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Is the retail sector Nigeria's next big industry? 16 Feb 2018

Jabi Lake Mall, Abuja

Nigeria's population of 186 million people and the country's rapid urbanisation present a huge opportunity for global retailers. Moreover, its fast-growing middle class makes Nigeria a formidable consumer market in Africa. However, the key to making the retail sector more competitive and contributing more to Gross Domestic Product (GDP) lies in the government's ability to formalise the sector.
    
Some of the bottlenecks that policymakers must address include improving the level of physical infrastructure, reducing the high unemployment rate, and boosting GDP per capita to support consumer spending growth. The demographic advantage, high population growth rate, and rising urbanisation will not automatically translate to high consumer spending. But a formal retail industry has the potential to employ millions of Nigeria's teeming youths and improve incomes.      

In my November 2017 column in Financial Nigeria, I cited a 2013 report by McKinsey and Company, entitled “Africa's growing giant: Nigeria's new retail economy.” The report estimates that from 2008 to 2020, there is a $40 billion growth opportunity in food and consumer goods in Nigeria. But despite this positive forecast and the highly favourable fundamentals, the projection would not be realised without the necessary policy measures put in place to tackle the challenges impeding the sector's growth.

Nigeria's retail sector remains relatively under-developed. Over 80% of the shopping is still carried out at the traditional shops such as corner shops, kiosks, local markets and also from street vendors. Notwithstanding, the sector is seeing a shift towards modernisation as the economy grows and diversifies. The trend towards modernisation will continue as the rate at which the population is shifting from rural to urban areas continues. According to the McKinsey report, Nigeria's rate of urbanisation is one of the fastest in the world, with ongoing urbanisation rate estimated at 4 per cent per annum.

According to the International Labour Organization (ILO), at least 142 million people work in the retail sector in developing countries. Retail employment accounts for an average of 10 to 15 per cent of the job market in any given country. Seeing that the retail industry is very vital to a nation's economy, the Nigerian market holds significant opportunities for retailers (local and international), real estate investors as well as the Nigerian people in terms of job opportunities.

But investors have noted that although Nigeria offers a potentially massive consumer market, the country's opportunities are not without high risks and a challenging business environment. Notwithstanding these risks and challenges, the Nigerian retail market – which currently accounts for about 16.4 per cent of total GDP – remains a gold mine. With the right policies and government support, the retail sector could be the nation's next growth frontier.

Retail space in Nigeria reached 326,958 (sqm) in 2017, compared to 30,000 sqm in 2005. From only two shopping malls – The Palms Lekki Mall in Lagos and Ceddi Plaza in Abuja – 13 years ago, the country now has several malls such as the Jabi Lake Mall in Abuja, Ikeja City Mall and Maryland Mall in Lagos, among others in Port Harcourt, Ilorin, Owerri, and Onitsha.   

The retail space in Nigeria is still miniscule when compared to the other markets such as South Africa, Africa's most developed retail economy, which boasts of 23 million sqm of retail space. Despite its maturity, South Africa was ranked 26th in the 2017 Global Retail Development Index (GRDI), published by A.T. Kearny. The GRDI ranks 20 developing economies for retail investment, identifying not just the most attractive market today, but also those that offer the most potential in the future. Nigeria is ranked 27th, and also behind Tunisia (24th) and Kenya (25th). While India tops the ranking with rapidly expanding consumer spending, followed by China and Malaysia, the highest ranked African retail market in the 2017 GRDI is Cote d'Ivoire at 17th position, for its high economic growth rate – making it an attractive target for retailers.

South Africa's retail market is relatively modern, with around 80 per cent of sales in formal outlets. The country has a well-developed retail sector including a number of major domestic players, which include Steinhoff International, Pick n Pay, Shoprite, Woolworths, Spar, Truworths, and Holdsport. The 12 largest retailers in the country account for nearly R600 billion (or $50.6 billion) in annual sales.

But in terms of the growth of consumer spending in Africa, Oxford Business Group (OBG), a global consultancy group, said last year that the average value of consumer spending in Kenya has risen by as much as 67 per cent over the past five years, making the country Africa's fastest-growing retail market. The formal retail sector in Kenya accounts for between 30 and 40 per cent of the total retail market.

In recent years we have seen the expansion of foreign retailers into Nigeria, especially from South Africa, and there are still more waiting to come. Nigeria's retail industry needs all the support required to take it to the next level. But like other sectors, the lack of infrastructure has impeded the development of the industry. Without infrastructure, formal retailers will be tentative about entering the market.

Public-Private-Partnership is a good model to help the development of the sector like we have seen happen between Greenfield Assets Limited and the Abia State government, who are currently developing the first purpose-built smart mall in the world. It will also be the largest mall in Africa, located in Osisioma Ngwa Local Government Area of the state. The mall will have a 280,000 sqm retail space, and able to accommodate about 5,830 shops. The N50 billion mall will also include a games arcade, petrol stations, climate-controlled warehouse and a state-of-the-art cinema. While this is commendable, the country could do better with more of such retail projects.

More local investors should be encouraged to invest in both real estate projects as well as establish retail brands. Apart from the dominant foreign brands in the local retail sector, Nigeria needs local brands to take the lead in the country's emerging retail sector. This would be a more sustainable approach to formalising retail experience in the country.

The formalisation of this sector has several benefits to the economy, apart from the increase in employment, increase in revenue to the government, modernisation of the environment, it also gives consumers more choices and drives down prices. A study in 2010 found that consumers in Poland, Bulgaria and Romania preferred modern retailers for their groceries. The reasons for their choice included competitive prices, better variety and higher quality. Modern retailers invest in technologies and processes that enable them to achieve greater economies of scale and drive down costs, contributing to lower prices for consumers.

The entry of modern retailers and the formalisation of the industry will also drive developments in other industrial value chains, such as agriculture and manufacturing. Most of these retailers will buy a large portion of their products from local farmers and manufacturing companies in Nigeria. We have seen this play out with Shoprite, where most of the outlet's supplies are sourced locally, especially its food supplies.

Online retailing is still at its infancy in Nigeria. Therefore, it does not yet pose a threat to the brick and mortar retailers. We have seen some successes with Jumia and Konga, the two largest online retail platforms. With growing internet penetration and increased adoption of smartphones, consumers may slowly move towards online retailing. Nevertheless, as many Nigerians still want the mall experience, patronage for formal retail outlets would not slow down.

In order to fully harness the vast opportunities – including favourable return on investment (ROI), job creation, development of cottage industries, infrastructure development, contribution to GDP growth –  the challenges of harsh business environment, political instability, insecurity, poor infrastructure and high financing cost must be properly addressed. Nevertheless, the economic impact of the formalisation of the Nigeria's retail industry cannot be overemphasized. According to McKinsey and Company, “Nigeria's retail market is both capturable and too large to ignore.”

Olajide Olutuyi, a Financial Nigeria Guest Writer, is a graduate in Management from the University of Lethbridge, Canada. He is Founding Partner, Greentouch Consulting Inc. Canada, Co-Founder/CEO Top-Olax Energy Ltd. He is on the Board of Calgary Quest School, Canada. Email: Ola.olutuyi@greentouchconsulting.com. Twitter: @jideolutuyi