When a major private sector player decides to exit a country despite long-running investment and a perceived strong brand, it raises many questions.
South Africa-owned Shoprite’s choice to get out of Nigeria’s retail space is no different.
One immediate effect is that Shoprite’s call is being discussed as a referendum on the state of Nigeria’s economy which has been hit hard by the Covid-19 pandemic and accompanying lockdown measures. But there are also significant questions over the country’s vaunted middle-class segment and the dwindling purchasing power of the wider consumer market.
For its part, while being blunt about “discontinuing” its Nigerian operations in recent financial releases, Shoprite [SHO.JO] has sought to couch the weight of its exit by framing it as a way to engage local investors and create “a truly Nigerian business run and owned by Nigerians for the Nigerian market.” It’s an angle that has also been played up by Nigerian government officials, keen to stave off criticism of the present administration’s handling of the economy and the obvious downside of one of the country’s largest private sector players voting with its feet.
But shareholders and investors clearly thought this was good news, Shoprite’s stock shot up 10% on the Johannesburg Stock Exchange on Monday in the wake of news of its proposed Nigerian exit. Shoprite Nigeria had seen sales drop 6.3% in the first six months of 2020, compared with a 7.5% rise South Africa.
With Shoprite’s messaging suggesting its exit is unlikely to be abrupt, the company could pursue a franchising model which will see its brand maintained by the next owners who are expected to be indigenous investors, suggests Dele Akintola, head of Sub Saharan Africa equity sales at Stanbic IBTC bank, in an investor note. Part of Shoprite’s exit strategy will reportedly see it sell off 70% of its Nigerian subsidiary with the option of buyout after five years. It’s a different exit track to what the business has adopted in Kenya where it laid over over 100 staff and shut down two of its four stores over the past year.
Vested interests
To be clear, despite its struggles in the Nigerian retail market, Shoprite still retains some allure for prospective owners given its brand strength as well as its logistics and supply chain infrastructure built over the span of 15 years. Shoprite employs nearly 2,000 Nigerians across its 25 local outlets.
While Shoprite’s concerns over dwindling sales and consumer market size are tangible, its exposure to currency volatility has become an albatross in recent years. Nigeria’s naira currency has significantly shrunk in value against the US dollar over the past five years, partly due to the government’s ineffective currency policies, leaving multinational businesses like Shoprite at risk. Other multinational businesses that have exited Nigeria have also noted difficulty with repatriating profits amid currency controls. A fully locally-owned business, as Shoprite’s Nigerian subsidiary could soon be, would be partly immune from such volatility.
However, Shoprite’s sheer size—it accounts for 21% of formal retail in Nigeria—puts it out of reach of emerging, homegrown retail businesses that may have otherwise been presented with a chance to speed up growth. Yet, as Shoprite’s roll-out in Nigeria has consisted of only opening up store outlets in large, urban center malls, questions over the company’s future are having ripple effects on the burgeoning formal retail sector.
Shoprite’s outlets are typically the anchor store for large mall developments and are seen as key sources of foot traffic. Occupying up to 30% of retail space in malls also meant Shoprite pays the lowest rates per square meter and has a strong negotiating hand in drawing up lease agreements, one retail industry insider says.
As such, it’s of note that Persianas Investments (which controls 40% of Nigeria’s formal retail space and owns 10 of the 25 malls that house Shoprite outlets) is reportedly a front-runner to buy a majority stake in Shoprite’s Nigerian business, according to The Cable newspaper.
Such a move on Persianas’ part is likely borne of a need for self-preservation but could also give it a significant competitive advantage in the formal retail space as mall owners jostle for strategic tenant partners to generate footfall and sales to, in turn, justify the rapid expansion of the sector in recent years: between 2009 and 2015, Nigeria’s retail industry grew rapidly at 40% per year with nearly 200,000 square meters added to the formal retail space.
“Can you imagine suddenly losing up to 30% of your anchor space? The uncertainty that will bring is a lot,” says Dolapo Omidire, lead researcher at Estate Intel, a real estate research firm.
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