Although European supermarket multiples like Carrefour and Tesco are increasingly taking note of the potential of Africa for retail growth, they are unlikely to launch on the continent soon.
Nor are US multiples likely to invest in Africa soon because there is plenty of potential for growth at home thanks to the younger population there. This leaves the field for the trend towards modernisation of the African retail sector – and for supply to retailers – open for development by indigenous retail chains (like Uchumi in Kenya) and South African retail chains like Shoprite and Pick n Pay.
This is what Boris Planer, chief economist of Planet Retail of Britain, told delegates at the recent Retail World Africa 2013 conference in Johannesburg, South Africa. Planet Retail produces purchase reports and bespoke research on the retail sector internationally.
Planer said Walmart’s recent investment in Africa would therefore prove to be the exception rather than the rule. And, he said, even Walmart’s investment was going slower than had been expected by some observers – it had not resulted in any big-bang change in the South African/African retail sector.
Challenges in Europe
Although there is indeed potential for strong retail growth in Africa, and European multiples are desperate for growth, they are fully occupied by fundamental changes which have taken place in the European market due to ageing of the population.
The European multiples are generally historically heavily invested in hypermarkets, which have a 40-60 year lifespan. But the European population is becoming more aged, and family units are becoming smaller on average, and they are no longer making the weekly trip to hypermarkets. Therefore, there is a scramble to find smaller, more local retail space – and multiples are focused on “fixing the home markets”.
He also expects a sharp drop in the number of suppliers in Europe because of the fall in SKU numbers as a result of the closure of hypermarkets.
Planer added that most European multiples will concentrate their overseas investments, if any, on China for the moment. Companies like Carrefour have withdrawn from as many overseas locations as they have remained invested in.
He said multiples will also decide against investment for the moment in Africa because of lack of infrastructure like roads for distribution, reliable electricity and modern communications – all of which are essential for efficient retailing. Advanced financial services and good education systems are also sought.
Most of the European multiples are listed and need to show ongoing earnings growth – any investment in Africa would be expensive and would take at least 10 years to reach profitability.
Planer believes that China will generally be the favoured overseas destination for retail investment for the next 30 years; thereafter India could become the favourite (because of an ageing population in China and a more youthful population in India). By then, Africa will also feature more for investment by European multiples.
Opportunities for local retailers
Nonetheless, there is huge immediate opportunity in Africa, which local retailers and suppliers can develop.
He said consumer spending in Africa will multiply because of urbanisation and an increase in the middle class. But “the middle class” in Africa has much less per capita income than the equivalent in Europe or even the Far East. He also said that “sub-Saharan Africa is a market of cities rather than countries”, with cities in the following countries (beyond SA) having the most potential: Angola, Nigeria and Kenya.
Internationally, 93% of the retail sector in Britain is “modernised”, 91% in Germany, 60% in SA, and 17% in sub-Saharan Africa (13% if South Africa is excluded).
Growth in modernised retailing in Africa is faster than in traditional retailing, which is through the informal sector. Nonetheless suppliers have to understand and use informal sector distribution channels to spaza-type shops because these still account for over 90% of grocery sales in sub-Saharan Africa.
The change to modern retailing is a “regeneration project” and is, for instance, still ongoing in former communist countries in eastern Europe and Russia. In Russia, as he expects in Africa, domestic supermarket chains have accounted for most of the modernisation of retailing (however, a problem for retail investment in Russia is the declining population).
New export markets for suppliers
As South Africa itself “loses growth steam” and retail competition increases, he recommended that South African suppliers of groceries concentrate on developing export markets. They should choose markets where there is urbanisation and population growth – beyond just African markets.
Brazil is one such market – its population is heavily concentrated along the Atlantic seaboard, and its retailing industry is only 40% modernised. Although its groceries industry has been highly tariff-protected, this will not last.
Planer emphasized that private label is an area where South African retailers are uncompetitive by international standards. “South African private label goods come from the same suppliers as local branded goods and are little different in price. By contrast, European private label goods are often half the price.” – Teigue Payne
Planet Retail: www.planetretail.net