Mixed fortunes for African retail

Africa’s biggest retailers have continued to expand over the past two years of low commodity prices but there is no doubt that some of the energy has been taken out of the sector.

New mall projects are being completed but fewer are being planned; some cross-border ventures have failed to take root; and outlets in mining areas have been particularly hard hit. There are always likely to be some setbacks but investment will continue to increase as a result of the growing markets on offer.

The revenues of the biggest retail companies in Africa and the Middle East grew by 19.1% in financial year 2015–16, with an average 5.8% net profit, according to Deloitte’s Global Powers of Retailing survey. The Deloitte report stated: “The rising middle class in Africa has contributed to the modernisation of the retailing sector, and many African economies are transitioning toward consumption-driven markets.”

Low commodity prices have had a negative effect on African mall retailing but could have a positive impact on African manufacturing. The economic slowdown has caused currency depreciation in most countries, which has driven up the price of imported goods.

The big players

Only five retailers in sub-Saharan Africa make it into the world’s 250 biggest by retail revenue and all are South African. Steinhoff International, which sells household goods through its JD Group and Pepkor brands in South Africa, was the top-ranked African company in 72nd position, up from 101st in the 2016 survey.

It generated retail revenue of $13.1bn in financial year 2015–16 across the 29 markets in which it operates. The other four were Shoprite, Spar Group, Pick n Pay and Woolworths.

Steinhoff was also ranked as the sixth fastest-growing retailer in the world, with average annual revenue growth of 44.5% over the five-year period 2010–15. The Deloitte survey also served to underline the sheer scale of the global retail industry, with the 250 biggest retailers worldwide generating $4.3 trillion in revenue in financial year 2015–16.

Some of the world’s biggest retailers are involved in Africa but perhaps not to quite the same extent as many predicted in 2011 when Walmart bought a controlling stake in South Africa’s Massmart, which also owns Makro, Game and Builders Warehouse, for $2.4bn. As by far the biggest retailer in the world, Walmart was keen to become involved in the African continent.

Massmart now has 39 stores outside the country but other South African firms have expanded their operations more quickly without the financial muscle and buying power of the US giant. This slow pace of growth could be the result of setbacks for parent company Walmart in other parts of the world.

Other companies have embarked on cross-border investment. The biggest foreign supermarket chain to invest widely in Africa is France’s Carrefour, which is the seventh biggest retailer in the world.

Majid Al Futtaim of the United Arab Emirates holds its franchise rights across Africa and the Middle East. South African firms are particularly keen to create a continent-wide footprint, while Botswana’s Choppies is one of the few retailers from smaller African economies that is expanding into other markets.

It operates in Kenya, Tanzania, Mozambique, Zambia, Zimbabwe and is attempting to take on the continent’s biggest supermarkets in South Africa. Choppies has been badly affected by the downturn in mining demand in Southern Africa.

It had intended to increase its branch network to 250 by the end of 2016 but has now pushed that target back to the end of 2018. CEO Ram Ottapathu announced in early February that the company still intended to expand in order to reduce its reliance on revenue from mining towns and develop a broader customer base.

The 26 new stores planned for this year will require investment of R300m ($22.9m) and will mainly be opened in Zambia and KwaZulu-Natal in South Africa.

Continental trends

Given the benefits of scale, retail trends emerge first in Africa’s biggest and most developed markets. For investors, the two key trends are demographics and economic growth.

As the population of Africa grows quickly, it is becoming ever more urbanised and therefore better placed for retail developments. At the same time, although figures on the disposable income of the continent’s middle classes are often confused and exaggerated, there is little doubt that incomes are rising. The big question is the pace of this growth.

Retailers are scared about missing out on early entry to the continent’s key markets but committing themselves too soon and not appreciating the differences between different markets can lead to burnt fingers. There is plenty of anecdotal evidence of retail units in shopping malls in Accra, Lagos and Nairobi standing empty but overprovision of retail space is a challenge in any market.

The ambition of the past five years is entirely understandable, particularly when shopping malls were a relatively new phenomenon in many areas. South African companies have had a particularly difficult time in Nigeria.

High-end clothing and food retailer Woolworths pulled out of Nigeria in 2013 because of a lack of profitability, while clothing store Truworths followed suit. Even the biggest international retailers suffer such setbacks: Tesco and Carrefour have both had to pull out of entire markets, but this is the nature of capitalism – sometimes a gamble fails.

With a population of 180m today, forecast by the United Nations to reach 397m by 2050, Nigeria has massive potential, so another influx of foreign investors should be expected when the economy begins to pick up, although government import policy may have to be relaxed. Retailers in every market in the world depend on importing a huge proportion of their goods, so the Central Bank of Nigeria’s ban on providing foreign currency for a range of imports is obviously hitting high-end retailers hard.

As ever, it is wrong to view the African continent as a homogenous whole. It may be possible to discern general trends but the situation will vary from country to country. The Ghanaian economy may still be growing fast but new shopping malls are struggling to secure tenants at the same rates as previously.

The South African economy is stagnating but retail sales are still rising. In January, shares of South Africa’s biggest retailers reached their highest level in four months. Cratos Capital equities trader Greg Davies commented: “The market is saying that even with these poor to average trading updates, the share prices have climbed so maybe there’s value in these retail shares. The market is anticipating the next six months will be a little better.”

Analysts at World Wide Worx calculate that the e-commerce sector in South Africa generated R7.5bn in sales in 2015, making it by far the biggest market on the continent, although less than 1% of the entire retail market and still small by international standards. There are growing synergies between physical and online retailers and many South African mall retailers have launched their own e-commerce operations over the past two years.

This investment largely seems to be aimed at the sector’s potential rather than the profits currently on offer, although Pick n Pay says that it has the biggest online supermarket operation on the continent. However, there are some e-commerce specialists, including Takealot, which merged with Naspers’ online shopping website last year.

North African options

Beyond South Africa, the north of the continent has the most developed retail sector in Africa. Although the past five years have been volatile, even in the most stable country in the region, Morocco, investment does seem to be picking up.

Leader Price, which is owned by Groupe Casino, is in the process of opening 50 supermarkets in Morocco over two and a half years, while the Mall of Egypt was due to open in Cairo on 2nd March, covering a gross leasable area of 165,000 sq m, with 6,500 parking spaces.

Developed by Majid Al Futtaim at a cost of E£6.3bn ($399m), it will host the first indoor ski slope in Africa, a 21-screen cinema and a wide range of retail, restaurant and leisure businesses. AT Kearney’s 2016 Global Retail Development Index forecasts that the Egyptian retail sector will experience a compound annual growth rate of 10% this year and again in 2018.

The country had been left out of the index since 2012 because of instability following the Arab Spring. AT Kearney expects the trend of consumers switching from traditional markets to shopping malls, supermarkets and hypermarkets will intensify over the next few years. In addition, it predicts that the proportion of households earning $10,000 to $25,000 a year will rise from 19% in 2015 to 34% in 2019.

Government import restrictions may encourage Egyptian manufacturers but could also prevent retailers from bringing stock into the country. Investors are sure to be attracted by the size of the market, with the population growing by about 2m people a year and expected to reach 100m by 2020.

There is still a great deal of scope for economic reform, but the IMF expects the economy to grow by 4% in 2017, with inflation running at 18.2%. Online shopping offers excellent scope for the creation of pan-African retail companies. E-commerce sites can retain a very wide range of stock to appeal to different markets, although the lack of infrastructure currently holds the sector back.

Yet if the drive for e-commerce results in improved addressing, distribution and transport networks, then it will have benefits far beyond the sector. By providing a platform for manufacturers and merchants to target a far larger pool of potential customers, it could act as a catalyst for much greater cross-border trade.

Kenyan potential

Kenya, with its 43m inhabitants, is one of the most interesting markets on the continent. There are plenty of modern retail units, particularly in and around Nairobi and the developed retail sector has given birth to a number of large domestic firms, including Nakumatt, Uchumi, Naivas and Tuskys, most of which have operations across East Africa, particularly in Uganda.

Unlike many other African economies, there has been no downturn in economic growth because of the lack of reliance on commodities. The IMF predicts average annual growth of 6.2% between 2015 and 2020 in Kenya.

A survey carried out by Procter & Gamble found that Kenyan retail spending reached KSh1.8 trillion ($17.38bn) in 2016, a 13% increase on 2015 and equivalent to 30% of GDP. Supermarkets account for 30% of the market, with more than half of all urban Kenyans now regularly shopping in supermarkets, many of which are now located in residential areas.

Procter & Gamble managing director Vivek Sunder said: “This is happening because neighbourhoods are now dense enough that they have the spending power to sustain such businesses, and also out of the need for retailers to compete with traditional traders on convenience. Proximity will be one of the big drivers for supermarkets as a channel gaining importance within retail.”

A large number of shopping malls have been completed in Kenya over the past five years. The biggest yet, the Two Rivers Mall, opened its first units in February. It has a gross leasable area of 65,000 sq m covering 150 units.

Tenants include Carrefour, Swarovski and Nike. It is being developed by a consortium of Centum (58%), AVIC International (38%) and ICDC (14%), which will now start work on building a five-star hotel and apartments in Phase 2.

Centum chairman Chris Kirubi said: “Two Rivers Mall will show the world that Kenya is capable of delivering a world-class experience. It creates employment opportunities and is designed to offer a world-class shopping experience and hopefully stop people from going to foreign countries for shopping.” This suggests that the mall will be targeted at people with sufficient wealth for shopping in other countries to be an option.

Kenya is also attractive for e-commerce because of its reputation for IT innovation. According to figures from the Communications Authority of Kenya, there were 26.8m mobile data or internet subscriptions in June 2016, but almost all of these were mobile data subscriptions. Mobile money transfer system M-Pesa has 17m active customers and it is not alone in the market.

Apart from Jumia, other operators in Kenya include Rupu, which is owned by Swiss interests, and Chinese-owned Kilimall; while Mama Mikes targets Kenyans living overseas who want to send gifts home.

Neil Ford