In 2005, former Shoprite CEO Whitey Basson said he was not expecting any competition in Nigeria any time soon, after it took him several years to get the first store up and running in Lagos.
And he was right. The first real competition emerged a few years later. The tough battle to establish a retail presence in one of Africa’s most challenging markets set the tone for Shoprite’s 15-year journey in Nigeria.
The business environment has never been easy, but Shoprite adapted and made good money for a long time despite the challenges.
Basson had a passion for the continent that made him determined Shoprite would get the best out of these markets. He famously asserted in 2013 that there could eventually be room for up to 800 Shoprite stores in Nigeria, the only constraint being the slow development of modern shopping malls in which to house them.
In 2012, Shoprite reported that sales in its supermarkets in the rest of Africa grew 28% compared with 9.8% at home. At the time it had 47 new African stores in the pipeline, most of them earmarked for Nigeria and Angola.
Yet by 2020 it had just 25 stores, and the Nigerian business is up for grabs. The company announced this week that it will sell all of, or a majority stake in, Retail Supermarkets Nigeria, Shoprite’s Nigerian subsidiary.
Of all the SA retailers that entered African markets, Shoprite was the one most expected to last the distance. It fine-tuned its country models along the way, shortened supply chains where possible, and set up centralised warehousing, which enabled it to manage the long port delays in Lagos, for example.
Local sourcing of products was a focus of the business, and in Nigeria up to 80% of stock was eventually locally sourced, made possible by the growth of manufacturing in the country as a result of a government-imposed import ban on more than 30 products in 2003, to drive import substitution.
But the ban was also one of the reasons for the slow development of malls. It included a prohibition on finished clothing, which precluded the entry of fashion retailers, which would later make up a sizeable portion of tenants in the new developments. It was finally lifted after eight years, unlocking the growth of formal retail in Nigeria.
Demographics has been a driver of investment into Nigeria. Size matters for consumer-facing industries. Nigeria’s population, now estimated to be about 200-million people, is bigger than SA’s, Ghana’s and Kenya’s combined. But the much-vaunted middle class, celebrated in the early part of the decade, has retreated in the wake of economic hardships.
The main problem with Nigeria is deep seated and structural — its dependence on oil for revenues and foreign exchange. This doesn’t mean the economy is not diversifying; it means it is not diversifying exports.
This has long dogged real progress in Nigeria. A previous wave of formal retail in the country was swept away by the oil price crash of the 1980s. Local department store chains such as UAC’s Kingsway Stores, Chellarams, UTC and Leventis Stores, some of which had been in the market since the 1950s, were forced to diversify to survive.
The retail market then developed into the channels most evident today — sprawling markets, tabletop sellers and mini plazas, with formal retail growing only in recent years.
The knock-on effect of oil crises into the broader economy is huge, offsetting the benefits the sector provides in generating wealth, jobs and opportunity.
The oil price crash of 2014 precipitated a deep recession in Nigeria in 2015/2016. Inflation spiked, manufacturing slowed as foreign exchange dried up, companies battled to repatriate profits and dividends, jobs were lost and consumers tightened their belts.
Not long after Nigeria exited the recession, the Covid-19 pandemic swept across the world and drove the oil price to record lows, with the attendant problems for Nigeria and other oil producers.
The rollercoaster ride has been tough for companies, and this makes it even more important to have a business model that can roll with the punches. Many of the SA companies that have disinvested have blamed the tough operating environment rather than their own business models and strategies for their pain.
Tiger Brands, which bought Flour Mills from Nigeria’s premier entrepreneur Aliko Dangote, failed to get to grips with the complexity of the business environment and culture. Telkom spent a fortune buying into the wrong technology and walked away several billion rand poorer. Nando’s chose a partner (UAC) that was in effect also its competitor in the fast-food franchise market.
Woolworths failed to market itself well and had no brand familiarity in the market. Nor did it find a niche. Most of the clothing retailers ended up somewhere between high income shoppers, who preferred buying abroad, and middle-income earners who couldn’t easily see the value in the SA offerings compared to stock in local markets.
The retailers also entered the market a time when there was no critical mass of modern malls to help to build an appetite for formal retail. Shoprite still believes there is value in the Nigerian market and room for many more stores in strip malls around the country, hence its stated preference to keep a stake in the business. But it also believes local capital is a better fit for the model as cross-border trade gets ever more complex and costly.
Shoprite’s new CEO, Pieter Engelbrecht, has told analysts Shoprite remains committed to the continent — but not at any cost. All eyes are now on who is lining up to take Shoprite’s offering. It’s a potential game-changer for local empowerment.
But the supermarket chain’s exit, as such a prominent investor in the country, sends a strong signal that Nigeria is a tough place to do business, which the authorities need to take seriously for local companies as much as for foreign investors.
There has been incremental progress in improving the business environment. Nigeria rose 15 places on the World Bank’s 2020 Doing Business Index, but it came off a low base and is still ranked 131 out of 190 countries, with an even lower ranking when it comes to trading across borders.
A retreat to safety in the time of Covid-19, given not just the regional but the global ramifications, is an understandable strategy even for a company with a strong risk profile such as Shoprite. But this is not the strategy envisaged for the success of the African Continental Free Trade Area, which aims to increase cross-border trade and investment and deepen regionalism.
The Covid-19 disruption provides an opportunity for change in Nigeria, as it does elsewhere in Africa. The investment case, although damaged, remains compelling. But it does need work. It would be a pity if Nigeria emerged on the other side of this crisis without significant structural change and new models of efficiency and discipline to take the country into a new era.