South African retail and the story of Africa’s consumer boom

As Shoprite announces its probable withdrawal from Nigeria, Dianna Games examines the rise and fall of South African retail expansion across the continent and what it tells us about Africa’s wider investment climate

The retail sector in Africa has been one of the big success stories of the past decade, driven initially by a consumer boom in a handful of high-growth economies, demographics and a growing middle class. South African retailers and developers have ridden this wave, but in recent years some have encountered difficulties that reflect wider problems in the African investment environment.

The beginning of Africa’s consumer boom precipitated a round of growth in Western-style shopping malls, which were designed to offer a new experience to consumers used to small neighbourhood stores and the large open markets that characterise shopping in most of Africa. South African developers and retailers marched north to explore these markets as an alternative to the overcrowded and largely saturated market at home. 

Shoprite, Africa’s biggest supermarket chain, was one of the first. Its first move outside South Africa and its immediate neighbours Lesotho, Swaziland, Namibia and Botswana had been to Zambia in 1995, where it opened a further 17 stores in less than a decade. It opened its first store in Nigeria in 2005 and by 2018 it had 25 stores across the country. Currently, it has operations in 13 African countries outside South Africa, although as the current edition of African Business went to press the company announced it was considering pulling out of Nigeria (see below). 

Diversified department store Game, which was acquired in 1998 by Massmart (itself acquired by Walmart in 2011), is present in 12 countries. Another South African supermarket giant, Pick n Pay, has set up stores across southern Africa.

Low-cost clothing retailer Pep Stores set up in six African markets, including Nigeria, where it has outlets in 20 cities, while clothing and household retailers Mr Price and Truworths joined restaurant chains, mobile phone companies, hospitality groups, and many other South African companies investing in other African countries.

Private equity money lined up behind this popular commercial opportunity and facilities managers made the move to provide services to new developments in modernising cities. Property developers Atterbury, Hyprop, Attacq, Liberty Properties and others, snapped up shopping mall developments developed by UK-based Actis and others in Nigeria, Zambia and Ghana. 

Problems emerge

The South African engagement was generally positive –  the companies brought jobs and training, expanded the market for local producers, implemented new retail technology, introduced new goods and built infrastructure and entertainment facilities for the newly emerging consumers.   

However, there were problems. In a few countries, Shoprite was criticised for importing most of its goods rather than sourcing locally, and wage and dumping disputes erupted in some markets.

The companies themselves were on a steep learning curve, as they quickly learned that the South African model did not always easily replicate itself in other African markets, which were themselves different from each other.  

Some adapted better than others. Shoprite, despite exiting three markets to date (Egypt, Tanzania and Mauritius), has navigated some of Africa’s most challenging environments. It has reduced currency and logistics risk with local sourcing – in some markets, local products comprise about 80% of total stock – and set up centralised warehousing.  

But some did not adapt sufficiently. South African high-end food retailer Woolworths, for example, found the challenges of operating in Nigeria too daunting and exited the market, even as Pep Stores was expanding.  

Falling demand poses challenge

But declining consumer demand in high-cost, inflationary environments has become a challenge for everyone. The volatile oil price has been a major factor in some of the biggest markets patronised by South African retailers, notably Nigeria, Angola and Ghana. 

The plummeting oil price from 2014 drove Nigeria and Angola into recession and sparked serious foreign exchange shortages and currency devaluation. In 2020, record low prices came just as these economies were coming out of a period of prolonged recession. The knock-on effect hit consumer pockets hard.

Last year, Shoprite’s shares fell to their lowest level in more than three years after the company disclosed a 20% drop in earnings, driven largely by poor performance and currency problems in its non-South African operations. It is closing unprofitable stores in its rest-of-Africa operations while rationalising its expansion plans in what it called “persistently challenging trading conditions”. In a statement released on 2 August the company announced that it was considering “all, or a majority stake in” its Nigerian subsidiary, Retail Supermarkets Nigeria Limited. 

Another of the countries it is busy exiting is Kenya, as a result of unprofitable trading. It only entered the market in 2018 after the demise of two of that country’s largest retailers – Nakumatt and Uchumi.

Pep Stores has closed the last of its 20 stores in Zimbabwe, ending a 20-year presence in the country after battling to trade amid soaring inflation, fuel shortages, currency issues and stagnant wages. Mr Price announced in late June that it would close its last remaining store in Nigeria in early 2021.

Property companies, too, are exiting their investments in the rest of Africa, such as Hyprop, which is disposing of its African investments in favour of more profitable opportunities in Eastern Europe.

Need for reform

There are many reasons why some of these investments have not worked out. They include the tendency for retailers and mall developers to go big in countries based on the size of the opportunity, while the real need is for much smaller, and more widely dispersed, shopping centres in big African cities.

There is also the issue of cost. Building malls in countries without the relevant skills, a lack of locally available equipment and inputs, land shortages and power and water deficits, makes development costs prohibitive and drives down yields.  

A relatively low stock of sufficiently sized local tenants and the tendency of global brands to either sit on the fence or distribute through small franchises is another challenge. 

While the retail sector is often used as a barometer of a country’s fortunes, the issues are not peculiar to this sector or to South African companies. But they provide a snapshot not just of the challenges of doing business in Africa, but also the ebb and flow of fortunes on a continent with so much promise and opportunity. 

Some of these trends can be attributed to inappropriate business models that are not tailored to local conditions or flexible enough to roll with the punches. 

The fundamentals that have attracted many investors have not changed – lack of competition in many sectors, growing populations, an expanding middle class and improving governance among them. But the investment story in Africa, in South Africa as much as elsewhere, is much less compelling of late than it was a decade ago. 

Reform in Africa is not happening fast enough. Most countries have avoided taking bold steps towards much-needed structural reform, preferring to tinker around the edges of their challenges. Thus, they remain vulnerable to internal and exogenous shocks. 

Although investing in Africa is a good long-term bet, even savvy investors will not be around forever.