Shoprite pulls away from the Nigerian retail market opportunity
South Africa’s Shoprite has reevaluated its expansion in Nigeria and opted out. It moved into lower-income cities when sector growth was high, but conditions have since changed and competitors with a different approach for expansion seem to be on a more sustainable path.
Main Findings – Expanding in the right direction
In 2020, Shoprite concluded a deal to fully divest its Nigerian unit pending approval from the country’s regulators. The company is now discussing a franchise agreement for the new shareholders to retain the brand in the country. This will likely be similar to SPAR’s franchise arrangement with its Nigerian partner Artee Group. Shoprite aims to have completed this divestment by the end of the year.
Looking back, Shoprite entered the Nigerian market in 2005 but only began branching out of Lagos in 2012 when wholesale and retail trade was growing at about 10% a year and high oil prices allowed authorities to stabilise policymaking.
The company’s strategy under the then-CEO was to spread across the country, and by 2015 it was present in nearly all six geopolitical zones. However, the international oil price slump in 2016 triggered import and foreign exchange restrictions at home. The naira depreciated, inflation rose and consumers tightened their spending. Following the economy at large, growth in the wholesale and retail trade sector has contracted. The impact has been especially pronounced in the lower-income cities to which Shoprite had been expanding e.g., Akure, Ondo State.
During this same period, a number of local chains saw greater success applying different strategies. For instance, Grocery Bazaar and Justrite mostly built stores on the outskirts of Lagos and in less affluent parts of the city concentrating on people working in Lagos and moving into areas where it is cheaper to build, buy or rent a home. These areas were previously unserved or underserved by major retail stores, and as people with higher income levels have moved there, so have Grocery Bazaar and Justrite.
Other local chains have kept to a niche. Market Square stores are mostly clustered in Port Harcourt city and neighbouring states in the south where its founders first established Kilimanjaro restaurants, while Prince Ebeano mainly serves upscale areas in Lagos such as Lekki. Also, 12 out of SPAR’s 14 stores are in Port Harcourt and upscale Lagos markets.
Keeping to a niche and aligning with demographic shifts in proven markets appears to have helped these chains absorb shocks in the business environment. To illustrate further: Prince Ebeano’s newest supermarket is in Lokogoma on the Abuja outskirts where demand for housing is rising.
Outlook – Differentiated businesses and their hard-won wins
The country has come out of its second recession in five years, but GDP grew by only 0.11% in the last quarter of 2020. The economy remains structurally weak and monetary policymaking unstable given continued exposure to oil price volatility.
Foreign exchange instability and high inflation will continue to top operational risks for retail firms in the medium term, especially so because the Muhammadu Buhari administration is not considerably under pressure to apply reforms with two years left on his final term.
Meanwhile, population growth in the country supports long-term forecasts for major retailers to multiply outlets nationwide. But the industry will remain fragmented for the foreseeable future and major retailers will mostly be clustered around Lagos, Abuja and cities in the oil-rich Niger Delta where customer spending power is relatively favourable under ongoing economic conditions.
—
Photo credit: Songhai Advisory
—
We are an African-owned and managed firm delivering local knowledge supporting transformative and sustainable strategic decision-making. Do get in touch: questions@songhaidvisory.com