Understanding likely Shoprite’s divestment from Nigeria

07 Aug 2020, 12:00 am
Tade Oludare
Understanding likely Shoprite’s divestment from Nigeria

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Other retail outlets such as SPAR Nigeria, Prince Ebeano Supermarkets and Sahad Stores may buy Shoprite’s stake.

On August 3, 2020, Shoprite Holdings Limited released its Operational and Voluntary Trading Update for the year ended June 28, 2020. The retailer reported an 8.7 per cent growth in sales for its South Africa supermarkets division. Its Nigeria operations, however, declined by 6.3 per cent for the fiscal year. Excluding Nigeria, sales at its supermarkets outside South Africa, fell by 1.4 per cent.   

In the update, the retailer also reported its intentions to consider the potential sale of all, or a majority stake, in Retail Supermarkets Nigeria Limited, a subsidiary of Shoprite International Limited, one of the grocery chains owned by Africa’s largest supermarket retailer. For this reason, its Nigerian division was classified as "discontinued operation" in the financial statement.

No reasons were given in the group’s statement for its intentions to discontinue its operations in the continent’s largest economy. However, several analysts and media organisations have suggested various reasons for Shoprite’s announcement. For example, following the release of the new report, Bloomberg deduced a few reasons for Shoprite’s decision to pull out of Nigeria, including that “Nigeria’s economy is being ravaged by a slump in oil prices that have dried up dollar supplies and a naira that was devalued earlier this year. Delays in clearing goods from Nigerian seaports, traffic congestion and poor road accessibility have made it difficult for the Cape Town-based supermarket operator to get stock onto shelves.”

Anecdotal reasons

While Shoprite’s exit would not be good for Nigeria on many fronts (including signaling effect, job losses, etc.); there appears to be more to the retailer’s announcement of a potential divestment from the country. The reasons suggested by Bloomberg and other sources are rather very simplistic as the decision to exit a major market cannot be kneejerk, unless it is a culmination of several longstanding and fundamental issues.

The argument about oil price slump is not tenable. As revised downward from US$30 per barrel (pbl) in May 2020, Nigeria’s 2020 budget benchmark price for oil is US$20 pbl. Meanwhile, crude oil prices are currently over US$40. Data from the Central Bank of Nigeria’s (CBN) show average crude oil price from January 1, 2020 to July 24, 2020 was US$40.98, with Nigeria’s Bonny Light priced at US$43.88 as of July ending.

The other reasons commentators have adduced for Shoprite’s announcement are also farfetched. Shoprite has been operating in Nigeria for over 15 years with at least 25 outlets spread across eight states, including the Federal Capital Territory. Despite the problem of traffic jams in Lagos, serious retail businesses do not leave a highly populated city because of traffic congestion. Major cities such as Mumbai, Manilla, Moscow, Mexico City, Istanbul and London are also known to have traffic congestion and road accessibility issues. Besides, Shoprite’s footprints in Nigeria extend to other states where there are no traffic congestion issues.

With regard to the delays in clearing goods from seaports, Nigeria has other seaports that are operational, apart from the Lagos Port Complex and Tin Can Island Port in Lagos. The other seaports, the Calabar Port, Delta Port, Rivers Port and Onne Port, are alternatives to the Lagos seaports.

Plausible explanations

Other critical developments provide more plausible explanations for why the retailer may be mulling its exit from Nigeria.

a.    Legal issues

In January 2018, a Lagos High Court awarded US$10 million as damages against the South African retail giant for breaching its contract with a Nigerian firm, AIC Limited. The contract was for a joint venture between AIC Limited and the retailer to set up the first Shoprite brand in Nigeria.

In May 2020, the Court of Appeal sitting in Lagos affirmed the ruling of the lower court. It is not clear whether Shoprite would proceed with an appeal of this judgement to the Supreme Court or the grocer has agreed to pay the US10 million (circa N3.6 billion) damages.

b.    Regulatory issues

To encourage local production and growth in micro, small, and medium enterprises, the Ministry of Finance, in 2017, circulated a list of prohibited or restricted imports; this list is regularly updated and currently includes: live or dead birds, including frozen poultry; pork, beef, bird’s eggs, excluding hatching eggs; refined vegetable oils and fats (including mayonnaise); cocoa butter, powder, and cakes; spaghetti/noodles; and fruit juice in retail packs.
The Nigeria Customs Service also lists items whose importation is “absolutely prohibited.” They include airmail photographic printing paper, exhausted tea or tea mixed with other substances, meat, vegetables or other provisions declared by a health officer to be unfit for human consumption, and some spirits. In addition, the CBN has a list of items, which are ineligible for foreign exchange at the official window. Among these items are rice, cement, margarine, and palm kernel/palm oil products. Many of these items are part of Shoprite’s stock, which the retailer has found increasingly difficult to replenish.

Land border closure

In August 2019, Nigeria closed all its land borders to tackle smuggling of used cars, rice, refined petroleum products and cement (among other smuggled goods) with the biggest contraband route being the country’s border with Benin Republic. In June 2019, the Financial Times reported that Benin was one of the world’s largest importers of rice with no prizes for correctly guessing where all the rice was going.

Rice imports to Nigeria attract a 70 per cent customs duty, whereas Benin Republic lowered its tariffs on rice imports from 35 per cent to 7 per cent. Compare this also to Cameroon, which completely removed the 10 per cent import tariff it had on rice. Nigeria, therefore, had to close its land borders to curb the rice smuggling menace and the cartels of other banned products.

An October 2019 World Bank report discussed the impact of the border closure on Benin’s economy. According to the bank, the neighbouring country's economy is heavily reliant on the informal re-export and transit trade with Nigeria. These activities are estimated at approximately 20 per cent of Benin’s  gross domestic product (GDP).

The border closure also has both adverse and positive effects on the Nigerian economy. Apart from disrupting the supply chains of legitimate imports, the policy has been contributing to inflationary pressure in Nigeria due to shortages of those smuggled items in the country. On the plus side, it is now extremely difficult to smuggle subsidised petrol from Nigeria to neighbouring countries. According to the Major Oil Marketers Association of Nigeria, some 10-20 per cent of Nigerian fuel was being smuggled abroad.

The move has boosted government revenues because more duties are being collected on the increased volume of goods entering the country legally through the ports.

What next?

Based on its latest financial report, it appears Shoprite’s intention is to either sell all – or a majority of – its stake in the group’s Nigerian assets to local investors. Should it consider the latter, it would retain a stake in the domestic market, albeit a minority one.  

Other retail outlets such as SPAR Nigeria, Prince Ebeano Supermarkets, Sahad Stores, etc., may just be keen to consider the opportunity of buying Shoprite’s stake as a way to ramp up their national spread in one fell swoop. If this is the case, fears of massive job losses may be assuaged.

Furthermore, a sale of Shoprite’s assets to local investors may eliminate the need to regularly repatriate significant naira earnings and other management and technical fees to South Africa in foreign currency. It would also encourage increased local production of items that are currently supplied to Shoprite’s network of stores in Nigeria through importation. This would help to increase patronage of local businesses and stimulate employment.

Tade Oludare PhD, is an economist and a professionally qualified accountant, banker, and stockbroker. He has significant experience working or consulting for financial institutions and the academia in Europe, the United States of America, and Africa.

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