Despite the challenges inherent in retailing in Nigeria, the quick-service restaurants (QSR) segment has been growing rapidly. Like many areas of the economy, its long-term potential stands out in a global context because of Nigeria’s sizeable population, currently standing at around 170m. But while investors in most consumer-facing industries are expecting smaller returns upfront in exchange for bigger ones later on, QSR offers investors a quick turnaround for profits. The challenges, however, are familiar from other sectors, including the cost of electricity, land, experienced labourers and importing inputs. Challenges unique to QSR include striking a balance between the local palette and popular international tastes, all while maintaining consistency across franchise locations.
Segment Details
As of 2014 there were over 800 QSR outlets in Nigeria, the vast majority of them branded by about 100 small and medium-sized local companies, according to the Association of Fast Food and Confectioners of Nigeria (AFFCON). They generated about N200bn ($1.22bn) in revenue and employed more than 500,000 workers, according to AFFCON’s president, Bose Ayeni. What precisely constitutes a QSR business varies by source, however. Market research by the US Department of Commerce’s Commercial Service found 290 QSR locations, for example, with three firms dominating the field: Mr. Bigg’s, Tantalizers and Food Concepts, the parent company of Chicken Republic.
At the executive level the sector is notable for its female leadership, in particular in comparison to other areas of the economy. In addition to AFFCON’s Ayeni, female leaders include Kehinde Kamson, the founder of the local chain Sweet Sensations, which now has more than 28 outlets.
Long History
Mr. Bigg’s was first to market and is a leader in terms of locations, with more than 131 restaurants in 40 cities in both Nigeria and Ghana. Mr. Bigg’s is owned by United Africa Company of Nigeria (UAC), a diversified conglomerate founded in 1931. UAC was the first to bring the QSR concept to Nigeria in the 1960s, when it put coffee shops inside its Kingsway department stores, and then replaced them with broader offerings branded Kingsway Rendezvous in 1973. These and other early QSR chains were sometimes as simple as small stands serving snacks. In 1986 the first Mr. Bigg’s opened up, ushering in a new era in which hot food became the focus. From these early beginnings a twotrack market has developed in which local chains are mostly aiming to provide cheap meals to Nigerians in the country’s middle-income belt, while foreign chains service wealthier customers.
These wealthier customers are typically people who may rent a home but do own a car and have a salaried job in the formal economy. Only a small fraction of the population meets this standard, about 2m to 5m people. For the American chain Kentucky Fried Chicken (KFC), customers whose income falls between N1.8m ($10,980) and N5m ($30,500) annually generate 70% of sales, the company said. The local Domino’s franchisee, Eat’n’Go, sees its customer profile as those earning N3m ($18,300) a year or more, said Managing Director Tony Zammarieh – an income level at which Domino’s expects they will buy a pizza at least once a month. In Lagos, that would mean fewer than 1m people, or roughly 8% of the population. In looking for suitable locations, the chain wants to be able to identify 20,000 such customers living in proximity to the location.
Foreign Franchises
For foreign franchises whose brands are often associated with luxury or elite spending patterns, it may be important to decide early precisely which segments within the middle-income category should be targeted, and how to tailor the offering to local tastes. Domino’s has elected to target a higher-income bracket, Zammarieh said, and unlike in its home market where delivery service is standard, the chain has learned that most customers prefer to dine in. “Nigerians have gone abroad and know the quality difference,’’ Zammarieh said. “They want to associate themselves with it by coming in and eating on the premises.’’ International brands in the market have come from either the US or South Africa. Chains from South Africa were the first to enter Nigeria, such as Debonairs, a pizza chain. Later investments include Steer’s, which offers a burgers-and-fries menu, and the 2013 transaction in which South Africa’s Famous Brands bought a 49% stake in UAC Restaurants, the UAC subsidiary that holds and operates the conglomerate’s QSR assets. The first American chain was KFC, which arrived in 2009 in the City Mall in Onikan, a district of Lagos. In a sign of the importance of the investment, former Nigerian President Olusegun Obasanjo was present at the ribbon-cutting ceremony. Obasanjo Farms, north-east of Lagos in Ogun State, is a supplier of chickens to KFC in Nigeria. KFC has opened 24 more locations since. It was followed in 2012 by Domino’s Pizza and Coldstone Creamery ice cream outlets, and in 2012 by Johnny Rocket’s, which offers a 1950s American diner theme along with its burgers, fries and milkshakes. McDonald’s also expressed interest in 2014.
Segments
At the lower end of the scale, the market is led by Mr. Bigg’s. Sweet Sensations is known for being the first outlet to feature local cuisine on the menu, such as jollof rice and indigenous stews. In this segment Tantalizer’s is the most likely to offer parking on site, and had about 30 outlets in Lagos, Abuja, Ibadan and Port Harcourt in late 2013. Chicken Republic is expansion-minded, having opened 57 restaurants in Nigeria since its founding in 2004, according to its website. Of that total, 25 are in Lagos. Offerings at the chains vary widely. The most cost-conscious can spend as little as N100 ($0.61) on a meat-filled pastry, whereas bigger spenders might drop N1000 ($6.10) to N1500 ($9.15) for a meal including chicken, rice, vegetables and a drink.
International investors have taken notice and are participating. The International Finance Corporation (IFC), the private equity and advisory arm of the World Bank, has invested $28.5m in Tantalizer’s and Food Concepts, with both investments coming between 2010 and 2011. One of the key differentiating factors in the QSR sector is the consistency of the offering. According to domestic industry reports Mr. Bigg’s has been losing market share because of variations in quality from branch to branch, which has been attributed to its franchising system.
Policy Issues
For chains serving meat, Nigeria’s import rules are an important consideration as it is forbidden to import unprocessed meat, a boon for local producers but often a complication for buyers. Selling chicken wings might require dealing with suppliers who want to sell the whole chicken rather than just parts of it, for example.
For chains of a sufficient size and scope, one possible solution is backwards integration, which has been a common move in Nigeria for retailers over the years, enabling companies to realise potential cost savings and ensure a secure domestic supply to replace imported inputs.
Food Concepts pitched this strategy in seeking investment from the IFC, according to a presentation posted on the organisation’s website. The firm proposed using an out-grower model for chicken farmers, in which it provides them with a steady supply of feed, chicks and vaccines as well as extension services to ensure yields at expected levels. In return, the company guarantees those out-growers an offtaker at market prices. It aims to source 40% of its chickens this way – roughly 400,000 birds a year.
Food Concepts estimated a capital expenditure savings of $10m from the move. The presentation also highlighted the ultimate benefit of operating in Nigeria: a large, rapidly growing population with low per-capita consumption levels. Nigerians eat roughly 1.5 kg of poultry a year, according to Food Concepts, compared with a global average of 14 kg.
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