Expanding middle class fuels retail growth in Nigeria

Home to the largest consumer market on the continent, Nigeria offers attractive opportunities for investors and retailers that apply growth strategies tailored to specific consumer preferences and take into account distribution challenges. While macroeconomic headwinds and currency volatility have weighed on consumer spending power in recent years – particularly since the drop in international oil prices in mid-2014 – price sensitivity is leading to new opportunities for smaller packaging, localised retail developments and the sale of essential goods.

Market Structure

The Nigerian retail market remains relatively fragmented and largely dependent on informal sales channels such as neighbourhood markets and kiosks, which account for upwards of 90% of retail activity in the country. Although the formal retail segment has made significant strides since the early 2000s, effectively tripling its footprint in less than a decade, the twin challenges of the Covid-19 pandemic and recent political unrest are expected to reinforce customers’ reliance on informal channels for the purchase of many essential, non-durable goods. E-commerce, meanwhile, stands to benefit in the post-pandemic era, as merchants and platforms look to convert the shift many middleand high-income residents made to online shopping during the lockdown into a more permanent pattern of consumption in the years ahead (see analysis).

Performance

The wholesale and retail trade sector – which accounts for approximately 15% of total GDP, making it the second-largest individual contributor to the Nigerian economy – contracted by 0.63% in 2018 and 0.38% in 2019, according to data from the National Bureau of Statistics (NBS). With traditional in-person shopping limited by lockdowns, and many households facing tighter budgets, the sector contracted by 8.49% over the course of 2020.

However, retail activity showed signs of recovery by the end of 2020. In the fourth quarter wholesale and retail trade GDP contracted by 3.2% year-onyear (y-o-y), an improvement from the 12.12% y-o-y decline posted in the third quarter. Accommodation and food services, meanwhile, registered a 15.03% y-o-y fall in the final quarter, up from -22.61% between July and September 2020.

Fitch Solutions, the research arm of the international credit ratings agency, projects that real household spending in Nigeria will begin to recover in 2021, forecasting 1.7% growth, albeit from a low 2020 base. With lockdowns and other restrictions on movement anticipated to be cyclically enforced and loosened in response to further outbreaks of Covid-19, spending and government support is likely to fluctuate. As such, the agency expects consumer spending to return to pre-pandemic levels closer to the second half of 2022 or the first half of 2023.

Purchasing Power

Nigeria’s large, expanding population and growing middle class are bright spots in its retail outlook: according to the UN, the population will reach 400m by 2050, up from an estimated 206.1m in mid-2020, which would make it the third-largest country in the world after China and India. The middle class has also expanded significantly since the turn of the century, rising by 600% to an estimated 4.1m households in 2014, or 11% of the population. According to pre-pandemic forecasts by US-based management consulting company Kearney, this was projected to increase to 11.7m households by 2030. While the 2016 recession and associated currency instability slowed middle-class income growth in the years leading up to the Covid-19 pandemic, this consumer segment remains a large and expanding force with an estimated combined purchasing power in excess of $28bn per year.

As is customary in many emerging markets, the bulk of household expenditure in Nigeria is directed towards food. Of the N40.2trn ($107.3bn) in household spending on food and non-food items in 2019, 56.7% was spent on food, according to the most recent “Consumer Expenditure Pattern” report from the NBS. However, this share has declined over the past decade, when it represented 60.2% of household expenditure in 2009/10. Food consumed outside of the home was the largest category of overall spending in 2019, representing 20.19% of food expenditure and 11.43% of total expenditure.

In terms of non-food expenditure, retail-related categories are broadly outweighed by spending on essential services such as transport, rent, health, education, telecoms and fuel. Clothing and footwear were the next-highest recipients, accounting for a combined 10.46% of non-food spending and 4.53% of total spending, while household goods made up 6.55% and 2.84%, respectively.

Although the majority of the population lives in urban areas – 51.2% as of 2019, according to the latest data from the World Bank – rural areas contributed a slightly larger share of total household expenditure, at N21.1trn ($56.3bn), compared to N19.1trn ($51bn) among urban households.

Changing Consumption

In the face of the pandemic, both brick-and-mortar and online retail players observed a shift in household purchases away from discretionary spending and towards food, hygiene products and other essentials. Indeed, Nigerian trade distribution platform TradeDepot recorded a 10% increase in the contribution of food items to its distribution volumes in 2020.

A combination of inflation and lower household incomes prompted many consumers to purchase essentials like detergent in smaller packages, or sachets, of 25, 90 or 190 g. While this so-called “sachet economy” is a mainstay in many emerging markets, its uptake in Nigeria has been accelerated by the pressures of the pandemic. A wide variety of fast-moving consumer goods (FMCGs) are sold in similar smaller quantities, including soft drinks and shampoo. Although smaller packaging is attractive for budget-conscious consumers, the unit costs are often much higher than for bulk quantities and they have many associated environmental disadvantages. However, given the economic pressure on incomes, combined with rising inflation, analysts expect this trend to expand to more retail products.

Another trend in FMCG is a focus on meeting global standards and sustainability. “Companies that produce FMCGs are increasingly making it mandatory that their service providers adopt quality and food safety management systems,” Ohioze Unuigbe, country CEO of certification provider Bureau Veritas, told OBG. “Firms are also adopting environmental social and governance criteria to facilitate sustainability.”

Inflation

Alongside metrics like employment and the level of disposable household income, inflation is a useful indicator of purchasing power in Nigeria, and can be an important determinant of consumer confidence and behaviour. The consumer price index registered a 16.47% y-o-y increase in January 2021, according to the NBS, up from 15.75% in December 2020. In rural areas it was slightly lower, at 15.92%, compared to 17.03% in urban areas. This puts Nigeria’s inflation above the average for sub-Saharan Africa and on a par with the level of inflation witnessed after the recession in 2016. Notably, higher prices were observed in the NBS’ composite food index, which was up by 20.57% in January 2021, compared to the 19.56% increase seen in December 2020.

Consumer Confidence

Unsurprisingly, given the effects of the Covid-19 pandemic, the most recent “Consumer Expectations Survey” from the Central Bank of Nigeria (CBN) published in December 2020, paints a similarly pessimistic picture. However, the survey notably measured positive outlooks among many respondents for the first quarter of 2021 and the coming 12 months. The CBN attributed this to expected increases in net household income, an improved macroeconomic backdrop and confidence in household savings levels. Overall confidence in the fourth quarter of 2020 stood at -14.8 points, whereas confidence for the first quarter of 2021 and full-year 2021 registered at 10.5 and 28.9, respectively. As is often the case during financial tumult, the majority of respondents signalled that they did not plan to make large purchases such as vehicles, homes or land in the next year, while also expressing expectations that inflation and borrowing costs would rise in 2021.

Formal Retail

The Nigerian real estate market saw strong demand in the retail segment in 2019, largely from local players, according to research from Broll Property Group, a South Africa-based commercial property services firm. The retail vacancy rate eased to 16.7% that year, helped in part by more favourable leasing conditions offered by shopping centres looking to fill unused space. Several flagship malls opened over the course of the year, including the 8000-sq-metre Landmark Retail Boulevard mall in Lagos, the 5000-sq-metre Osogbo Mall in Osun and the 5000-sq-metre Simbiat Mall in Lagos.

With lockdown measures coming into effect from March 2020, the year was an understandably difficult one for many retailers in the experiential retail segment. The market also saw a wave of looting and property destruction as a result of political unrest that escalated in October 2020. However, by the second half of the year Broll reported that the majority of malls in the formal retail space were operating at near-100% capacity. While the consumer basket value was lower during the Christmas shopping season in 2020 compared to the same time the previous year, the period was nevertheless a bright spot for the market, with foot traffic and trading activity reaching their highest levels since before the lockdown.

While some tenants were unable to continue their leases due to the pressures of the pandemic, Broll noted that the overall rate of collections by retail landlords improved in the second half of the year, facilitated in part by policies made to accommodate tenants in difficulty. In terms of new retail leases, the majority of demand in that period stemmed from fashion, beauty, personal care, and food and beverage outlets, the bulk of which were for spaces measuring 150 sq metres or smaller. By the close of 2020 the vacancy rate had declined to 12%, compared to 16.3% in the middle of the year.

Market Exits

Recent years have also seen a number of foreign retailers exit the Nigerian market. Australia’s Woolworths supermarket chain, for example, closed its operations in the country in 2014, followed by South Africa-based Truworths clothing retailer in 2016. In June 2020 Mr Price, a South African clothing and home goods retailer, similarly announced plans to wind down its Nigerian operations, following the company’s departures from the Australian and Polish markets in 2019. Most recently, South Africa’s Shoprite supermarket giant concluded the sale of its Nigerian operations to locally owned Ketron Investment; as of early May 2021 the sale was pending approval from the Federal Competition and Consumer Protection Commission.

Foreign exchange controls and currency volatility have been two notable motivations for these exits. In an effort to conserve hard currency in the face of weaker global oil prices and a depreciating naira – its relative value dropped from $1:N160 to $1:N380 between 2014 and 2021 – the CBN has rationed the sale of US dollars, euros and other foreign currencies.

As prices for Nigeria’s Bonny light crude oil fell from around $112 per barrel at the end of 2013 to $38 by the close of 2015, the central bank issued a list of 41 imported items that were no longer eligible to be purchased through official currency exchanges, meaning importers would need to access hard currency on the costlier black market in order to pay for these imports. The items on the 2015 list ranged from toothpicks and rice, to cement and palm oil, and in 2019 textiles were added to the list – putting more pressure on clothing retailers without robust domestic production chains. These barriers to importing, along with high duties and inadequate distribution networks, have been cited by multiple exiting retailers as motivations for their departures. South African retailers have also faced protests in Nigeria, following xenophobic attacks against African immigrants in South Africa in September 2019.

Outlook

Despite the most recent high-profile exits of formal retailers from Nigeria, the continent’s largest consumer market continues to offer attractive opportunities for investors with niche strategies. For example, FMCGs producers with successful track records in established sachet economies such as India could bring their experience to Nigeria, where low household incomes and macroeconomic volatility are likely to keep many consumers focused on affordability. At the same time, smaller, localised retail developments geared towards essentials like groceries could prove successful in the post-pandemic landscape, alongside e-commerce platforms looking to cement a foothold among increasingly mobile-savvy segments of society (see analysis).