Shoprite pulls out of Uganda, Madagascar and Nigeria

by Johan Burger

The continent has a population of 1.3 billion people, which is set to grow to 2.4 billion by 2050. At the same time, Africa is urbanising rapidly and the consumer segment is growing as well. African consumers rely mostly on informal markets to meet their daily needs. The formal retail sector is more evident in South Africa where home-grown retail outlets like Shoprite and Woolworths dominate. Nonetheless, shopping malls are coming up all over Africa now and foreign players such as Carrefour and Walmart are starting to make their presence felt. This report addresses some of the more recent developments in the sector.

SHOPRITE WITHDRAWING FROM NIGERIA

One of Africa’s largest retail store, Shoprite has announced it intended to withdraw from the Uganda and Madagascar. The group ran ten stores in Madagascar and five in Uganda. The move comes weeks after Shoprite decided to exit Nigeria 15 years after it first entered the country. According to Peter Hirst, senior analyst at Euromonitor International, Shoprite’s decision to leave Uganda was driven currency devaluations, lower commodity prices, and high inflation which have caused household disposable incomes to drop. Ugandans have moved to online shopping and the Covid-19 pandemic has also hit retail chain sales. The firm reported ‘unfavourable market conditions’ for its decision and it was made despite its business still being profitable. It comes soon after the firm decided to quit another growing market - Kenya.  Group CEO, Pieter Engelbrecht has blamed currency devaluations for his decision to reduce the firm’s footprint outside South Africa. He said the company has decided to maintain “minimum levels” of capital in Africa and manage costs “as best as possible”.^[1] Shoprite, however, will continue its operations in Angola, Zambia and Mozambique.^[2]

According to Piet Viljoen of Counterpoint Asset Management, some retail firms expand rapidly in Africa to chase growth, only to realise later on that it is a more difficult market to serve than originally envisaged. Another challenge is the difficulty associated with paying suppliers and expatriating profits and dividends. Nigeria as a market is a very tough place to operate, seemingly one that Shoprite did not fully understand.^[3]

The group is now reportedly focusing stronger on its home turf, South Africa, where it has the dominant market share. It is still moving towards Angola, albeit in a more cautious manner. While its Angolan revenue declined by 16% (as measured in local currency Kwanza) and by 40% (as measured in South African Rand) in the six months through 27 December 2020, Shoprite is doing well overall. Business in South Africa which accounts for the bulk of the group’s income increased 5.6% during the same period.^[4] Other South African retailers that have exit Nigeria include Truworths, Mr Price and Woolworths.

POINTS OF INTEREST

• It is interesting to note that while Shoprite has decided to scale back and other retailers in Africa such as Choppies (Botswana), Pick n Pay (South Africa), and Nakumatt and Uchumi (Kenya) are struggling to achieve success in the African retail environment others have entered the fray. Carrefour has established a footprint in Kenya and has recently also opened two supermarkets in Uganda.
• The world’s biggest cereal maker Kellogg established a meaningful presence in Nigeria by setting up a joint venture with Singapore’s Tolaram group. It acquired a 50% stake in Tolaram’s Nigerian food distribution subsidiary, Multipro, in 2015. Multipro has a network of over 1000 distributors spread across Nigeria. Through Multipro, the Tolaram Group also supports a network of privately run mini-marts under the brand name Best Choice. These are run as franchises. The popularity of Tolaram’s Indomie noodles, which are sold through the Multipro network, is a success story that defies belief. Through this joint venture Kellogg will also get access to Multipro's distribution network in Nigeria and Ghana, and potentially in the Democratic Republic of Congo (DRC), Ivory Coast, Cameroon and Ethiopia. This distribution network is what made Tolaram Africa Foods attractive to Kellogg.
• Tolaram clearly understands the challenges facing business in Africa and has its supply chains in place to make distribution less of a problem. It has learnt how to mitigate the risks in Africa and to make attractive returns. That is why it has become a partner of choice for Kellogg.
• Why is Africa such an attractive retail market? Africa’s growing consumer class provides retailers with a powerful incentive to expand into Africa. The African population is 1.3 billion strong and growing strongly. It also urbanising rapidly. Approximately 40% of Africans now live in and around cities. By 2030 Africa’s top 18 cities will have a combined spending power of $1.3trn. Few other markets outside Africa are as attractive.

PICK N PAY EXPANDS INTO AFRICA

While Shoprite is reducing its African footprint another South African retailer, Pick n Pay, is planning to do the opposite. Outgoing CEO Richard Brasher said Pick n Pay was exploring the opportunities to expand “in a measured way”. Outside its home turf, the retailer already does business in Zambia and Zimbabwe.

Head of Strategy and Corporate Affairs David North believes the expansion plan requires “a lean and low-cost model, which will cater to the majority of customers with a good value offer.”^[5]

• In addition to Zambia and Zimbabwe, Pick n Pay also had a retail presence in Tanzania, which it sold to Shoprite in 2002. It has traditionally been cautious about moving out of South Africa. Its “lean and low-cost model” for Africa is an interesting one. In South Africa, it is Shoprite that is considered to be a low-cost retailer while Pick n Pay caters to a more affluent consumer segment. Consumer purchasing power is even lower in the rest of SSA and certainly lower than Pick n Pay’s traditional market segment. Pick n Pay will have to streamline its supply chains to reduce its costs in order to cater to that kind of consumer market. Brand distinction will become important too. Position itself as a ‘low cost’ retailer overseas while retaining a ‘premium’ appeal at home could create cognitive dissonance and may end up hurting the brand in the long run.

LOCAL VERSUS FOREIGN COMPETITION

The retail sector in Kenya has been characterized by turbulence over the past few years. Local players Nakumatt, Tuskys and Uchumi have shut down while foreign entrants like Shoprite and Choppies have exited the market. French retail brand Carrefour, however, is an exception. It has been expanding its presence in the country, exploiting the space left vacant by competition. Also entering the race is local retailer Naivas, which will be opening three new supermarket stores in June 2021. This takes its footprint in Kenya to 74. The three new outlets will offer packed food, fresh vegetables, fast-moving consumer goods such as beverages, clothes, and electronics, amongst others. Naivas and Carrefour are investing heavily to fill the gap left open by retailers that have exited Kenya recently.^[6]

• The Carrefour operation in Kenya is run by UAE’s Majid Al Futtaim Group. The group has operations in a number of countries in Africa. Majid Al Futtaim operates over 320 Carrefour stores in 16 countries, serving more than 750,000 customers daily and employing over 37,000 colleagues. It sources more than 80% of the products offered from the region. This enables the Group to streamline its supply chain and minimise costs.
• Naivas will struggle to compete against such a formidable competitor as Carrefour. The retail environment in Kenya is a difficult one to start off with. The average Kenyan shopper is cost-conscious and research shows many prefer to shop at informal markets. However, it is expected that an urbanizing and more affluent consumer market will eventually turn towards a more formal retail environment and prefer to shop at supermarkets like Carrefour and Naivas.
• Retailers have adopted different models for expansion in Africa - each with varying degrees of success. Shoprite has followed a greenfield expansion strategy while Pick n Pay prefers to rely on local partners to drive its African expansion. Carrefour is following a greenfield strategy as well. The jury is still out on which of these two models will be more successful and under what circumstances, if at all.