With a population of over 218.5m as of July 2022, Nigeria boasts Africa’s largest consumer market, with retail being a key contributor to GDP second only to oil. The presence of formal retail outlets has undergone notable expansion since the turn of the century, and more space is set to come on-line in 2023. However, informal retail establishments still dominate the sector. Issues such as inflation, currency instability and oil price volatility have proven recurring impediments to sectoral and broader economic growth due to their impact on consumer purchasing power and GDP. The effects of the Covid-19 pandemic exacerbated these issues, with expendable income dropping for large sections of the population. These factors contributed to a shift in consumer habits, with essential purchases like food, medicines and clothing significantly outstripping demand for non-essential purchases.
However, with a population the UN forecasts to become the third-largest globally by 2050, the mediumto long-term outlook for Nigerian retail looks promising. The return of footfall in the country’s malls to pre-pandemic levels presents opportunities for international brands and investors, while the rise of e-commerce is opening the door to sector disruption and innovation.
Structure & Oversight
The Federal Competition and Consumer Protection Act (FCCPA) 2018 came into force in its titular year, repealing the Consumer Protection Act of 2014. Under the provisions laid out in the FCCPA, the Federal Competition and Consumer Protection Commission (FCCPC) was established to absorb the duties of the former Consumer Protection Commission. The FCCPC is authorised to formulate rules, regulations and guidelines to protect consumer interests and welfare, ensuring safe and fair market practices for businesses of all sizes. Parameters set by the FCCPC include regulations relating to sales promotion and administrative procedures, in addition to guidelines regarding investigative policies and sustainable consumption practices. New guidelines and regulations were introduced in response to pandemic-induced dynamics. FCCPC rules and regulations apply to all public and private enterprises engaged in practices relating to consumer satisfaction.
Investment Regulation
The Nigerian Investment Promotion Commission (NIPC) Act was amended in 2004, opening the economy to 100% foreign business ownership and control across sectors. Once a foreign company is incorporated, it must be registered with the NIPC. Activities on the negative list, such as involvement in arms and ammunition production and related activities, are restricted to both local and foreign investors.
In recent years many processes – such as registering businesses and properties, obtaining building permits and credit, and paying taxes – have been made more efficient. However, foreign direct investment levels have somewhat stagnated across the economy, with multiple issues relating to a lack of transparency – such as delays and fees at ports – among the reasons contributing to investor hesitance. Underscoring these challenges, Transparency International ranked Nigeria 154 out of 180 countries in the 2021 Corruption Perceptions Index. This was five places lower than its 2020 rank of 149 out of 179 countries.
Market Dynamics
There have been several external and internal factors that have affected the retail sector’s performance in recent years. Given that its manufacturing capacity is largely underutilised, Nigeria is a net importer, which has exposed many formal retailers to the foreign exchange challenges facing the country. Indeed, the decreasing value of the naira and the subsequent inflated cost of US dollar-priced imported stock has negatively impacted retailers’ bottom lines. As a result, a number of international players such as South African chains Shoprite and Mr Price, have ceased operation in Nigeria since 2021. Despite these challenges, malls in Lagos and Abuja saw average occupancy rates of 97% in the first half of 2022, while in other areas of the country it was 91%, according to real estate firm Broll. Those figures represent a yearon-year (y-o-y) improvement from an average vacancy rate of 13.8% in the first half of 2021.
In terms of new space, an August 2022 report by Broll estimated that 26,800 sq metres of retail space would come on-line in the fourth quarter of 2022, which will primarily be smaller developments. Even as more retail space is set to open in the coming years, several projects were put on hold due to the high cost of building materials – a consequence of the foreign exchange imbalance and import dependency. In the case of building major shopping centres, the additional costs would have to be covered by higher rental rates for retail units, so the prospect of filling significant volumes of new high-end space under such conditions may prove to be challenging. As such, many real estate developers and operators have opted to hold assets and stretch out yields rather than sell their properties.
“Sector constraints have set in motion a trend towards the construction of smaller shopping centres and stores that house local retailers. These are less reliant on imported goods and materials, with some development costs and stock replenishment largely being paid for in naira, allowing retailers and developers to avoid the worst effects of the foreign exchange imbalance,” Dolapo Omidire, founder and CEO of local market researcher Estate Intel, told OBG.
Performance & Size
Wholesale and retail trade, which the National Bureau of Statistics (NBS) categorises as trade in its quarterly GDP reports, was significantly disrupted by pandemic-related health and mobility restrictions. It contracted by 8.5% in 2020, causing its contribution to GDP to fall from its 2019 level of 16% to 14.9% in 2020. When pandemic-related restrictions were eased and economic activities reconvened, the sector rebounded, registering growth of 8.6% in 2021 and contributing 15.7% to GDP that year. That positive trajectory continued into 2022, albeit fluctuating, with the sector expanding by 6.5% and 4.5% in the first and second quarters, respectively. The latter figure represented a 16.8% contribution to GDP for the corresponding period.
That pattern is reflected in data on the restaurant and food services space. In 2020 the segment shrank by 17.6% before dipping again by 0.5% in 2021. The first half of 2022 saw the sector undergo a moderate revival, registering progressive growth of 1.9% and 3% in the first and second quarters, with the latter of those figures equal to approximately 0.4% of GDP.
There is strong demand for quick-service restaurants in the country which offers an opportunity for an expanded retail footprint. “The Quick-Service Restaurant (QSR) sector is marked by a supply-demand mismatch given the enormous reservoir of potential QSR customers and only 1000 accredited QSRs. Addressing the foregoing requires investment into building supply chain networks and attending certification mechanisms. Furthermore, one has to think outside the box in terms of geographic footprint; that is, locating chains outside typical hotspots and driving margins through volume selling,” Antoine Zammarieh, managing director of Allied Foods and Confectionary Services, told OBG.
According to the NBS, foreign investment in the sector rebounded from $288m in 2020 to $588m in 2021. Meanwhile, retail activities were valued at $65m in the first quarter of 2022 and $56.5m in the second.
In addition, value-added tax in Nigeria is charged at 7.5%. Wholesale and retail trade and accommodation and food services combined generated N39.5bn ($94.1m) in government revenue in the first half of 2022, accounting for 55% of the total for that period. Meanwhile, e-commerce in Nigeria grew by 44% in 2021, which was significantly higher than the average global growth rate of 18% that year.
Consumer Sentiment
A sustained shift towards essential purchases for the majority of Nigerian consumers resulted from recessions in both 2016 and 2020, lower levels of employment and reduced income levels. In addition, inflation saw the consumer price index rise from 17% in August 2021 to 20.5% in August 2022. Before the economic decline that led to the 2016 recession, the country’s middle class had undergone rapid expansion, growing by 600% between 2000 and 2014 to account for 11% of the population, according to South African Standard Bank. As of June 2022, the African Development Bank estimated that the middle class made up 23% of the population. Despite the high growth rates, currency fluctuations and inflation have eroded purchasing power in this group.
According to global consultancy firm Kearney, between 2015 and 2019 annual retail sales in Nigeria fell from $135bn to $105bn, reflecting a contraction of 22.2%. Kearney did not publish its Global Retail Development Index for 2020 due to the pandemic. However, its 2021 iteration showed that annual retail sales in Nigeria rose to $108bn in 2021. In addition, in a July 2022 report analytics firm Fitch Solutions forecast that household spending was expected to undergo an expansion of 3.5% in 2022 before slowing to 2.5% in 2023.
Purchasing Power
In 2021 sub-Saharan Africa had a GDP adjusted for purchasing power parity of $4.8trn – a sizeable amount, but the smallest of the seven measured regions. Nigeria accounted for $1.1trn of that figure, making it a strong contributor to the regional consumer market, second only to Egypt with $1.4trn. By comparison, Cameroon, Côte d’Ivoire and Ghana had GDPs adjusted for purchasing power parity of $110.7bn, $160.6bn and $196bn, respectively. Breaking down GDP adjusted for purchasing power parity on a per capita basis underscores how higher levels of income could further contribute to the sector’s growth. In Kearney’s 2021 Global Retail Development Index, the figure for Nigeria sat at $5190, compared to $12,800 for Egypt, $5690 for Ghana and $3650 for Cameroon. Nigeria’s per-capita GDP adjusted for purchasing power parity was down from $6000 in 2015, reflecting the decline in the country’s middle class. Even so, many markets in Africa remain behind their developing economy counterparts in other regions of the world. For example, in 2021 per capita GDP adjusted for purchasing power parity was $10,300 in Jordan, $11,900 in Peru, $12,200 in Indonesia and $12,900 in Paraguay.
Food & Household Essentials
While pandemic restrictions were in place, locally grown food became expensive in Nigeria due to disruptions in domestic supply chains. After such restrictions were removed and economic activity resumed, continued inflation and other external shocks caused food prices to remain high. The war in Ukraine following the Russian invasion had a detrimental impact on both fuel and food prices around the world, a trend to which Nigeria was not immune. Indeed, Nigeria has traditionally imported much of its wheat. Indeed, in 2021 the country imported 51% of its wheat from Russia and Baltic countries – a trend made tenuous by Russia’s blockade of Ukrainian ports and Western sanctions.
These external factors have contributed to price increases for staples such as bread, cereals, potatoes and yams. Against this background, the food inflation rate rose by 2.8 percentage points between August 2021 and August 2022 to reach 23.1%. “In the food retail space, we are seeing a contraction across the board,” Ambali Afolabi, market and consumer insight manager at Flour Mills Nigeria, told OBG. “Retailers are cutting back on the size of individual packages they stock in response to consumers looking to reduce average spending.” The consumer’s focus on reducing outlay has also given rise to an increase in sales of value brand goods and an uptick in purchases of fast-moving consumer goods (FMCGs) like liquid soap .
E-commerce
The pandemic saw global e-commerce activity rise, with a proliferation of new platforms appearing across markets in response to the need for efficient solutions to the restrictions on movement and physical interactions. Reflecting this trend, Nigeria’s e-commerce revenue was $6.2bn at the end of 2022, down from $7.6bn in 2021. With a compound annual growth of 11.7%, that figure is forecast to reach $9bn in 2023, and grow to $14.1bn by 2027, with a user base of 143.9m. Such expansion will amount to a user penetration of 45.6%, a 47.1% increase over its 2022 level of 31%. Improvements in broadband coverage, increased smartphone ownership and a tech-savvy population are key drivers of this trend, with user penetration expected to hit 58.7% by 2027. According to a 2023 report electronics and media was the most popular category in the market, comprising 34% of all e-commerce revenue, followed by fashion (22%), furniture and appliances (21%), and food and personal care (13%).
Jumia, established in 2012, is Nigeria’s leading online marketplace, with revenue of $22bn in 2021. Slot and Ajebomarket, the second and third largest, saw revenue that year of $7m and $6m, respectively. In relation to the country’s 2021 revenue of $7.6bn in the e-commerce space, these three platforms combined accounted for less than 1% of online revenue that year, due to a moderately saturated and fragmented market.
As consumption patterns evolve and online shopping gains momentum, policymakers and business leaders are keen on unlocking e-commerce’s full potential. According to a May 2022 report by market researcher Mordor Intelligence, increased access to digital payments systems, improved logistics to ensure timely delivery and tighter controls to prevent cybercrime could shore up consumer confidence in the channel.
Outlook
As the second-largest contributor to GDP, retail has long been a driver of growth and a bellwether of Nigeria’s future economic trajectory. Several challenges have impeded the sector from fully leveraging the potential of such a large consumer market, such as inflation, exchange rate volatility and vulnerability to external price fluctuations. However, there is room for optimism, highlighted by the continued expansion of retail real estate offerings.
While Covid-19 had a negative impact on traditional retail activity, it also helped spur an uptick in e-commerce activity, a trend reflected in markets worldwide. The pandemic’s downward pressure on the sector also proved to be short-lived, as the lifting of health measures and resumption of economic activities and in-person gatherings resulted in a return to growth. This was especially true in segments such as FMCGs, staple goods and value brands, reflecting a general shift in consumer preferences that began during the early months of the pandemic and continued through to the end of 2022. With household consumption set to reach N96trn ($228.7m) by 2025, these trends could represent viable opportunities for investors looking to enter or grow in Africa’s largest consumer market.
Read More from OBG
