The retail sector in Nigeria is based on the latent potential of Nigeria’s population, currently estimated at 184m and growing. Firms hoping to cater to that block of consumers must overcome challenges such as finding land to build retail space, importing goods and managing currency risk. The naira, under pressure since the drop in oil prices began in mid-2014, has made imports more expensive and pushed up inflation, while the growing middle class in Nigeria is not as large or resilient as previously thought, in particular outside Lagos, Africa’s biggest city.
Modern retailing accounts for just 2% of all retail consumption, and a current slowdown due to low oil prices and currency woes may slow overall discretionary spending in the short term. However, the number of malls and shopping centres is increasing, and supply of retail space is likely to be lower than global per capita norms for decades to come, indicating a steady demand for more. Per head, only Kinshasa has less mall space than Nigeria among major African cities, according to a March 2016 report by Knight Frank, a global property consultancy. The long-term challenge will be to coax the mass of Nigerians to try shopping in a new and unfamiliar environment. “It is going to take a long time before Nigerians really embrace retail. Even elites still like to go to the market for things. If they buy a fish, they are going to want to see it swimming around first,” Bola Sobande, marketing manager of The Palms Shopping Centre, the first mall opened in Nigeria, told OBG.
Small Base
Informal channels still account for 98% of transactions, according to a market study by the global management consultancy Deloitte. That compares with 40% in South Africa and 70% in Kenya. The overall size of the retail market was $122.9bn as of 2013, according to UK-based market researcher Planet Retail. Wholesaling and retailing account for roughly a quarter of the country’s total GDP, according to Deloitte but, unsurprisingly given the high level of informality, the market is fragmented, with the top six retailers accounting for only about 2% of sales.
Many of Nigeria’s formal retailers are foreign investors, such as the South African big-box chains Shoprite and Game, along with high-end brands such as Ermenegildo Zegna, which opened its own standalone boutique in 2013. Domestic franchisors are also playing a key role in bringing global name recognition. Fast food outlets such as KFC and Domino’s are well-represented in major urban areas, as are retailers such as Dutch firm Spar, which is operated locally by the Artee Group that merged its own domestic Park ‘n’ Shop chain with Spar. Foreign investment also plays a crucial role in terms of retail property, although in the majority of cases, foreign funds are partnering with local developers rather than opening up greenfield projects. Actis, the UK-based emerging markets private equity firm, teamed up with locally-owned Persianas to open up The Palms, for example, the country’s first modern mall.
Localised
As Nigeria has 250 different languages, a wide spectrum of religious beliefs and significant variance in the income scale, the retail scene is largely centred on catering to city-level demand. Lagos is the largest, with Abuja and Port Harcourt being secondary cities. Malls elsewhere are often smaller than the “showcase” mall size of 20,000 sq metres or more in gross leasable area (GLA). Retailers must take into account regional variations in consumer typology and distribution networks, from the prosperous areas of the largely Christian south-west to rural regions in the mostly Muslim north. Distribution strategies are particularly dependent on the shelf lives of products. In the food sector, regional producers are increasingly looking to cut transport times (see Industry chapter).
Retail sector rents bear out the regionalisation trend, as Lagos is the most expensive market and the only one in which costs for space increased between 2014 and 2015, according to market research from Northcourt Real Estate, a Lagos-based advisory. Average prices per sq metre rose from $65 to $68 in the same time period. Abuja and Port Harcourt were at $55 and $50, respectively, and smaller markets at less than $40 including Enugu and Warri in the southeast and Kano, the main city in the northern half of the country. As of mid-2016, Lagos’s two main malls, Lekki Palms and Ikeja City Mall, were fully occupied, but elsewhere vacancy rates were higher.
Slower For Now
While the long-term narrative for retailing in Nigeria is firmly tied to its massive population and fertility rate, short-term prospects were cloudy in 2016 due to the country’s foreign exchange (forex) woes, which are largely the result of depressed demand for the naira from foreign buyers of Nigerian oil and gas. In 2015 the Central Bank of Nigeria (CBN) implemented import restrictions to keep the naira valued at just below $1:N200. This has been accomplished by providing fewer dollars to importers, reducing downward pressure on the naira. In 2015 the CBN cut 41 categories of items from the list of those for which it would provide forex at the official rate, representing 680 items. That approach was reinforced in June 2016, when the central bank adjusted elements of its naira-management approach, but left the import rules in place. Many importers were then forced to secure US dollars through the informal market, where the resulting scarcity pushed the exchange rate as high as $1:N400.
Clothing retailer Truworths International of South Africa announced its departure from Nigeria in February 2016, citing a struggle to stock its outlets and manage the forex challenge. Michael Mark, Truworths’ CEO, told Bloomberg, “The regulations were making it extraordinarily difficult to get stock into the stores.” Truworths had already cut its roster of locations from four to two before making this decision.
Another South African retailer, Woolworths, exited in 2013, before the forex problems began. It cited the high cost of rent, taxes and supply-chain management. Many of the 41 item categories subject to capital controls directly impact the retail sector. Textiles, clothes and woven fabrics, for example, along with enamelware, glassware, kitchen utensils and tableware are on the list. In the food segment, affected products include rice, vegetables and processed vegetable products, meats and processed meat products, and margarine. Chellarams, a franchisor of KFC outlets in Nigeria, announced that it was switching out potatoes for rice on its menus as a result.
Having third parties with forex settle accounts with foreign suppliers has also raised concerns among those suppliers about compliance with foreign banking regulations – particularly in the US, where “know-your-customer” rules are a factor, according to Sajan Suvarna, director of operations for the retail arm of Persianas Group, a local retail developer. Some of the global brands that Nigerian retailers work with were also concerned about old stock on sales floors impacting brand favourability, while brands not yet represented in Nigeria are struggling to find a local partner. Suvarna told OBG, “Some brands want to come in, but we cannot take on more.”
Malls
Malls in Nigeria range from the larger showcase properties of at least 20,000 sq metres to smaller strip malls with a GLA as small as 5000 sq metres. According to Knight Frank, Lagos has a total of 121,000 sq metres of GLA in malls throughout the city. That is the sixth-highest total in sub-Saharan Africa; however, on a per capita basis it is just 10 sq metres per 1000 people. Among major African cities only Kinshasa, the capital of the Democratic Republic of the Congo, has a lower ratio. There is another 240,000 sq metres of GLA in the pipeline, however, according to Knight Frank. Demand is clearly high, but varies significantly by district and city. According to a report by Broll Nigeria, The Palms and the Ikeja City Mall in Lagos were fully occupied, as was Grand Towers in Abuja, as of early 2015, but other malls had space to spare. The occupancy rate was 52% at Kano’s Ado Bayero Mall, 73% at Palms Illorin in Kwara State and 70% at the Apapa Mall in Lagos’ port district.
Main Venues
Nigeria’s first mall, The Palms, opened in 2005 with 67 shops and over 20,000 sq metres of GLA. It is built at the western edge of Lekki, an east-west strip of land between the Lagos Lagoon and the Gulf of Guinea, as a joint venture between Actis and Persianas, which has separate divisions for property and retailing. The Palms cost $50m, with Actis providing $10.5m in equity and Persianas $6.5m. Persianas bought Actis’s stake in 2007. An expansion is currently under way that will add 40,000 sq metres of additional retail space. The two anchor tenants, Shoprite and Game, occupy some 49% of the available square footage, according to Broll.
Actis has been a catalyst in real estate ventures across Africa, and after The Palms it shifted to the mainland Lagos neighbourhood of Ikeja, where its investment partners included South Africa’s RMB Westport and the local Paragon Holdings, among others. The Ikeja City Mall was built to target a middle-class clientele, along with the daytime workforce in nearby Lagos State government buildings. In one of the major recent transactions in Nigerian retail, in late 2015 the three partners in the project sold their stakes to two South African investors, Hyprop Investments and Attacq. The terms have not been disclosed. The mall’s layout differs from that of The Palms in that it has only one anchor tenant, Shoprite, occupying 4000 of the property’s 22,000 sq metres.
Tenants
Anchor tenants in Nigeria’s biggest malls tend to be middle- and high-end supermarkets, such as Shoprite and Game, with a number of other spaces taken up by technology and luxury brands. Luxury retailers have suffered less from the economic troubles in 2015 and 2016, but this is a small group of customers. Franchisors have brought luxury brands into malls, including Hugo Boss and Lacoste, but others have opted for standalone stores or boutiques in more exclusive spots such as in hotel concourses, including Ermenegildo Zegna and Polo. For mall owners, filling space may tempt them to look in the opposite direction, such as having sections with microshops, similar to the “table top” model of informal markets, or designating one or two days a week for that type of commerce, according to Sobande. This would be similar to the model used by The Village Market, a mall in Nairobi that hosts a traditional market for local crafts on Fridays.
Land
Finding land to build on, particularly in footfall-heavy locations, can be difficult. Development is often heavily concentrated in certain neighbourhoods, and the most accessible areas are frequently located in outlying neighbourhoods. “Along the Lekki-Epe Expressway is the one area where you can find land easily in Lagos, but the further out you go the less the demographics support a large mall,” Bolaji Edu, CEO of property services firm Broll Nigeria, told OBG. Mall development along the toll road is already under way, however. In addition to The Palms, which is adjacent to the expressway’s westernmost point, further east along the road there is Circle Mall, a strip mall with Shoprite as an anchor tenant being developed by RMB Westport and Paragon Holdings, along with Royal Gardens, which is also being developed by RMB Westport and Trojan Estates. Getting creative in this crowded market has meant doing more on smaller plots of land in fewer locations. “This is ultimately more challenging given that large pieces of land, on the scale of those required for malls, are harder to obtain,” said Laide Agboola, managing partner of investment firm Purple Capital Partners, in a March 2016 profile with the Africa Private Equity and Venture Capital Association.
Beyond Lagos
Projects in mid-size cities like Enugu and Illorin, or in the less-developed northern half of the country, often begin with a public-private partnership in order to access suitable land. This is because land designated as urban in Nigeria is controlled by state governments, which have proven willing to work as partners on mall developments. Typically, a minority stake is granted in exchange. For example, the 10,430-sq-metre Kwara Shopping Mall in Illorin is 70% owned by Persianas, with the balance of 30% held by the Kwara State government. In Oyo State the government has a 5% share of Persianas’s 18,500-sq-metre Ibadan Mall. Enugu’s 22,350-sq-metre Polo Park Mall, another Persianas development, is 20% owned by the Enugu State government. At each of these sites Shoprite is the anchor tenant and the offering includes a cinema and restaurants. Malls currently scheduled to open in 2016 or 2017 include Abia Mall in Abia State, Benin Mall in Edo State, Owerri Mall in Owerri State and Onitsha Mall in Anambra State, according to Northcourt Real Estate.
Abuja, the landlocked capital city, is seen as an exception to the divide between Lagos and everywhere else, potentially offering the buying power of Lagos, but without the challenge of finding land. However, the city’s new Jabi Lake Mall, which opened in November 2015 and is now the city’s largest shopping centre, had just three non-anchor tenants that were open when customers entered for the first time. Like in Lagos, however, there is a significant pipeline of new projects in Abuja, with a total of 170,000 sq metres in various stages of planning and development, according to Knight Frank. Port Harcourt also offers a significant group of potential customers, but retail development has lagged here. Its first mall, the Port Harcourt Mall, was developed by Nigerian retailer Artee Group, with Spar as an anchor tenant.
Food & FMCG
Despite the evidence for a rising middle class in Africa, which applies to Nigeria, the focus is still on basics: fast-moving consumer goods (FMCG), typically in small packages sold in informal markets. This market was worth $41.7bn in Nigeria, the largest on the continent in a 2010 World Bank survey conducted in 39 African countries. The next largest market was Egypt at $27.6bn, with Morocco being the only other above $20bn. According to Nielsen, 80% of consumers buy from roadside stands, informal markets or street vendors, for which there are an estimated 200,000 sites in the country. “International firms in the food industry often need support understanding the local context when considering investing in Nigeria, as these are key to a successful market entry,” Tunde Ogunrinde, CEO of Just Food, told OBG.
FMCG suppliers have worked to devise strategies to streamline distribution and minimise time to market to fit the needs of informal retailing. That means working with a myriad of distributors which serve as middlemen, but also selling directly to street sellers, and understanding their business models in the process. Street sellers in Nigeria are often focused on the morning and afternoon commute, when traffic piles up and cars are stopped or moving slow enough to sell on foot in the traffic lanes. “If you miss the morning rush hour you have lost half your peak,” Joan Ihekwaba, general manager for marketing at domestic producer UAC Foods, told OBG.
However, a recent change in the law in Lagos banning street vendors may result in a shift towards more semi-permanent installations. This may result in a major shake-up for the sector. UAC Foods’s logistics arm, MDS Logistics, has depots for street vendors across the country’s 36 states, and can deliver directly to supermarkets and other major wholesalers and large retailers. Mobile vendors are about 80% of sales, Ihekwaba said. At Diageo, an alcoholic beverages company, a programme it launched in 2013 to study commuters’ routes has led to an expansion from 8000 outlets in Nigeria to the current 45,000.
QSR & E-commerce
Quick-service restaurants (QSR) have also proved to be a dynamic growth market in Nigeria, with foreign brands such as Domino’s Pizza and Coldstone Creamery representing a premium offering, South African chains Steers and Debonairs Pizza are mid-point and domestic franchises including Mr. Bigg’s and Tantalizers are less costly. QSR outlets such as Café Neo, a coffee chain, are frequently paired with petrol stations or other stores.
Online platforms in Nigeria have gained a toehold, with $527.6m in sales in 2013. They are set to grow; Deloitte forecasts a compound annual growth rate of 37.7% from 2013 to 2017. The largest firms in the segment include Jumia, which was set up in 2012 and has attracted investment from outsiders such as JP Morgan Asset Management and German internet company Rocket Internet. Konga, also established in 2012, has backing from Naspers, a South African media investor. Both firms offer a wide array of consumer goods, with customised options for the local market, such as cash-on-delivery and pickup locations, in response to consumers’ concerns regarding sharing personal data online or a lack of access to bank accounts and credit cards. Others include consumer-to-consumer platforms such as Bidorbuy.com.
Outlook
At present, the CBN’s decision to change its currency policy is the most important factor for the retail sector. Once retailers gain some certainty on that, in particular for those importing global brands, the next steps will likely be to take stock of balance sheets and capital requirements, then begin the process of utilising current retail capacity at malls.
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