Expanding selection and commercial space carry the sector forward

Long dominated by traditional and largely informal markets, Ghana’s retail landscape is undergoing significant change. As with many African frontier markets, formal retailing is beginning to capture a greater share of spend as an expanding middle class increases consumption and becomes more demanding in terms of convenience and variety. The Ghanaian market, according to global management consultancy A.T. Kearney, is experiencing annual sales growth in excess of 10% – buoyed in part by the strong headline growth – which has led to investments from new retailers and a rise in dedicated retail properties.

Setting up shop in Ghana, however, is not without its challenges. A shortage of prime retail real estate translates into high rents, and the fact that a large proportion of consumer goods are imported leaves margins subject to currency volatility, import duties and logistics bottlenecks. On the demand side of the equation, although average income levels are rising, rapid inflation and an absence of consumer credit have the potential to slow spending in the short term. A similar confluence of events in Nigeria, for example, a larger regional retail market with similar rates of growth, led to a slowdown in beer consumption as households diverted spending to staples.

Attractiveness

In A.T. Kearney’s 2014 African Retail Development Index, a study conducted to determine the most attractive sub-Saharan markets for organised retail to enter, Ghana ranked in sixth place after Rwanda, Nigeria, Namibia, Tanzania and Gabon. Earning a weighted average score of 59 out of 100, Ghana scored highly on “country risk” (81) and “market saturation” (71), with the net score weighed down by lower evaluations on “market size” (34) and “time pressure” (41). According to research from global consultancy McKinsey & Company, 55% of households in Accra have disposal income over $5000, which is nearly twice the 29% for the national average.

“BGI chose to enter Ghana because of the economic growth buoyed by the oil discovery and resulting surge in the middle class. A number of retailers we were speaking with at the time were looking for mall space,” Morley Gordon, president of US-based commercial property developer BGI Properties, told OBG. BGI currently has a portfolio of four projects in the country. Due to the size of the country’s population, Ghana offers smaller overall prospects than much larger markets, such as Nigeria, and it is much less saturated then Kenya. But Ghana also offers greater transparency with regard to business transactions than other countries in sub-Saharan Africa.

Shopping Landscape

While traditional open-air markets continue to account for two-thirds of retail sales, followed by convenience stores and independent small grocers, most new space is coming from mass supermarket chains. Ramesh Sadhwani, the joint group managing director of Melcom Group of Companies, told OBG, “Given the cost of doing retail business and the growing competition, several big-name retailers which were formerly doing only groceries or durables are now doing both.”

Domestic grocery brands, including Melcom, Koala, Kwatsons and Palace Hypermarket, are opening up new locations in smaller urban areas, such as Takoradi, while foreign players who have entered the market include South Africa’s Shoprite and Game, with Pick n Pay also set to arrive soon. South African groups also have a stronghold on Ghana’s modern clothing and general merchandising outlets through brands such as Woolworths, Mr Price, and Truworths.

“Africa should be considered a long-term play, and even though it is set to account for only around 10% of our group turnover in the coming years, over time it is a major opportunity and justifies the investment. If you do not enter these markets early on, the barriers to entry will only increase over time,” Ian Moir, the CEO of Woolworth’s, told OBG.

Interest in West Africa has also been expressed in francophone markets by France’s Carrefour and the UK’s Tesco, although nothing has yet materialised.

Moving Too Fast

Imad Wolley, managing director of Wolley Group, a Ghanaian retail distribution firm that owns two Koala branded supermarkets in Accra, questions the degree to which such international interest in Ghana is justified.

“It is almost as though because Africa is considered the final frontier, retail groups feel compelled to come. But one wonders whether the decision is driven by fundamentals or hype and a lack of opportunities elsewhere,” said Wolley.

Ghassan Yared, CEO of local marketing and distribution group Forewin Ghana, also expresses concern that international expectations might not match the realities on the ground. “Many overseas fast-moving consumer goods and white goods suppliers overestimate the consumer base in Ghana due to buzz and reputation,” Yared told OBG. Gordon agreed, “There are only a finite number of shopping centres the country can handle for presently.”

Fortunately, for those cautioning against overaggressive expansion, formal retail is at the moment being concentrated in Ghana’s wealthier urban areas where a shortage of real estate for development is constraining growth. Furthermore, the way in which Ghana is currently expanding will also have an impact in the trajectory of the local retail sector. In Takoradi, for example, the hydrocarbons sector is expanding demand outside the capital area, but this has not inspired an increase in local retail there.

“Growth outside the capital in Takoradi is not translating into more retail nodes outside of the main cities as it is mostly male workers, not families, moving there. And in Ghanaian society, women still do most of the shopping,” Wolley explained.

Retail Centres

South Africa’s Broll Property Group, in a report published in November 2013, tabulates Accra as having 93,000 sq metres of modern retail space. This figure is expected to double by 2015 when a number of new developments open their doors. According to company estimates, Broll – which helped develop the country’s first purpose-built mall, Accra Mall, in 2009 – is responsible for developing around 70% of available modern retail space.

Among the anticipated 100,000 sq metres of new developments tapped to join the market in the near term is: the West Hill Malls project, a joint development between South African property group Atterbury and Ghana’s pension fund, which at $93m and 27,000 sq metres would become the country’s largest shopping centre when it opens in late 2014. One Airport Square, an office development by Actis containing a mall with 2000 sq metres of retail space, and the Octagon, a similar style development by Dream Reality being built on a 6500-sq-metre plot in central Accra, are also in the works. The Oxford Street Mall, also in Accra, which opened in December 2013, contains 5580 sq metres of retail space and 650 sq metres of restaurants and food courts and was developed by Ghana Libyan Arab Holding.

Welcome Developments

The new developments are being welcomed by retailers as a much needed correction that they hope will reverse the trend of surging rental rates. Over the course of 2013, the price of retail space rose by about 50% to reach between $60 and $65 per square metre, nearing the levels seen in markets such as Nigeria (at $80 per sq metre), which has larger volumes of high-income earners.

However, landlords still hold much of the leverage. “A few years ago, when there were only a few retailers willing to take a flyer on Ghana, the early adopters were able to negotiate more favourable terms,” said Gordon. “Nowadays, with so many new, non-South African retailers looking to enter, the competitive landscape is changing.” According to Gordon, the dynamics will still differ on a case-by-case basis as well-known brands looking to anchor as tenants tend to be able to secure preferential terms.

Find Land

Another factor that is likely to also keep rents on the higher side is that suitable land for development, especially in more populated catchments, is costly to acquire and attaining the necessary ownership permits and rights can be a convoluted process. “Developers are competing for premium sites in the city centre or near outer-ring highways as Ghanaians, like everyone else in the world, still value convenience and access. However, consumers are not yet into destination shopping, which is unfortunate, as land outside of town is more competitively priced and with less challenges with land titles,” Gordon said.

Maintaining modern retail facilities also requires heavy electricity consumption for refrigeration and air conditioning, adding to a tenant’s monthly bill. “We are spending $25,000 each month on electricity for a 1800-sq-foot hypermarket. The new hypermarkets coming into the malls would have to be spending double that,” Wolley told OBG.

Sourcing From Abroad

Strong logistics chains are crucial to maintaining both stock and margins in West Africa, and Ghana is no exception. Most goods, be they durable or perishable, are brought in from elsewhere, and this makes merchandising susceptible to logistical, currency and tax challenges. “Around 70% of my stock is imported and I imagine it is roughly the same for competing retailers,” Wolley said.

Tema Port, which handles the majority of arriving cargo, is highly congested and subject to lengthy bottlenecks. According to Wolley, in addition to physical delays, Customs clearance can be slow as it can often take up to three weeks for agricultural products to pass through inspection.

“This causes our customers to become frustrated as they run out of replacement stock, and costs add up for us while the cargo is sitting idle, and we still need to keep it refrigerated,” Wolley said.

Woolworths stocks food, clothing and general merchandise in its home market, but in Ghana import regulations force the retailer to adapt its offerings. “We focus only on the clothing side of the business in Africa, as it is an absolute nightmare transporting food north of the [South African] border, especially in terms of managing quality control,” Woolworths CEO Ian Moir told OBG. “As we expand our presence and new opportunities open up, we will then look at securing local food supply and moving into produce.”

Duties tag on as an additional cost associated with landing a product, and some luxury items are taxed as much as 100%. Retailers, depending on their supply chain, can also end up paying double duties in the process of getting materials to the country, such as if they originally source a good from China that arrives to Ghana through South Africa.

Consumer Spend

Retailers find themselves in a delicate situation, as their costs are on the ascent, yet they are limited in the degree to which they can pass the burden onto the end-consumer.

Despite growing income levels – GDP per capita rose from $1100 in 2009 to $1668 in 2013 – and a new-found middle class pointing to greater demand for consumer goods, currency depreciation and a concomitant increase in inflation, measured at 14.7% for the month of April 2014, is leading consumers to tighten their wallets. “In a tough economic environment, consumers are cutting down on their discretionary spend,” Peter Ndegwa, managing director of Guinness Ghana Breweries, told OBG.

The year 2013 was especially hard-hitting for consumers, as retail fuel and utility subsidies were dramatically reduced after prolonged periods in which their tariff ceilings were frozen. This resulted in year-on-year inflation for the expenditure basket of housing, water, electricity, gas and other fuels of 37.9%, and 21.4% year-on-year inflation for the transport category. In January 2014 the value-added tax rate was raised from 15% to 17.5%, a move that Pieter Swanepoel, financial manager for West Africa at BSI Steel, believes will depress consumer demand all the more, and will be reflected in the next inflation cycle.

“Less disposable income for consumers in 2014 means a shift towards cheaper consumer goods,” Yared told OBG. “Those with a long-term vision will have to drop prices even if this means losing money in the short term, as you cannot afford to lose market share and then try to gain it back later,” he said.

Outlook

In many emerging economies, the development of formal retail centres is often met with some opposition, which claims that the trend could crowd out smaller independents. In the case of Ghana, shifting income status and the arrival of international retail chains does not appear to be eroding the role of traditional markets, as the informal segment still makes up around 90% of retail activity. “Ghanaians are used to shopping in markets and like the element of touch and feel. This, as much as a lack of a delivery system and widespread credit card usage, makes online shopping a possibility only in the future,” Gordon said.

As retailers are queuing up to secure space, new real estate stock should help ease overall rental rates and provide new competition to the existing retail centres currently enjoying high foot traffic.

The cyclical challenges, including currency volatility and high inflation, will likely ease in the short term, so provided that distribution challenges are alleviated over the medium term, this 25m-person market could offer significant scope for investment growth.