When Shoprite announces its likely withdrawal from Nigeria, Dianna games explores the rise and fall of the expansion of South African retail across the continent and what it says about Africa’s overall investment climate
T.The retail sector in Africa has been one of the great success stories of the last decade, initially driven by a consumer boom in a handful of high-growth economies, demographics, and a growing middle class. South African retailers and developers have mastered this wave, but in recent years some have encountered difficulties reflecting larger issues in the African investment landscape.
The onset of African consumer consumption sparked a round of growth in western-style shopping malls that is a new experience for consumers accustomed to the small neighborhood shops and the large open markets that characterize shopping in most parts of Africa should offer. South African developers and retailers marched north to explore these markets as an alternative to the crowded and largely saturated home market.
Shoprite, Africa’s largest supermarket chain, was one of the first. The first move outside of South Africa and its immediate neighbors Lesotho, Swaziland, Namibia and Botswana was to Zambia in 1995, where another 17 stores were opened in less than a decade. The company opened its first store in Nigeria in 2005 and had 25 stores across the country by 2018. The company currently operates in 13 African countries outside of South Africa, although the company announced at the time of this issue of African Business that it was considering withdrawing from Nigeria (see below).
The diversified department store Game, which was acquired by Massmart in 1998 (acquired by Walmart itself in 2011), is represented in 12 countries. Another South African supermarket giant, Pick n Pay, has opened stores in southern Africa.
Inexpensive clothing retailer Pep Stores has set up shop in six African markets, including Nigeria, where it has branches in 20 cities, while clothing and household retailers Price and Truworths have joined restaurant chains, cellphone companies, hotel companies and many other South African companies operating in other African countries are investing.
Private equity money was behind this popular business opportunity, and facility managers took the step to provide services for new developments in urban modernization. Real estate developers Atterbury, Hyprop, Attacq, Liberty Properties and others have taken up shopping center developments developed by Actis of the UK and others in Nigeria, Zambia and Ghana.
South African engagement has been generally positive: companies added jobs and training, expanded the market for local producers, implemented new retail technologies, introduced new goods, and built infrastructure and entertainment for the emerging consumers.
However, there were problems. In some countries Shoprite has been criticized for importing most of its goods and not sourcing them locally. There were wage disputes and dumping disputes in some markets.
The companies themselves found themselves on a steep learning curve as they quickly learned that the South African model was not always easily replicated in other African markets that were themselves distinct from one another.
Some adapted better than others. Despite leaving three markets (Egypt, Tanzania and Mauritius) so far, Shoprite has mastered some of the most challenging environments in Africa. Local sourcing has reduced currency and logistics risk – local products make up around 80% of total inventory in some markets – and central warehousing has been set up.
However, some have not adapted sufficiently. The South African high-end grocery retailer Woolworths, for example, felt the challenges in Nigeria were too great and left the market even though Pep Stores expanded.
The falling demand is a challenge
However, the decline in consumer demand in expensive, inflationary environments has become a challenge for everyone. The volatile oil price has been a major factor in some of the largest markets visited by South African retailers, particularly Nigeria, Angola and Ghana.
The falling oil price in 2014 led Nigeria and Angola into recession, triggering serious currency shortages and currency devaluation. 2020 saw record lows as these economies emerged from a period of prolonged recession. The impact hit the consumer bags hard.
Last year, Shoprite stocks fell to their lowest level in more than three years after the company posted a 20% drop in earnings, largely due to poor performance and currency issues in its non-South African businesses. The company is closing unprofitable deals in the rest of Africa and streamlining its expansion plans amid so-called “persistently challenging trade conditions.” In a statement released Aug. 2, the company announced that it was considering “all or a controlling interest in” its Nigerian subsidiary Retail Supermarkets Nigeria Limited.
Another country that is being left is Kenya due to unprofitable trade. It didn’t hit the market until 2018 after two of the country’s largest retailers – Nakumatt and Uchumi – passed away.
Pep Stores closed the last of its 20 stores in Zimbabwe, ending its 20-year presence in the country after battling to trade with rising inflation, fuel shortages, currency issues and stagnating wages. Mr Price announced in late June that it would close his last remaining store in Nigeria in early 2021.
Real estate companies are also abandoning their investments in the rest of Africa, such as Hyprop, which is selling its African investments for more profitable opportunitiesin Eastern Europe.
Need for reform
There are many reasons why some of these investments didn’t work out. These include the tendency of retailers and mall developers to grow large in countries based on the size of the opportunity, while the real need for much smaller and more dispersed malls is in major African cities.
There is also the problem of cost. The construction of shopping centers in countries without the appropriate skills, the lack of locally available equipment and resources, the scarcity of land, and electricity and water deficits make development costs unaffordable and lower profits.
A relatively small inventory of sufficiently large local tenants and the tendency for global brands to either sit on the fence or sell through small franchises is another challenge.
While the retail sector is often used as a barometer of a country’s wealth, the problems are not unique to that sector or to South African companies. But not only do they provide a snapshot of the challenges of doing business in Africa, but also the ups and downs of happiness on a continent with so much promise and opportunity.
Some of these trends are due to inadequate business models that are not tailored to the local realm or flexible enough to roll with the strokes.
The fundamentals that attracted many investors have not changed – lack of competition in many sectors, growing populations, a growing middle class, and improved governance among them. But the investment history in Africa, in South Africa as elsewhere, has been much less convincing lately than it was a decade ago.
Reform in Africa is not going fast enough. Most countries have avoided taking bold steps towards much-needed structural reforms, preferring to tinker with the edges of their challenges. This leaves them vulnerable to internal and exogenous shocks.
While investing in Africa is a good long-term bet, even savvy investors won’t be around forever.