Nigeria: Retail rules

As the most populous country in Africa – and one recently experiencing some of the highest and most sustained GDP growth anywhere in the world – Nigeria is going through the early days of a major boom in its retail sector.

This is affecting everyone from white goods manufacturers to commercial real estate developers, as the country’s 160m people play catch up with the world of consumer products.

This process was recently highlighted in a report from Renaissance Capital, which pointed out that while many of the country’s 160m Nigerians may be on low incomes, a recent period of stability and economic growth – 7.4% in the first quarter of 2011, after seeing 7.85% in all of 2010 – has created a pool of some 37m middle-class citizens.

These people fully intend to spend too, with Renaissance Capital’s survey revealing low ownership levels for a host of household appliances, electronic and electrical goods and automobiles – and an intention by many of these middle- and higher-income earners to correct that anomaly.

Thus there is clearly huge pent-up demand, with this likely to continue to swell in the immediate future. Over the last 10 years, the economy has grown from $46bn to $247bn, and the government is targeting a ranking in the world’s top 20 economies by 2020.

This means surging per-capita incomes too, from $390 in 2001 to $1541 in 2011. Of course, as an average, this figure does not take into account the inequalities of income distribution. Currently, with a Gini coefficient of 0.43 and roughly half of the population near or below the poverty line, class disparities are stark and widespread, but the burgeoning middle-class segment earns around $6000-$7000 a year, bringing the purchase of modern household goods within range.

There are, however, a number of important constraints on the Nigerian middle class’s ability to spend. First, there is a current dearth of modern retail outlets. This is most obvious in Lagos, which has a population that is estimated to reach up to 17m people, but boasts only a handful of modern shopping centres. Similarly, the grey sector comprises well above half of total activity in the retail market, which further compounds the ability of formal retail outlets to attract business. In the pharmaceutical distribution segment, for example, an estimated 60% of secondary distribution takes place through informal means, according to the IFC.

Clearly then, there is a major opportunity for retail developments in high-population, middle-class districts, with this likely to dovetail with a trend of movement to the suburbs of cities such as Lagos, given the heavy traffic congestion of island areas.

Another constraint on purchasing power is of course, inflation, which was at 9.3% in August. The government has also since announced plans to cut fuel subsidies and raise spending in 2012, moves which are also likely to add to inflationary pressures. Lower oil prices in recent months have also had an impact on the Nigerian currency peg, with the possibility of higher interest rates ahead and/or a depreciated naira, raising the cost of imported consumer goods.

Furthermore, the retail segment suffers from an underperforming distribution network, with poor infrastructure and clearance procedures dramatically lengthening delivery timelines. Some 95% of imported containers must be manually checked, for example, while road networks chock-full of potholes slow transit. This has prompted some major fast-moving consumer goods (FMCG) manufacturers to consolidate their distributor lists to streamline factory-to-outlet linkages.

Finally, Nigeria currently has a number of bans on imported products, which are ostensibly in place to encourage local production but limit the ability of retailers to stock shelves. South Africa’s Shoprite, for example, was initially unable to import more than 3000 standard items, such as oven cleaners and washing detergents, due to import restrictions.

Yet the government is certainly committed to establishing the retail sector as a major future engine of growth as it tries to diversify away from oil and gas dependency.

Speaking in New York at the International Investment Summit on Nigeria’s Economy in September, President Goodluck Jonathan identified retail as a “critical growth driver”, alongside agriculture, industrialisation, small and medium-sized enterprises, construction, telecommunications, health care and the informal sector.

The president also said that the investment atmosphere had become much more transparent in recent years, thereby driving down the costs of doing business, one of the more traditional constraints on growth. Indeed, provided the government and its agencies keep up its current campaign against graft – and continue moving towards further easing of the foreign and domestic direct investment climate – retail may see some major investments in the months ahead.