Expanding consumer market: In line with the growth of the middle class, formal retail activity is on the rise

Although the domestic market is relatively small, with one of the world’s fastest-growing economies and an upwardly mobile population, Ghana is increasingly attractive for producers and retailers of consumer goods. Suddenly flush with cash, the ranks of Ghana’s high-income shoppers are growing and they are buying up imported products from $10,000 TVs and designer sneakers to high-end beers. At the same time, an expanding middle class is moving from traditional markets to mega-store shopping.

Ghana’s GDP per capita increased from $920 in 2006 to $1570 in 2011. The country was ranked the second best destination for retailers in sub-Saharan Africa, after South Africa, in a 2013 survey conducted by Barclays Bank. The retail industry grew 14% in value between 2006 and 2011, buoyed largely by increased sales of fast-moving consumer goods (FMCG), UK-based research group Euromonitor reported. There is limited reliable data on income distribution, but merchants see clear evidence of a rising middle class. “You can see it in the cars,” said Valerie Fontanier, a retailer selling Birkenstocks and Adidas shoes, told OBG. “Just 15 years ago there were only big sport utility vehicles or tro-tros (minibus shared taxis) made of wood.” Now, however, the streets are filled with mid-range cars.

Eager to tap into demand from these new consumers, formal retail outlets are moving into Accra and expanding across the country, with the rate of growth for formal retail activity increasing significantly. When Koala opened one of Accra’s first formal supermarkets in 1989, locals referred to it as the obroni (“foreigner” in Ashanti) store. Today, there are more than seven supermarkets on just one stretch of Spintex Road in Accra. The city did not get its first mall until 2008, but the total will rise to five by the middle of 2015. Locally owned superstore Melcom has grown from one location in 1991 to 25 in 2013, with three additional stores under construction. South Africa’s major retailers are all now active in Ghana, including Shoprite, Massmart (now 51%- owned by Walmart) and Woolworths.

Formal retailers continue to face a variety of challenges, from securing adequate space to informal competition and operating in a cash economy, but with GDP on track to grow another 8.7% in 2013, selling to Ghanaians remains a lucrative endeavour.

CHANGING PRODUCTS: As incomes have risen, retailers have found success with increasingly sophisticated product lines. Imports of consumer durable goods rose some 39.2% in 2012 to $18.1m, while nondurable goods imports increased 25.6% to $34.1m. “Some 15 years ago you couldn’t find anything here,” Fontanier told OBG. “Now you can find everything, but it is all expensive.”

When Melcom opened its first store in 1991, the firm carried mostly entry-level electronic products. Today, the store stills sells entry-level brands but has added a number of higher-end global brands that range from housewares to non-perishable foods. Ramesh Sadhwani, joint group managing director of Melcom Group of Companies, told OBG. “Even five years ago, we would hardly carry a 40-inch LCD/LED TV,” he said, “Today we carry 60-inch to 70-inch TVs. These sell for up to GHS10,000 ($5141) a piece.”

Even as upper-income Ghanaians have more money to spend on retail and consumer electronics, retail growth depends on targeting a broader audience with Inflation, Jan-July 2013 (y-o-y % change)* FMCGs. “Food seems to be the driver of growth,” Imad Wolley, the managing director of Koala supermarket, told OBG. Shoprite’s grocery retail sections serve as an anchor tenant in several of Accra’s planned malls and Massmart’s biggest store brand, Game, which was traditionally focused on the sale of general FMCGs, has added non-perishable food and groceries to its selection.

MARKETS TO MALLS: Formal shops remain in the minority in Ghana’s retail landscape, but Ghanaians are increasingly making the shift from shopping at informal markets to the new wave of retail stores.

“In the last few years the formal market has grown,” Sadhwani told OBG. There was not much formal retail in 1991 when Melcom opened its first store. Now about 5-10% of shopping is formalised. Indeed, as is often the case in emerging markets, the competition in the little-penetrated market is welcomed, for as formal chains increase their footprint, they educate and upgrade the overall market. Since Shoprite and Game entered the market and expanded, for example, Koala has seen its sales increase. “Their expansion is changing the culture,” Wolley told OBG.

Most of the malls in the country are relatively small – at an average size of about 5000 sq metres, they are a far cry from the massive structures that dominate shopping in Middle Eastern markets. The continued popularity of street stalls and small shops means the informal retail segment still makes up about 90% of all retail activity. The country’s malls, on the other hand, tend to attract high-end retailers and have a relatively wealthy clientele.

RETAIL PROPERTY: The West Hills Mall in Accra will be West Africa’s largest shopping mall when it opens in October 2014. The $93m project is a joint venture between Delico Property Developments, a subsidiary of South Africa’s Atterbury Property Group (60%), and Ghana’s Social Security and National Insurance Trust (40%). Anchored by Shoprite and Palace supermarkets, other tenants at the facility are due to include Woolworths, Mr. Price and Truworths.

Formal retail, however, remains largely confined to Ghana’s bigger cities, where the wealth is concentrated. The country’s three operating malls, Accra Mall, Marina Mall and A&C Mall, are all located in the capital city. The Meridian City Mall is scheduled to open in Accra’s Tema suburb in 2015. South African investment group Western Development Consortium is planning an 8.7-ha mall in Takoradi, Ghana’s oil city, and the Accra Mall will open a subsidiary in Kumasi, the capital of the Ashanti region. The Kumasi Garden City Mall will host many of the tenants that anchored Accra Mall when it opened as Ghana’s first modern retail centre in 2008, and the tenants, including Shoprite, Game and Mr. Price, have requested bigger retail spaces in the new facility, Accra Mall’s CEO, Alex Bruks, told local media.

Home grown chain Melcom maintains the largest retail footprint, with 26 stores in locations as far flung as the northern city of Tamale and southern city of Techiman. However, while Melcom developed several of its store sites in Accra and Kumasi, the company rents locations in smaller cities throughout the country. “We’re looking at some of the markets outside Accra,” said Sadhwani.

REAL ESTATE CONSTRAINTS: The expansion of high-end mall real estate will go a long way to ease one of the biggest challenges formal retailers faced in the country – limited availability of adequate retail space. “Finding real estate is the biggest challenge,” said Wolley. Similarly, Fontanier obtained the licence to distribute Adidas in Ghana and planned to open her first location in May 2012; however, due to difficulties finding an appropriate site, the store will not open until March 2014. As is the case in many African countries, “land acquisition and registration is a nightmare,” Sadhwani said. When Koala sought to expand, it took nearly five years for the firm to register the property. Both Koala and Melcom are building land banks to prepare for future development.

Meanwhile, the rents at Accra Mall increased 300% in October 2012. “When the new malls come on-line, there will be rent dilution,” said Fontanier, who runs GDP per capita, 2003-12 Nutmeg, a clothing and shoe store, at the location. “But for now, there is nowhere else to go.”

However, developers are beginning to invest more in land specifically with the goal of creating retail space in mind. Mixed-use properties are also becoming a viable option and as developments pick up in the coming years increased competition will likely have an impact on the range of customers and tenants at the country’s shopping centres.

FINANCING: Limited consumer credit also poses challenges to retailers trying to sell to upwardly mobile Ghanaians. While household loans are growing in value by double digits annually, most Ghanaians do not have access to banking tools. When Fontanier opened her Nutmeg shop in 2006, she decided to sell on a cash-only basis. Many observers told her she would fail, as Ghanaians were accustomed to shopping on lay-away or buying on credit from the shopkeeper. However, her cash-only strategy has been a success, she told OBG, and she has seen other Accra Mall tenants discard lay-away and shop-credit mechanisms.

The vast majority of sales at Melcom are cash purchases. But in 2011, Melcom partnered with Fidelity Bank to offer consumer loans of GHS300-1000 ($154-514). The bank offers 12-month interest-free facilities, and the store subsidises the bank’s lending costs. The scheme has worked for a year and more banks are looking to partner with Melcom, Sadhwani said. Indeed, the value of loans to households grew 29.3% in real terms in 2012, after a 24.2% increase in 2011, according to the Bank of Ghana.

OTHER CHALLENGES: Retailers face common constraints to other businesses in Ghana, including excise taxes, unskilled labour and foreign exchange risk. As little manufactured goods can be sourced locally, the bulk of goods for sale are imported, meaning merchants face growing delays at Tema Port.

“Bottlenecks, especially at the ports, have been a major issue. Even in terms of general trade and imports the government has not really prepared for this influx,” Ashok R Mohinani, executive director of the Mohinani Group, told OBG. Durable goods and clothing sold at the malls are almost exclusively foreign, most of which are subject to a 100% luxury tax, raising prices further. The market for higher-end clothing and electronics thus remains small.

The consistently depreciating cedi causes its share of problems. Melcom, for example, carries 45,000 stock-keeping units, and as the cedi falls, it is impossible to change prices quickly enough. Hiring can also be an issue. “Labour in the country is often unskilled and unproductive,” said Sadhwani.

OUTLOOK: Ghana’s retail sector offers enormous potential for growth. Nutmeg’s business grew 300% in the last six years. Fontanier is now working with Adidas to open four stores by 2015. In the short term several internationally managed mall properties will open up outside of Accra, resulting in a significant expansion of space available to retailers. “There is still a lot to look at in Ghana,” said Sadhwani.