Enter The Tiger

Spurred on by a growing middle class, a large market and attractive returns on investment, South African firms such as Tiger Brands are trooping in to invest in the Nigerian retail sector. 

When Mrs Mildred Acha resigned from her comfortable job in a bank in Lagos last year, she invested her savings into poultry farming. Her investment seems to be yielding dividends. She makes good income from supplying eggs and chickens to quick-service restaurants in the nation’s bustling commercial capital. These days, she can hardly keep up with increasing demand for her products.

Mildred Acha and very many others like her are riding the crest of a booming fast-food industry that is sweeping the major metropolises of Nigeria. The growth of this sector itself is part of the explosion in consumer spending in Africa’s most populous nation.

The consumer boom and changing lifestyles in Nigeria have not gone unnoticed by some of Africa’s biggest retailers, such as South Africa’s Shoprite and SABMiller. The latter has established a $100m brewery in Onitsha, southeastern Nigeria.

Tiger Brands Limited, South Africa’s largest food company, has also moved in to take advantage of the opportunities in the Nigerian food industry. Tiger Brands acquired a 63.35% stake in Nigeria’s Dangote Flour Mills Plc (DFM) in a recent transaction valued at $183m. The investment, which is Tiger Brands’ third acquisition in Nigeria in the last two years, is its largest so far. Tiger Brands acquired 100% of Deli Foods Nigeria Limited, a biscuit manufacturing firm based in Isolo area of Lagos in April last year and a 49% stake in UAC of Nigeria Plc’s Food and Beverage businesses in May also last year.

Tiger Brands’ latest transaction, which got the nod of the board and shareholders of Dangote Industries Limited (DIL), the parent company of DFM, and the Securities and Exchange Commission (SEC), provides for the billionaire president/chief executive of Dangote Group, Aliko Dangote, to retain his chairmanship of the board of DFM, while the CEO of Tiger Brands, Peter Matlare, becomes the vice-chairman. Nthabiseng Segoale, a South African, becomes group managing director/CEO of DFM.

Dangote is expected to retain a strategic interest of 10% of the total issued ordinary share capital of DFM for a minimum period of five years after implementation of the transaction. Dangote will also continue to have the right to appoint two directors to the DFM Board.

Why Dangote divested

DIL’s divestment from its flour business seems to be in line with its current diversification drive across three critical sectors of the economy: fertiliser production, oil and gas and infrastructure.

DFM, the second-largest flour milling company in the country, has a market share of 30% and holds 40% share in pasta output. DFM has a total installed milling capacity of 7,300 metric tonnes per day and manufactures its products from five strategic locations in the country. The company, which recorded a turnover of $425m for 2011, has three subsidiaries: Dangote Pasta Limited, Dangote Noodles Limited and Dangote Agrosacks. DFM commenced business in 1999. It was incorporated as a public limited company in 2006 and was listed on the NSE in 2008.

Commenting on this development, the DFM chairman said: “The acquisition which is in the overall interest of DIL, will further strengthen the Dangote brand and facilitate the globalising of our operations. Tiger Brands is expected to bring its world-class systems and processes that will enhance the profitability of the new company in the next few years.”

Tiger Brands, a fast moving consumer goods (FMCG) company, operates primarily in South Africa and other African countries such as Kenya, Ethiopia, Zimbabwe, Cameroon and more recently, Nigeria. It also has operations in Chile, South America. It is involved in a wide range of sectors including consumer brands, home, personal, and baby care, value-added meat products and snacks, treats and beverages. The acquisition of DFM, which is in line with Tiger Brands’ strategy of expanding its footprint on the continent, is expected to further boost its presence in Nigeria. Analysts believe the deal will deliver long-term value for all stakeholders given DFM’s current profile. They also predict that just like MTN Nigeria, DFM will contribute significantly to Tiger Brands’ international operations in the next few years.

Matlare said: “We are very excited over this partnership with Dangote Industries Limited. We believe that DFM is a great asset. We see together we can build great market opportunities, not only in the existing business, but also in the new businesses we will be able to introduce over time. So I think this is one of the most exciting times in Tiger’s history.”

Tiger Brands, he says, is bringing into the relationship the experience of developing and driving FMCG brands in emerging markets. The Tiger Brands CEO, who believes Dangote is one of the most successful groups on the continent, hopes to build synergies with staff of DFM with a view to enhancing the operational capabilities of the company. He added: “We also believe there will be many things we will learn from DFM, especially in the way markets operate and brands deliver. This is for us one of the best partnerships we have formed in the last 50 years.”

Nigeria, Africa’s second-largest economy, has been a strategic growth market in West Africa over the last few years. Its population of 160m people, a fast rising middle class and handsome returns on investment, continue to entice investors.

However, the relationship between Dangote and the South Africans is not one-sided. In October 2010, Dangote increased its stake in Sephaku Cement of South Africa (Pty) Limited from 19.76% to 64%, in a deal valued at $89.8m (R779m). The transaction is the largest ever foreign direct investment by an African company into South Africa and it came just a day before DIL successfully listed one of its subsidiaries, Dangote Cement Plc on the NSE, in what has been described as the largest merger ever witnessed in the history of the exchange.

The attraction for Nigeria

Dianna Games, who is the honorary CEO of the South Africa-Nigeria Chamber in Johannesburg, says South African retailers were unable to enter Nigeria initially because of the ban on some imported items, particularly finished clothing, intended to stimulate local production.

Games said: “Since clothing was removed from the list, retailers have been quick to move into the market driven by a large population, rapidly expanding middle class, returning diaspora and high growth rates. There are malls under way in many other African cities but Nigeria is considered to be the big prize given these considerations and mostly the size of the potential market.”

Nevertheless, she identified some of the challenges that South African businesses currently face in Nigeria. One of them is the high cost of running a business in the country. In addition, delays at the ports have been a headache as well as residual items on the import ban list such as plastic and certain kinds of shoes. She explains further: “There is also the high cost of land and limited availability of land in the right areas for retail malls, requirement for imported materials and fittings, the need for expensive generators and a range of other issues that developers have to deal with, which is slowing down the number of malls that could be built, given the potential demand.”

Despite these challenges, she says retail malls are either under way or in the planning stages in Lagos, Abuja, Kano, Ibadan and a few other cities in Nigeria. She adds that Game is looking to expand its footprint, while other retailers such as Woolworths, Mr Price, Truworths and Foschini have moved quickly into the market.

Besides these, there are also food franchises in the market such as Spur and Ocean Basket. Most are looking for a larger footprint than the current number of malls provides and one of the South African companies, low-cost chain PEP, has opted mostly for street stores – a model that most of the South Africans are avoiding.

“They all have big plans for Nigeria with Shoprite looking at hundreds of stores over the next 10 years, for example,” she reveals. “There are also a number of South African developers involved in the market such as RMB Westport, Novare Equity Partners and Resilient Property Income Fund, while construction company Group Five has been involved in building retail malls. Standard Bank is funding retail developments in partnership with some of the South Africans.”

Waving aside fears that the discount stores operated by South African firms will stifle the growth of the traditional shop owners in the major cities where they operate, she says malls are still quite new in Nigeria. Even though The Palms in Lagos has been in operation since 2006, she observes that it has taken a while for other projects such as the Ikeja City Mall in Lagos, Polo Park in Enugu and Grand Towers Mall in Abuja, to come on stream. She says it will be a while before Nigerians really start to change their shopping habits. Games said: “Traffic congestion and large distances mean that until neighbourhood malls become a reality in Nigeria, people will continue to shop in markets and other traditional outlets in addition to malls. Also, because of the very high costs of land and development in Nigeria, rentals are high and that means shops in them will probably be more high end and not competing with the markets. However, it is also true that efficient supply chains and economies of scale mean Shoprite, for example, can offer foodstuffs and other goods that are very competitively priced in relation to informal outlets. But the market is big enough to accommodate both.”

These are indeed interesting times for the Nigerian consumer.