ABUJA – Rumors about Africa’s largest Fast Moving Consumer Goods (FCMG), Shoprite, exiting Nigeria caused a stir. In August 2020, Bloomberg reported Shoprite’s planned exit from Africa’s largest market, with media publications making reference to Shoprite’s announcement to classify its retail supermarkets in Nigeria under “discontinued operations” during an operational and voluntary trading update for the year ended June 28, 2020.
“Following approaches from various potential investors, and in line with our re-evaluation of the Group’s operating model in Nigeria, the Board has decided to initiate a formal process to consider the potential sale of all, or a majority stake, in Retail Supermarkets Nigeria Limited, a subsidiary of Shoprite International Limited,” Shoprite noted. A few days later, these reports were updated with news of Shoprite’s intention to evolve into a franchise with opportunities for local investors to synergize for growth and expansion – rather than abandoning Nigeria where the South African brand has capped over $30 billion in investments.
More apt today is Shoprite selling all its stake in Retail Supermarkets Nigeria Limited, a move awaiting final approval from the Nigerian Federal Competition and Consumer Protection Commission (FCCPC). Given that there is hardly a smoke without a fire, let us probe further the circumstances that put ‘Shoprite’ in the same sentence as ‘exiting Nigeria’ with a view on the impact of market forces on Nigeria’s foreign direct investments (FDI).
Case Study: A retail giant versus the giant of Africa
My first reaction to news about Shoprite’s planned exit was, “where is the case study?” I reckon that available data on how Shoprite scaled operations, including navigating the complex cultural contours of market socialization in Nigeria, will enrich scholarship on economics in Africa’s most populous nation. While discussing business frameworks for fixing healthcare in Nigeria, Dr. Ola Brown, @NaijaFlyingDr, once tweeted a phrase that appeals to my reasoning: “There are two forces that can act on a start-up in Nigeria, Market forces and Evil forces.” If Shoprite is giving up on Nigeria after having its billion-dollar success story make waves, then Shoprite fought well and should divulge how to subdue these forces.
To gain perspective on the variables that converged to trigger an imminent divestment, I spoke to Ayanda Tshabalala in Johannesburg, who has experience in global FMCG companies. She described the FMCG landscape for Shoprite in South Africa, giving context to the slippery slope called Shoprite in Nigeria. “It is interesting because, in SA, Shoprite is such a force and affordable. The brand caters mostly to LSM 4-7 and has another flagship, Checkers, which is aimed at a higher LSM market. I am quite amazed how it failed in Nigeria since Nigeria has such a huge population – therefore more profits,” she said.
Interestingly, there is a groupthink that comes to mind when considering doing business in Nigeria. Diaper Market Specialist, Raymond Chimhandamba, summarized the disposition of investment advisors when setting the Nigerian market in perspective for foreign brands: “You cannot claim to be big in Africa unless you are big in Nigeria. That is because, with an estimated 200 million consumers, Nigeria holds Africa’s biggest population and is also Africa’s largest economy. So if you are big in this market, you can certainly claim to be big in Africa.”
But Nigerians are poor. For businesses that target the middle and minority upper class, the ease of doing business in Nigeria is still shunted by infrastructural shortfalls. Businesses suffocate under market forces and economic policies that are poorly designed and implemented. Then there are evil forces, including corruption, impunity, and gross mistrust (along social, ethnic, political, and religious lines) all working together to produce stagnation and a general sense of frustration.
When we focus on Nigeria as a market, based on her population size, a key element of business strategy like Bruce Henderson’s economics of mass on fixed-versus-variable costs can be instructive. Cost advantage, resources, awareness of competition, and the ability to identify and apply unique strengths or capabilities are basic requirements for penetration and scale. Against the backdrop of Nigeria’s persisting challenges and economic reality, the masses have very low purchasing power and Nigeria as ‘a market with big numbers’ amounts to a facade.
Business Overview: The Shoprite brand in Africa
The Shoprite Group of Companies (JSE: SHP) is Africa’s largest food retailer and leading importer-exporter of grocery products. It operates more than 2,829 stores in 14 countries across Africa and is headquartered in Brackenfell, Western Cape South Africa. Shoprite, its original and flagship brand, owns 439 stores in South Africa which contributed 78% of its total business revenue in 2020 (FY 2019 restated: R147.5 billion) and spearheads growth into other parts of Africa where it currently boasts an additional 138 stores.
In Nigeria, Shoprite launched in 2005 and now has a total of 25 stores across eight states, including the Federal Capital Territory (FCT), Abuja. Shoprite employs more than 2000 people, of which 99% are Nigerian citizens. The supermarket is affordable and accessible, catering to a mass middle-income market by providing lowest prices on groceries and basic household products. It is a known brand in the FMCG space that stocks consumer packaged goods, i.e. items with high turnover rates, low prices, and short shelf lives.
FMCGs account for over half of consumer spending, characterized by low-profit margins with large sales quantities. Examples of goods that fall within this group are soft drinks, toilet paper, dairy products, cleaning products, office supplies, etc.
In its 2020 Integrated Annual Report, Shoprite noted that “the retail operating environment is significantly impacted by the state of the economy. The economic downturn impacts affordability and for many, food security. Effective application of technology is becoming essential to maintaining a competitive position.” A number of decisions were made after reviewing its performance for the year to de-risk African exposure while maintaining a competitive position on the continent. This includes reducing exposure to dollar-based costs and reducing capital expenditure allocated to certain low-performing regions.
Like every business is expected to do, Shoprite will move in a direction that is best suited for growth, value creation, and improved performance.
A compendium of rights and wrongs
Being in tune with the stress and strains of the Nigerian society, investors are now focusing on the narrative that Nigeria, as a rich nation that is ‘full of potential’, is fast becoming a heresy. For Shoprite, arriving for business in Nigeria seems to have been deliberated on a table of sentiment over large profits. The following variables and complexities are now in glaring view only from experiential learning and doing:
- The culture of grocery shopping in Nigeria is for the upper class. Most Nigerians buy groceries in the open market where they are able to bargain prices, whereas in South Africa it’s the opposite – Shoprite is all about everyday prices.
- Nigeria is haggered with policies that the government makes on a whim. In addition to the devaluation of the Naira, Nigeria’s predatory policies kill businesses however big or small, local or foreign.
- Poor infrastructure to support local and foreign companies, increases running cost from self-servicing electricity, to connectivity, water, and transportation costs for transfer of goods and services.
- Corruption in Nigeria is affecting every regulated requirement from importation, quality assurance and control etc. With an unregulated market, inferior quality products also infiltrate the market, allowing for stiff competition.
- Local policies demanding for Shoprite to increase the ratio of Nigeria manufactured products in its stocking (from 15%-60%) – whereas the quality of products manufactured in Nigeria does not align with Shoprite’s idea of quality.
- The under-development of Nigeria’s local manufacturing industry to support local production of goods for foreign FMCG companies drives the cost of importation of goods. This, in turn, drives the cost of shelf items up, placing foreign companies at a disadvantage in competition with the local market.
News about Shoprite or other sources of foreign direct investments leaving Nigeria is certainly negative and signals a weakening economy. For local supermarkets, it might become positive to take up spaces made void by such an exit, but this does not heal the wounds of abandonment, job cuts, and dwindling FDI. The cascade effect of such a move will also mean that foreign brands will approach investing in Nigeria with a tongue-in-cheek in the very near future.
With over a decade of operations in Nigeria, Shoprite has progressively influenced consumer behaviour, expanded the influence of retailers, and directed financial flows into Nigeria. With a consumer class that is expanding, there will be a rise in consumption of consumer goods, and increased opportunities for investment by local and global industry players. A balanced approach to policymaking must weigh the positive and negative implications of foreign investments, then drive the processes that guarantee a healthy financial future for Nigeria’s growing population.
It is not enough to be the giant of Africa, neither is it complimentary to remain in a perpetual state of potential. Nigeria will see progress only when the forces at work to stagnate her growth, despite hard efforts, make way for democracy, the rule of law, and fresh perspectives driven by youthful ideologies.
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