Johannesburg - Attracted by high growth rates in the rest of Africa and motivated by depressed conditions at home, local retailers are expanding more aggressively further up the continent. But analysts warn that bumps along the road are guaranteed.
Retailers face many challenges in parts of Africa with a lack of infrastructure such as poor or no roads, high rentals, and limited electricity, among others. Political instability and a large informal market are also stumbling blocks.
However, with growth rates of up to 8 percent, many retailers have labelled Africa as the “next frontier” and have braved the challenges.
Food and clothing retailer Woolworths recently pulled out of Nigeria as high rental costs and duties were among the problems that made operating in Africa’s second-biggest economy unprofitable. In the same week, the company announced it would buy back control of its franchises in Namibia, Zambia, Swaziland and Ghana.
“[These are] huge potential markets which are not well penetrated by formal retailers. There is a strong consumer story to be had but it’s a longer-term story. There are long-term and medium-term stumbling blocks,” said Noah Capital Markets analyst Roger Tejwane.
He said property and supply chains made operating costs high in countries outside of South Africa, which motivated some to push up selling prices.
One of the findings of the World Bank report on infrastructure revealed that about 40 percent of the total spending needs in Africa were associated with power. Rolling blackouts across the continent forced many retailers to generate their own, which was expensive.
“Together with border administration, the insufficient amount and quality of infrastructure is one of the major impediments to developing trade in Africa and improving competitiveness; closing this deficit is part of the solution,” the World Bank said in its Africa Competitiveness Report for 2013.
It added that with growing consumer markets and urbanisation, more pressure would be placed on the already weak electricity supply.
South African retailers have led the charge into Africa and have reported largely positive results.
Africa’s biggest grocer, Shoprite, reported a 27.9 percent climb in revenue in its operations outside South Africa, while local revenue gained 9.8 percent. This was attributed to debt-ridden and overstretched consumers.
The group operates in 16 African countries, out of almost 2 000 stores.
Pick n Pay continues to grow its African division with six stores opening across Zambia, Mozambique and Namibia and 51 operating in Zimbabwe.
In its annual results last week, Tiger Brands reported a R389.2 million operating loss of in its newly acquired Nigerian business, Dangote Flour Mills.
Chief executive Peter Matlare said despite these losses, the group still believed in the Nigerian market growth opportunity. He added that most trading took place in the informal market.
Absa Investments analyst Chris Gilmour said though that economic growth in countries elsewhere in Africa remained positive, despite the challenges faced by South African retailers.
“The growth in these countries is huge, the problem though is it is coming off a low base. Although the overall growth rate is currently low, we will see a surge in the future,” he said.
Gilmour added that companies such as Shoprite, which has been operating in other African countries for about 20 years, had a better understanding of how these markets worked. “Companies such as Pick n Pay, Massmart and other food franchises have a good footprint in Africa. They understand these markets and can work around challenges.”
Commenting on Woolworths’ decision to pull out of Nigeria, Gilmour said the retailer had experienced supply chain difficulties. He said delays at the port of Lagos coupled with low brand recognition were the main challenges it faced in Nigeria.
However, he said that he suspected Woolworths would ultimately return to Nigeria.
He added that the challenge with some African markets outside of South Africa was that suppliers were operating in informal trading spaces and that the informal sector was more price-sensitive, but it was growing. - Business Report