reliant on imports. According to Bloomberg data, the cedi proved to be one of the worst-performing currencies in Africa in the first half of 2012, falling to GHS1.93 against the dollar on June 22, 2012, the lowest value for the currency since June 1993. The year-to-date drop at that point against the dollar was 16%.

That means imports are more expensive for local sellers, but the impact is felt in other ways too. At the Accra Mall and elsewhere in the modern retail sector, rents are typically paid in dollars. Generally, owners want rents paid up to a year in advance, and for those who did so, this has been less of a problem. However, rents at the mall are frequently paid on a quarterly basis, said Adjei-Ampofo, exposing renters to greater currency risk. Letters of credit from banks, used to acquire goods to be paid for later, are also generally denominated in dollars. The cedi’s fall against the dollar has prompted retailers across the sector to scramble for ways to handle this other than raising their prices. “We can’t just pass on the cost to consumers,” said Ofori-Atta, “We’re looking to do quicker turnover.” Melcom’s Sadhwani expects a squeeze on margins, and perhaps the need to stock some lower-quality brands.

MALLS: Accra Mall opened in 2008, introducing Ghana to international-standard retailing. The mall is located at a crossroads on the outskirts of Accra, easily accessible from points east and west, making it a regional draw instead of just an urban one. The mall has 22,900 sq metres of leasable space, with two anchors: Shoprite, a major South African supermarket chain, and Game, a discount household goods chain also from South Africa. Game is a Massmart Holdings subsidiary with more than 100 stores across the continent. As of 2011 the store’s goods were estimated at 95% imports, and the plan was to drop that share to between 85% and 90% in order to cut costs.

According to mall administration, footfall is roughly 18,000 people a day, increasing to 25,000 on weekends. However, it is still unclear how many of those in the mall are there to buy. “Much of the footfall is not shoppers but people going to see what it is all about,” said Sadhwani. “They are curious.”

Others say that while the anchor tenants are popular, some boutiques are struggling. As of mid-2012, four shops in the mall were empty. All had been rented by the same owner, who could not keep up with rent payments, and an eviction process was underway. Adjei-Ampofo said finding other tenants would not be a problem – the waiting list of those wanting a spot has more than 100 names.

Indeed, demand appears to be robust enough that plans are now under way for five new malls. An additional 2000 sq metres of high-end space has also opened in the new Mövenpick Hotel in central Accra. South African investment firm Atterbury Group has emerged as a major player, having purchased an 85% stake in the Accra Mall in May 2012, a deal that placed the mall’s value at $65m. Atterbury has also paired with the Social Security National Insurance Trust (SSNIT), Ghana’s pension fund, to develop a 27,300-sq-metre mall in Accra called West Hills.

While opinions are divided as to precisely how much mall space Accra needs, indicators thus far are positive. Rents in the Mövenpick arcade are running at about $50 per square metre, which has emerged as a basis price point for mall space. At the Accra Mall, contracts signed a few years ago at $35 are up for renewal in 2012, and the mall administration expects to get the $50 price as well.

Melcom, which operates standalone stores, has several hypermarkets called Melcom Plus in which renters of small retail spaces pay about the same or slightly more, Sadhwani said. This market is too new for there to be a wide consensus on a saturation point, but few expect a slide in rental rates in the near or medium term. If anything, Adjei-Ampofo said, annual escalation clauses could fall below the current standard of 5%.

A WIDER DEMOGRAPHIC: For now, it appears that a limiting factor for future growth is that the consumers driving the development of modern retail are the small minority of Ghanaians already in the middle- and upper-income brackets. This segment has more cash to spend now than it did a few years ago and is happy to splash out on shopping.

However, the small minority of Ghanaians who have the money to shop at malls also have other options as well. “The price of items in shopping malls is so expensive that people who can afford to shop in them are also travelling abroad at least once a year,” Imad Wolley, the managing director of Woimex Group, owner of the Koala supermarket and department store in the Osu district, told OBG. “If you shop in a mall here, you are paying more for fewer options.”

Nevertheless, as the benefits of growth work their way through the economy, the number of those who can afford to shop in shopping malls, boutiques, supermarkets and hypermarkets will undoubtedly grow. “We're seeing teachers, nurses, and more middle-class workers,” said Ofori-Atta. “The perception used to be that this kind of retail was too expensive. Now people are realising they can afford it.”

Additional malls could help by allowing chains to grow, Ofori-Atta said. His company has decided to look for new locations in malls only, and he is aiming to occupy both an anchor spot, with a Woolworths, as well as some boutiques. If the space is available in multiple locations, Ofori-Atta expects to cut costs through economies of scale: importing for several stores at a time and defraying the cost among them. Eventually, he sees Ghana as a regional staging point. “We're hoping we have the levels where we can have a distribution centre here to service regional markets,” he said. “We could ship straight from East Asia. Côte d’Ivoire and Nigeria are possibilities, and we are already going into Sierra Leone.”

Another possible model is to keep costs low and to pack goods into a smaller space. Woimex Group has land reserved to build a mall, but Wolley said he might be interested in trying convenience stores instead. Koala’s floor space is 1800 sq metres, and requires 100 employees and $32,000 a month for electricity. “Bigger is not better because of the overhead,” Wolley told OBG. Convenience stores are currently limited to petrol stations, but more retailers may experiment with the model, and Melcom, for example, has stated its interest in establishing a line of modern convenience stores.

OUTLOOK: The major catalysts for growth in retail in Ghana are the country’s growing middle class and its nascent oil and gas sector. While early hiccoughs with oil extraction may push back growth projections to an extent, Ghana’s retailers are focused on what remains a bright long-term future. After the first wave of malls and the continued migration to modern retailing, retailers will have a better picture of how precisely the sector will take shape, such as whether stand-alone supermarkets will gain popularity, and how many malls the country can support.

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