Underlying fundamentals drive growth in the Nigerian retail market

Following a decade-long period of growth, in which formal retail supplies more than tripled, Nigeria’s retail sector faced several challenging years. Macroeconomic volatility, a recession in 2016 and the naira’s rapid depreciation impacted retailers and consumers alike. Likewise, both purchasing power and household incomes declined, while input costs and vacancy rates simultaneously increased. Despite these recent economic challenges, the country remains one of Africa’s most attractive retail investment destinations for local and foreign investors.

As retailers move to capitalise on opportunities in the sector, stakeholders anticipate that developers will increasingly shift their strategy towards smaller, localised retail developments offering essential grocery, pharmaceutical and clothing items. In the longer term, resurgent middle-class growth, supported by improving oil prices and strengthening macroeconomic fundamentals, should see a return to large scale, high-end regional and mixed use retail centres.

Market Snapshot

Although formal retail development has accelerated since the early 2000s, the sector continues to be dominated by traditional open markets and kiosks. According to local media reports, as much as 95% of the country’s retail market is informal, and in November 2017 market research firm Nielsen reported that hypermarkets and supermarkets accounted for 26% of consumer spending, with 76% of consumers shopping at open markets an average of 10 times per month. A further 61% of Nigerians visit kiosks approximately 20 times per month, accounting for 12% of overall grocery expenditures.

Nigeria’s retail sector was lacking a variety of formal retail space prior to 2004 and 2005, when the country’s first large, modern shopping centres opened, successfully tapping into previously unmet demand and drawing investors to the market.

Consumer Class

Nigeria’s growing population and rising middle class have led it to become a highly attractive retail destination in Africa. The UN projects that the population will increase from 198m in 2018 to 400m by 2050, which will transform Nigeria into the world’s third-most densely populated country after India and China.

Although the middle class was greatly impacted by currency depreciation and the recent recession, overall its growth has been strong since the turn of the century. Standard Bank estimates that between 2000 and 2014 Nigeria’s middle class expanded by 600% to reach 4.1m, and the bank anticipates that an additional 7.6m households will attain middle class status by 2030. Accordingly, the World Bank reports that GDP per capita soared from $379 in 2000 to $1383 in 2008, peaking at $3321 in 2014.

In a landmark 2013 study examining the country’s retail prospects, global consulting firm McKinsey projected that between 2008 and 2020 the food and consumer goods segment will have grown by $40bn, largely stimulated by increases in real GDP, expansion of the middle class and consistently rising levels of female employment.

Estimates of the current size of the country’s middle class vary. In 2013 the African Development Bank said that 23% of the Nigerian population, or 34.5m people, were considered middle class. This comprised of a 19.5m-strong “floating class”, meaning they could easily revert into poverty, a lower-middle class of 9.3m; and 5.7m upper-middle class citizens, with the majority living in Lagos and other comparable urban centres. This segment of the population has driven a huge proportion of new consumer spending, supported by service sector growth in the banking and telecommunications industries.

Urbanisation

The burgeoning middle class is also supported by increased urbanisation. McKinsey reports that as of 2011, nearly half of the country’s population lived in urban areas, a number that increases by about 4% annually. This makes Nigeria one of the most urbanised countries in Africa. Eight Nigerian cities, accounting for 16% of the country’s population, are forecast to drive 36% of the total growth through to 2020. Between 11% and 18% of urban households – amounting to more than 2m in total – had annual incomes of more than $10,000. According to McKinsey, this places them in the “modest affluent” class, and the firm projects that between 2008 and 2020 as much as half of the country’s wealth growth will come from households in this bracket. The emerging middle class, defined as households earning more than $5000 annually, is projected to make up 27% of the population by 2020. This is an increase of 20% from 2013, putting them immediately within the prime target customer range of many formal retail chains.

Macro Turbulence

Although the McKinsey report concluded with extremely positive short and mid-term forecasts for the sector, Nigeria’s economic trajectory has changed considerably since 2013.

In mid-2014 global oil prices began to plummet, and Brent crude fell from around $115 per barrel in June of that year to just over $30 in early 2016. Oil prices remained subdued and only recovered to the $80 per barrel mark in mid-2018, significantly disrupting Nigeria’s primarily oil-dependent economy. The country went into recession in 2016, and real GDP growth shrunk by 1.62% after reaching 5.39%, 6.31% and 2.65% in 2013, 2014 and 2015, respectively.

Foreign exchange reserves declined when oil export receipts began sinking, and in 2016 the Central Bank of Nigeria (CBN) attempted to alleviate the shortfall by removing its currency peg. Subsequently, the naira quickly fell by 30% against the US dollar, accelerating a trend that had been developing since oil prices began to fall. “Nigerian companies still lack adherence and compliance to international corporate standards, which are crucial factors in attracting foreign investors,” Olaide Agboola, CEO of Purple Capital, a local investment firm, told OBG.

Falling Incomes

This economic and currency volatility has had a measurable impact on household incomes and spending. The World Bank revealed that GDP per capita in current US dollars fell from the 2014 peak of $3328, down to $2655 in 2015, and $2175 in 2016. Inflation has been affected as well, with the annual consumer price inflation rising from 8.06% in 2014 to 9.02% in 2015 and jumping to 15.7% in 2016. The World Bank’s consumer price index (CPI), which in 2010 measured consumer price inflation from a baseline of 100, rose from 145.8 in 2014 to 158.94 in 2015, and 183.85 in 2016. The CBN, meanwhile, reports that its CPI rose by 16.5% for the 12-month period ending in December 2017, and the country’s inflation rate hit 15.37% in the same year. This was heavily influenced by rising housing, water, electricity, gas, fuel, education and transport prices, among others. The CBN outlined a target headline inflation rate of 12.54% in 2018. However, inflation remained elevated during the first half of the year, with the National Bureau of Statistics reporting that the CPI rose by 14.8% in the 12 month period between May 2017 and May 2018.

Retail Impact

In November 2017 Nielsen revealed that Nigerian consumers had become increasingly more price conscious as a result of the high inflation and subdued economic growth.

Approximately 70% of the Nigerian shoppers surveyed by Neilsen stated that they were aware of the prices for standard grocery store items, while more than 95% noticed when those prices changed. A further 60% of shoppers said that they were cutting back on luxury grocery items and buying only essential basket items, and 27% reported buying less groceries overall. A further 23% were buying in bulk to save money, while 17% had switched to cheaper products. According to Nielsen’s insights, the fast-moving consumer goods category that was most affected by inflation was fruit juice, with 93% of shoppers saying they bought less of this product. Next hit items were carbonated soft drinks and mineral water (92%), fresh meat and seafood (91%), and laundry detergent and household products (91%). Some 76% of shoppers said they were influenced by promotions, and 21% said that they would switch stores based on which one offered the most appealing or relevant price promotions, regardless of location. Approximately 92% of Nigerian consumers carefully consider their choices prior to purchase, and 86% attest that they maintain a strict grocery budget. However, 82% of respondents admitted to making the occasional unplanned or impulse purchase.

Stalled Malls

Most formal retail space in Nigeria is rented in US dollars. In its September 2017 report examining Nigeria’s retail real estate, market researcher estate intel found that retailers who relied on imports to restock struggled with the dual burdens of rising product prices and rising rents. Illustrating this, South African discount clothing retailer Mr. Price closed a store in Ibadan, and moved all remaining stock to Lagos.

In the aftermath of the recession, many shopping centres in development phase were stalled, and estate intel found that construction on RMB Westport’s planned 28,000-sq-metre Sunrise Hills Mall in Asokoro as well as its Royal Gardens Mall in Lekki, Lagos were both suspended. Additionally, property developer Resilient Africa had planned to build a portfolio of shopping malls in second-tier cities, but progress was adjusted for the prevailing economic conditions. According to estate intel, malls that were originally intended to be 12,000 sq metres were adjusted down to 8000 sq metres on average, and nearly 12,000 sq metres of cumulative retail space was lost in 2016 and 2017. This was a direct result of demand-led project adjustments reacting and adjusting to a stagnant market.

Road to Recovery

Of the 30 countries surveyed for global consulting firm AT Kearney’s 2017 Global Retail Development Index (GRDI), released in January 2018, Nigeria fell from 19th to 27th place. The firm’s numbers show that total national sales fell to $109bn in 2017, down from $125bn the previous year. Low oil prices, security threats and corruption were cited as the biggest challenges weighing on retail growth, however, the GRDI found that Nigerian retail’s long-term prospects remain positive, supported by the budding middle class, the growing popularity of formal retail space and the rapid rise of e-commerce (see analysis). This view has been reiterated by a variety of stakeholders in Nigeria. With the World Bank reporting that in 2017 real GDP grew by 0.81%, the country’s broader return to macroeconomic growth will also support a retail recovery.

Consumer Confidence

Consumer confidence also improved in 2017, though sentiment slipped during the first quarter of 2018. Nielsen Africa stated in March 2018 that Nigeria gained five points on its consumer confidence index (CCI), closing 2017 at 122 points. The percentage of Nigerians that reported feeling positive that their finances would improve over the next 12 months rose by 9% to reach 84%, while the proportion of people expecting their job prospects to improve rose by 3% to hit 65%. Some 54% of respondents recorded extra income after meeting essential living expenses, marking an increase of 9%.

In May 2018, however, the proportion of people with positive outlooks for their personal finances fell to 78%. Concurrently, the CCI slipped by nine points to 113 and the percentage of those who anticipated improved employment prospects over the following 12 months dipped to 56%. Nigerians’ immediate spending intentions fell by 5% to 38%, and consumers who reported having spare cash after meeting living expenses fell by 9%, down to 45%. According to Nielsen Africa’s survey, 84% of Nigerians are committed to a savings regime, with 76% hoping to invest in home improvements and 68% preferring to spend surplus money on items like new clothing.

Investment Trajectory

Although in recent years a volatile macroeconomic backdrop has reduced retail growth, the sector has remained attractive to investors. At the same time, the latest massive influx of formal space will likely lead developers to alter their investment strategies.

Retail space in the country grew by an average of 38% annually between 2004 and 2017, rising fastest during the boom era between 2009 and 2015, when the annual growth rate increased to 40%. Formal retail supply rose from 30,000 sq metres in 2008 to 199,600 sq metres in 2015, 298,500 sq metres in 2016 and it was estimated to reach 313,500 sq metres in 2017. Of the 27 modern retail centres operating in the country as of August 2017, 63% had been developed by domestic investors and just 34% originated from foreign investors.

According to local media reports, the country attracted $1.5bn worth of investment in the formal retail sector in the period between 2014 and 2017.

Notable recent and upcoming shopping centre developments include Royal Gardens Mall and Novare Gateway mall. RMB Westport’s Royal Gardens, budgeted at $170m and originally anticipated to open in November 2017, will eventually offer just under 30,000 sq metres of formal retail space in Lagos. The $68m, 15,000 sq metre Novare Gateway mall, opened in December 2017, was developed by South African private equity firm Novare Equity Partners. Its opening lowered the average rent for retail spaces of 100-200 sq metres to $43 per sq metre a month in the fourth quarter of 2017, up from $44 in the third quarter. Novare Gateway mall joins Novare’s 8267 sq metre Apo mall located 18 km away, as well as Novare Lekki Mall, which opened in August 2016 and, at 22,000 sq metres, is the largest in Lagos State.

Major developments scheduled to open include the 48,000 sq metre Twin Lakes Mall in Lagos, under development by UK private equity firm Actis, and the 40,000 sq metre Abuja Capital Mall, part of the $1bn Abuja World Trade Centre which is expected to reach completion before the beginning of 2019.

There is also the 7000 sq metre Central Office Park, located at Novare’s mixed-use development in Abuja, as well as the 6000 sq metre Oshogbo Mall, planned to open by end-2018, which will be Osun State’s first enclosed formal retail centre.

Secondary Market

Nigeria’s retail market in secondary locations continues to struggle with shallow tenant pools and reductions in the expansion plans of existing retailers. According to estate intel, there were no new deliveries recorded in the secondary market during the fourth quarter of 2017, but due to the subdued take-up of retail space, rental rates continued to fall, without increases in supply. Average asking rates for spaces ranging 100-200 sq metres dropped to $27 per sq metre per month, down from the $30 in the third quarter of 2017.

Macroeconomic volatility, oversaturation and limited tenant demand will likely cause developers to update their strategies moving forward. Estate intel reports that retail rents, which average $55 per sq metre a month nationally, have become increasingly unaffordable in the wake of the country’s currency crunch. Subsequently, vacancies in major retail centres rose by approximately 47% in 2016.

This means that future retail developments will likely be smaller and increasingly focused on catering to specific neighbourhoods, with emphases on accommodating basic needs like groceries, pharmaceutical products, services, white goods, food and essential fashion, rather than large-scale, mixed-use projects and regional shopping centres. Developments like these would offer lower rents and be more attractive to tenants, with estate intel estimating they will average between 7000 sq metre and 13,000 sq metres, which is roughly half the size of traditional large-scale formal retail developments in Nigeria.

Outlook

Although wholesale and retail trade growth diminished in the first quarter of 2018, consumer confidence remained low and formal retail vacancy rates stayed elevated. Nevertheless, Nigeria’s retail segment retains considerable mid- and long-term growth potential. When global oil prices rebounded to $80 per barrel in 2018, the foreign exchange crunch gradually began improving and macroeconomic stabilisation is expected to continue. As a result, consumer sentiment and purchasing power should improve within the next few years.

A potential shift away from large-scale formal retail developments and towards smaller neighbourhood shopping centres will also support industry growth, possibly helping to guide more Nigerian consumers into the formal retail space. Evidently, there is significant scope for further development.

Low levels of formal retail penetration, combined with steady and continuous population growth, will encourage long-term retail development, despite more immediate challenges such as market saturation and wavering degrees of consumer confidence.