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Shoprite exits Nigeria: Is the Nigerian market impenetrable?

| International retailers

"Nigeria is a largely informal market and there are a lot of businesses that have gone there and thought it is a good opportunity to consolidate and introduce some formalisation because that has worked in SA, but that does not work in countries outside of SA."

These are the words of Lulama Qongqo, an investment analyst at Mergence Investment Managers who is of the view that South African companies fail in Nigeria because they do not understand the market and apply strategy that is not tailored to that market.

The continent's largest grocery retailer, Shoprite, is the latest South African player to exit Nigeria.

The Christo Wiese chaired retailer, which has been in the country for 15 years, announced the move on Monday with its year-end results.

Shoprite has 25 stores in Nigeria, all of which will be discontinued by a later communicated date.

Retail analyst Syd Vianello said he was impressed with this decision by Shoprite's new management.

"Engelbrecht [Pieter Engelbrecht the chief executive officer of Shoprite] has taken a good decision to exit Nigeria and I think he may even exit a few other marginal operations in Africa. Nigeria has become a problem; the lines of communication are hard, and it is difficult to get goods into the country because of customs duties. The currency is volatile.

"Angola is also very problematic, and I would not be surprised in time if they think of exiting Angola. We are going to see far more emphasis on the South African business rather than the African business," added Vianello.  

Shoprite shares have plunged 57% since March 2018, while the JSE All Share has weakened to under 18%.

Since Shoprite's first foray outside the country's borders into Zambia in 1995, the retailer once led by Whitey Basson was heralded as the most successful South African operator on the continent. But over the past 25 years, sales outside the country still only make up 11.6% of overall sales.

But why are SA companies not able to penetrate the Nigerian market?

Qongqo said South African companies overestimated their capabilities and attractiveness of their product offerings moving into the Nigerian market and forgot different countries have different cultures and tastes because the strategy that worked in South Africa might not work in Nigeria.   

"Companies do not do enough due diligence. Taking your same offering and going out of the country selling it at the same price point is not going to work. The thinking that people should aspire to shop our product is damaging. Even though the Nigerian economy is big and growing fast, which is usually the selling point, the GDP per capita is so low," she added.

Vianello said the culture in Nigeria was different as "people still prefer to buy from street vendors. The most difficult problem they have is the lines of communication. They have a massive but skewed population compared to SA between lower-income and upper-income earners".

He added the strategy Shoprite used to enter the Nigerian market was to appeal to the higher-end customer, but this proved challenging when they had to expand.  

"They had to roll out stores in 'mainstream Nigeria' which is not Lagos or Abuja but all the other cities of the lower-end resident who earns a low salary. The average Nigerian cannot afford luxury items sold at Shoprite."

Distribution in Nigeria was also a problem that might have contributed to Shoprite discontinuing its operations, said Vianello.

"Distribution is near impossible, with being far away and the problems in landing goods at the port, the bribery that takes place with payment of duties. I think that Engelbrecht has just decided that he does not need it. There are more opportunities in SA than Nigeria and that's why he is doing it."

Qongqo said this was the right move for Shoprite "because if you can't grow to the extent that you can get to critical mass and operate profitably in a sustainable manner then it makes for a poor investment".

South African retailers have struggled in the Nigeria market. This exit follows the recent retreat of Mr Price which exited the country after Truworths pulled out as well.

"The market is tough out there especially the Nigerian market which needs Nigerians who understand it, you have to have the courage to admit when you've lost and I think this is it. It would continue to hurt pensioners if they chose to stay there indefinitely just out of pride," said Qongqo.  

Group sales rose by 6.4% to about R156.9 billion in the 52 weeks to June 28, the group said in a trading update. As a result of the lockdown, customer visits declined by 7.4%, while the average basket spend increased by 18.4%.

However, international supermarkets (excluding Nigeria) contributed 11.6% to group sales, and reported a 1.4% decline in sales from 2018. South African operations contributed 78% of overall sales and saw 8.7% rise for the year.


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