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As part of a series of articles looking at the retailing environment in markets not analysed within the syndicated research programme, Euromonitor International’s retailing team will look at sub-Saharan Africa and its attractiveness for retailers looking to globalise.

This article will be followed by another looking at the strategies being employed by retailers present in the market in 2011 as well as country spotlights giving insight into the latest developments and future prospects of specific markets.

Retailers are looking to grow their global presence

In an increasingly globalised economy, emerging markets have been under the spotlight for the last decade. However, these have become a top priority for internationalising retailers since the financial crisis hit Western Europe and North America. Amid depressed consumer confidence and sluggish GDP growth, grocery and non-grocery retailers alike have had to cut operating costs while maintaining profits.

Other strategies such as price cuts, cross-channel expansion and a reduction in store numbers are also underway. Nonetheless, companies have been looking to expand out of their core markets in order to achieve a wider geographical spread, benefit from counter-cyclical economies and more easily increase their footprint in less crowded markets.

Real GDP Growth By Region

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Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and World Economic Outlook/UN/national statistics

Sub-Saharan Africa to provide sustained growth and booming consumer markets

Sub-Saharan Africa has seen increasing interest from international businesses since 2000, with its relative resilience to the global downturn further encouraging this trend. The region as a whole has achieved impressive growth rates since 2000 on the back of high commodity prices, increased political stability and a thriving private sector. South Africa and Egypt, the continent’s most developed economies, have heavily invested in their neighbours’ development, taking positions in energy, telecommunications, services and retailing. South African and Egyptian companies have efficiently leveraged their geographical reach and know-how to access less mature nations and benefit from their booming consumer markets.

As a result, intra-African trade has been, after African-Asian trade, the fastest growing in value since 2005, accounting for around 15% of Egypt’s and South Africa’s exports. The growth of intra-African trade has also been facilitated by the progressive dismantling of trade barriers throughout the continent and the development of regional trade blocs, such as the SADC (Southern African Development Community), ECOWAS (Economic Community of West African States) and COMESA (Common Market for Eastern and Southern Africa). These trade blocs have led to a reduction in trade tariffs and have given member countries more bargaining power in their negotiations with other partners, such as Europe or Asia Pacific.

Egypt’s Foreign Trade by Region

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Source: International Monetary Fund (IMF), Direction of Trade Statistics

South Africa’s Foreign Trade by Region

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Source: International Monetary Fund (IMF), Direction of Trade Statistics

This has helped the continent’s poorest countries to become more connected to the world economy through trade, foreign direct investment (FDI) and new technologies. The knock-on effects of this intertwining of their economies with global markets have created job opportunities in the manufacturing and service industries, which in turn have fuelled consumers’ purchasing power and given them access to new products that were previously unaffordable.

Mobile communication technology has had a very visible impact on African consumers. Local and international news, social media and the opportunity to become aware of products and services available to other populations worldwide have contributed to the emergence of a savvy middle-class of aspirational consumers eager for higher quality products.

Improved political situation

Compared to the early 2000s, deadly conflicts and flashpoints in Africa have become more subdued and overall the continent is safer at the end of 2011 than it was 10 years ago. Instability remains but it is gradually evolving from armed confrontation to political disputes. South Sudan ceded in July 2011, becoming an independent country, while Angola ended its three-decade-long civil war in 2002 and Liberia, Sierra Leone and Côte d’Ivoire are all in the process of political transition. This has created new opportunities for rebuilding and construction programmes which provide jobs for the populations, thus aiding overall economic growth.

The improvement in political conditions within sub-Saharan Africa is highlighted by the Democratic Republic of Congo (DRC), which has witnessed large-scale unrest over the last decade. Despite facing issues with regard to guerrillas in the east, a number of regions in this vast country are relatively safe. As a result of this calming situation, South African-based retailer Shoprite announced in 2011 that it plans to open its first two stores in the country’s capital Kinshasa and in the southern city of Lubumbashi.

On the other hand, Somalia is increasingly descending into chaos and is also destabilising its neighbours while pirates threaten maritime traffic across the Indian Ocean, showing that while the situation has improved, in a number of markets issues remain that will continue to cause retailers concern about expanding into such countries.

Governments look to privatisation rather than foreign aid

As relative peace settles on most countries, political leaders have made significant efforts to try to promote reform, fight against corruption and increase accountability. Since 2000, heavily-indebted African states have sought to dispose of their shares in public companies, accelerating the privatisation of their economies. This process has given international investors plenty of opportunity to acquire existing and invariably successful operations rather than having to expand into these markets organically, with the inherent difficulties of having to build a brand at the same time as competing with locally-based companies.

In 2011, Ethiopia privatised the last of its state-owned breweries, with UK-based Diageo Plc emerging as the highest bidder. Diageo’s purchase of Meta Abo Brewery followed Heineken NV’s previous takeover of two other companies, the Harar and Bedele breweries. This gives the alcoholic drinks companies access to 80 million consumers. Meanwhile, in another industry, in October 2011 France Telecom SA announced its agreement to buy 100% of Congo Chine Télécom, a mobile operator in the DRC. The company pledged to invest nearly US$200 million in the country’s underdeveloped telecommunications market.

The introduction of more high-profile international brands has the potential to significantly change advertising and also the retail environment as manufacturers are also concerned by how retailers are positioning their products in-store. In addition, global brand owners bring with them experience about how to market their products in the local media and, also, increasingly online. In order to compete, locally-based brands have had to evolve as well, mimicking the trends being introduced in their countries, leading to an overall change in the way that brands interact with consumers.

China at the forefront of foreign direct investment inflow

Post-independence, a number of countries in Africa were heavily dependent on former Western rulers in terms of trade, FDI and development aid. At the turn of the 21st century, the picture is rather different. China and India have become significant investors in Africa as well as providers of technology, intellectual property and consumer brands.

Chinese and Indian companies, along with their countries’ governments, have also increased their footprint on the continent through joint ventures and acquisitions. Much of this investment has been made in order to secure energy and food supplies needed to fuel their booming industries and consumer markets, but this investment has filtered down into other areas of African countries’ economies.

Chinese money has helped to build roads and improve telecommunication networks and ports, which are essential to channel natural resources efficiently but which have also helped the expansion of retailing and consumer interest in brands. Although Africa is quite a small recipient of Chinese capital, the country has made the headlines on the continent thanks to its track record of building and renovating infrastructure that countries could not afford to do themselves. This came as a boon and opened the way to a new paradigm on the continent – business partnerships rather than development aid.

In many cases, investment and capital from foreign companies has had a positive impact on local industry as it has provided skills and money that were otherwise lacking. However, fast-track privatisation has been tainted by corruption and the interests of a few rather than welfare concerns. Land grabs are an example of how things can go wrong in badly regulated countries. Private companies and sovereign wealth funds have been buying arable land in poor African countries in order to secure future food supplies in rich but land-constrained countries, threatening food availability locally and leading to populations questioning the benefits of FDI throughout the economy, rather than in just this one area.

Also heightening local grievances is the fact that despite their pledge to increase productivity and provide jobs, many deals have failed to benefit local populations. This is the kind of deal that led to the ousting of Madagascar’s President Marc Ravalomana in 2008. South Korean Daewoo Logistics was about to be leased a third of the country’s arable land to produce corn destined to be exported, but a public outcry and an active opposition party prevented it from happening. As African citizens gain better access to the world media and demand more transparency from their governments, it is expected that more such deals will be exposed in future.

Technology gap?

Sub-Saharan African companies and consumers have been highly creative and keen on adopting and then building on technological innovations for the benefit of their countries and people. Mobile telecommunications is a good example of a technology that has enabled the continent to overcome the lack of landline networks, which are much more expensive to set up and harder to expand outside major cities. Mobile commerce and transactions have also emerged quicker than in developed markets due to the lack of alternatives.

The M-Pesa scheme, launched in Kenya and Tanzania in 2007 by Vodafone, allows mobile users to transfer money to other users (allowing for cashless payment of goods and services), pay for their utility bills and safely organise cash deposits and withdrawals without the need for a bank account. In 2010, Vodafone extended the service to South Africa where an estimated 13 million people do not have a bank account.

In every country where a similar service has been launched, retailers such as Kenyan-based Nakumatt Holdings Ltd have progressively allowed their customers to use mobile payments within their stores, as well as offering pay-point facilities.

Possession of Mobile Phones (% of Households)

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Source: Euromonitor International from national statistics

Other mobile-based services include live commodity price information and weather forecasts for smallholding farmers who are far removed from the globalised agri-business industry. These services help support farmers gain fair prices for their products and increase productivity. Moving forward, there are likely to be numerous uses of the technology and the rapid spread of mobile technology will benefit retailers both through boosting consumers’ earning power but also through enabling them to shop more easily than they would have been able to without such initiatives.

Increasing number of consumers emerge from poverty

While most of Africa’s population is poor by international standards, a middle-class has started to emerge, benefiting from the economic boom of the last decade. This trend is best exemplified by the “Black Diamonds” of South Africa who have benefited from post-apartheid empowerment, but has also been observed in many less developed countries. A study by the African Development Bank (released in April 2011) considers the middle-class, which it defines as a person with the capacity to spend between US$2-20 per day, to account for 34% of Africa’s population in 2010, up from 27% 10 years ago.

The bank uses a broad definition of middle-class, including people just above the poverty line, but nonetheless it shows a shift in household profiles in the region, something that FMCG players and retailers are starting to acknowledge. This population group is driven by value for money but is also brand conscious, with most using the internet or mobile telecommunications on a daily basis. This group, however small, has a sizeable discretionary income and is eager for modern, air-conditioned retail outlets where they can spend their money.

Obstacles remain for modern retail

Despite all the positives, Africa has not been a significant recipient of world FDI since 2005, and inflows decreased by 15% in 2009 as a result of the global recession. According to the United Nations Conference on Trade and Development (UNCTAD), Africa’s share of developing countries’ FDI fell from 12% to 10% between 2009 and 2010. Asia Pacific and Latin America have a much larger share, mainly due to their relatively higher level of development and better business environment.

According to the 2011 global ease of doing business index, only seven of 53 African countries were ranked within the top 100, while almost half were positioned among the worst performers (i.e. those countries ranking between 150 and 183). Some countries have improved significantly, for example Ghana and Rwanda, but red tape, corruption and poor law enforcement are the main pitfalls facing international investors.

Drop in the Ocean: Africa’s Share of World FDI

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Source: Foreign Direct Investment Inflows: UNCTAD

Ease of Doing Business Ranking

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Source: Euromonitor International from World Bank

Before Wal-Mart’s investment in South African-based Massmart, only Internationale Spar had a sizeable market share in Africa. However, the company’s franchise business model made it comparatively easy to enter Africa’s retailing markets, rather than entering through company-owned stores.

In 2011, Wal-Mart acquired a majority stake in Massmart Holding Ltd, making it the largest shareholder in South Africa’s fourth largest retailer. Massmart was an attractive acquisition for Wal-Mart due to its strong presence within non-grocery in South Africa, but also due to its ownership of 29 outlets outside the country in markets like Botswana, Ghana and Malawi. Wal-Mart is hoping to tap into the high growth and large consumer bases of these sub-Saharan markets to sustain its future growth.

Apart from Internationale Spar and Wal-Mart, neither Carrefour, Tesco nor Schwarz Beteiligungs have a presence in sub-Saharan Africa, leaving an opportunity for locally- and South African-based retailers to thrive and increase their footprint at a rapid pace. Shoprite Holdings Ltd, South Africa’s leading retailer by sales, is present in 15 African markets, representing 12% of the company’s total store count. While Shoprite’s locally-based competitor Pick ‘n Pay Stores Ltd has a more limited geographical reach, the company increased its participation in Zimbabwean retailer TM Supermarkets from 25% to 49% and is planning to rebrand some stores into one of its own fascia’s.

When compared to the retail rush that has swept China and other Asian markets over the last 20 years, Africa lags behind in terms of modern retail penetration. Despite all the positives, some challenges remain that have prevented large-scale stores from really reaching their full potential.

Traditional trade dominates

The leading competitive issue for modern retailers is the informal market that exists in many sub-Saharan countries. This takes the form of street selling, hawkers, open-air markets and unregistered traders. They have prospered thanks to the lack of law enforcement and an over-reliance on imported consumer goods. Such channels attract the majority of urban and rural consumers as they are convenient and, most importantly, offer cheap prices. The dominance of cash for day-to-day transactions is also encouraging the small-scale retail format. Modern retail requires a sizeable consumer base in order to sell large volumes and be profitable, and most African countries are not mature enough for this scale of business. Of total grocery sales in Africa, less than 20% are accounted for by supermarkets, and growth is expected to be slow up to 2015.

This can be related to low car ownership in many sub-Saharan countries. Big box retailing requires its customers to drive to out-of-town locations to buy their weekly or monthly grocery supplies. Kenyan-based Nakumatt is one of a handful of retailers outside South Africa to have focused on suburban locations, targeting middle- and upper-class clients. This has left town centres in the hands of small-scale retailers, open markets and convenience stores which cater for the large majority of urban dwellers who do not own a car.

Possession of Passenger Car (% of Households)

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Source: Euromonitor International from national statistics

Endemic inflation creates instability

High rates of inflation have been recorded in most sub-Saharan countries since the 1980s, although there has been a slowdown across the region since 2008. Nonetheless, inflation rates are higher, at an average of 8%, than in Western Europe or North America and are usually very volatile as most economies in the region are based on the sale of fuel and commodities which can fluctuate strongly. For retailers, the issue is to keep input costs under control while passing on price rises to consumers.

At the same time, retailers have to promote themselves as offering the lowest prices and working for the good of the consumer. This is important for retailers if they want to be popular among low-income groups and compete with the informal channel. Apart from offering the lowest prices, the only other way for these retailers to justify their higher prices is by providing better quality products than traditional retailers. This is not always easy for modern retailers to do as local food suppliers are themselves not always set up to supply retailing clients in large enough quantities, at regular intervals and with a consistent level of quality.

Underlining this need to remain price competitive, consumers in Nigeria have proven sensitive to household brands being more expensive at Shoprite and Spar than in independent small grocers. According to store checks carried out by Euromonitor International in 2011, a brand like Milo milk drink was generally 20% more expensive in supermarkets than in open markets or kiosks. This may not prove by itself that modern retailers always sell at a premium, but does show that there is a price differential and it is something that consumers are more likely to notice when it comes to flagship brands. This price difference has the potential to affect a retailer’s image and limit its opportunities to attract consumers switching from traditional markets to modern grocery retail channels.

Inflation

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Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and World Economic Outlook/UN/national statistics

Real estate costs hold back large-scale developments

In most developing African countries retail space is scarce and expensive. Accentuating this issue for developers is the fact that local capital is often hard to obtain due to the reluctance of the banking system to invest in projects that are likely to face delays or legal issues over land rights. This has forced retailers to rely on their own resources or seek foreign partners in order to build new stores.

Furthermore, there are often long delays before a site can actually be built on due to overwhelming bureaucracy and complex land property rules. Shoprite Holdings had to scale down its expansion plans in Nigeria for this very reason. In the company’s 2010 annual report, the Chairman Mr Wiese himself acknowledged the many challenges of doing business in Africa, among them the overwhelming red tape and constant delays in getting merchandise into stores.

Similarly, Kenyan-based Nakumatt Holdings had to postpone the opening of its new outlet in Dar Es Salaam, Tanzania’s capital city, because of construction delays at the Dar Village shopping centre that the company was supposed to anchor. Instead, Nakumatt opened in the mid-tier city of Moshi. Knight Frank’s 2011 Africa Report highlights how retail space in Dar Es Salaam is scarce and no new developments are being planned in 2011 due to these difficulties. This will give retailers like Nakumatt, Shoprite and Game natural protection against the entry of other competitors.

Infrastructure bottlenecks create problems too

Another issue for retailers is the lack of large-scale supply chains in local markets and the need to rely on imports, which usually attract high duty costs. When it comes to perishable goods and groceries, retailers often need to invest in supporting local suppliers to raise productivity and standards, help fund roads or equipment so they can avoid shortages and poor product quality. This is an issue not just for retailing but also the local populations. Africa has no shortage of arable land but is constrained by small-scale farming and low productivity. A great deal of investment is required in agriculture, but this will have a positive impact on grocery retail and could lead to lower prices for consumers.

One issue often raised by operators and consumers alike is the frequent power cuts in many urban areas throughout the continent, but especially in countries where urban population growth has outpaced energy capacity. Lagos, Nairobi, Dakar and many other cities fail to provide steady electricity to their populations and businesses have to rely on their own power generators.

For a grocery retailer, this is a critical point as they need to ensure that their products remain fresh for as long as possible, but it also has an impact on the type of products they can store and what consumers can buy. Sales of frozen ready meals and pizzas, for instance, are likely to be held back in the medium term as most households do not own a freezer. The same goes for dairy products; most manufacturers sell powder or condensed/evaporated milk to emerging African markets, with sales of fresh milk being negligible. Therefore, retailers must adapt their product mix to the local market and avoid internationally standardised procurement policies.

Road map to market entry

In order to provide further insight into African markets that could become targets for retailers looking to globalise, it is necessary to narrow down the number of countries that are likely to be attractive to retailers in the short term.

Euromonitor International will look at three important factors that are likely to support an increase in consumer spending in the short to medium term: population in 2011 as large populations allow for larger volumes and economies of scale; gross national income (GNI) per capita growth between 2005 and 2010 as it explains economic performance and its impact on individual wealth; and ease of doing business, which evaluates how straightforward and costly it is to start a business, pay tax or deal with construction permits, for example.

Overall, the inputs offer an understanding of how well each market in the region has performed in comparison to others from a macro-economic perspective. Together, these items can help determine retailers’ expansion decisions in the future.

Looking at various countries in relation to these data points enables us to build the cluster chart below, which includes only the most populated sub-Saharan African markets that are not researched by Euromonitor International.

Countries to Prioritise in Sub-Saharan Africa

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Source: Euromonitor International from national statistics/UN

The most attractive countries for retailers looking to expand in sub-Saharan Africa in the short term will be those in the top-right hand corner of the chart. This is due to the fact that they have made sustained improvements in creating wealth and opportunities while providing the proper legal and political environment for business to develop.

Looking at the data in this way, three clusters of countries can be identified:

  • The countries in the green circle are those with the strongest improvement in real GNI per capita since 2005 and are the highest placed in the ease of doing business rankings. Some countries in this group also rank very high in terms of population, for example Ethiopia, Ghana and Uganda, which would provide a large consumer base for retailers to compete for.
  • The countries in the amber circle have experienced high GNI growth but are among the most difficult to do business in. These countries are likely to provide long-term growth opportunities if governments are able to improve law enforcement and reduce red tape for existing and future businesses.
  • The cluster of countries circled in red are the weakest performers, both in terms of GNI growth and ease of doing business. As of 2011, these countries seem to offer globalising retailers the least attractive options for expansion. Although certain markets may break from this group in the short term, the outlook is not positive, and so other countries are likely to prove more popular.

Following this article, Euromonitor International will be looking at the largest retailers operating in the region and discuss their strategies and challenges but also their future expansion plans. This will lead on to the country spotlight articles that will focus on the most dynamic markets for retailing and retailers looking for opportunities in sub-Saharan Africa.

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