Supermarkets, super profits

By Dianna Games in Lagos
Posted on Monday, 21 July 2008 00:00

South African firms have led the way in introducing

supermarket shopping ?around the continent, but home-grown imitators

hope to catch up

Wandering about The Palms shopping centre in Lagos is so much like being in South Africa that it is difficult to believe the chaos and colour of Nigeria are right outside the door. The two busiest shops in the shiny complex, Shoprite and Game, have quickly become household names in Lagos, just as they are in many other African cities.

South African firms have succeeded in the retail business across Africa because they were ahead of other international competition. They have world-class supply chains, provide quality goods and have not been afraid to tackle difficult markets, among them Angola and Nigeria.

The arrival of the South African companies has not been without its resentments. Being both visible and accessible, the retail sector is an easy target for critics of multinational firms. And any feelings aroused by the retailers’ displacement of local traders came close to being exacerbated by the recent attacks on foreigners in South Africa, when there were calls, in Nigeria as elsewhere, for retaliation against South African businesses. The atmosphere was eventually calmed by conciliatory statements by Presidents Thabo Mbeki and Umaru Musa Yar’Adua.

Despite the criticisms, the new stores at The Palms and elsewhere have been a clear success. Thousands of new jobs have been created, consumers now have much more choice, standards are being raised and the stores are extremely popular. Shoprite’s director for non-South African operations, Gerhard Fritz, says that an average of 48,000 customers pass through the Nigerian store each week, compared to an average of about 20,000 in a similar-sized South African supermarket.

Although it took Shoprite five years after it signed its first Nigerian investment agreement to finally open its doors there in December 2005, the first store has been a winner. General manager for Shoprite in Nigeria, Anton Wagenaar, says it was a success from the outset. “After six months we knew the store was too small. There is definitely high demand for a more formal way of shopping here.”

The company now has as many as 12 new projects in the planning stages in Nigeria, including shopping malls and supermarkets. New outlets are due to be opened over the next few years in other parts of Lagos, as well as in Port Harcourt and Abuja. The South Africans’ main competition right now is from smaller locally-owned chains such as Park ‘n’ Shop, which has six stores, and Goodies.

For the main South African retail giants, it was the economies of scale built up at home that prompted groups like Shoprite and Massmart to expand their operations into the rest of Africa. Shoprite now has 1,181 stores in 17 countries, while Massmart (which owns the Game, Dion, Builders Warehouse and Makro brands) has 243 stores in 14 countries. Other large chains that have ventured outside of South Africa are Truworths, Woolworths, Pepkor, JD Group and Pick ‘n Pay.

International chains like Carrefour, Walmart and Tesco have made little effort in Africa. The French chains Carrefour and Casino have some operations in North Africa and Senegal, but have concentrated their expansion in the Middle East. While other international chains have looked at countries such as Nigeria, according to some analysts, they have been daunted by the challenges.

Stiff competition?

South Africa still has the biggest retail sector on the continent. Supermarkets account for 55% of national food retail, a profile not found in any other African country. The big chains trade under many brand names at home to allow them to reach out across income groups and interests, and only some of these are replicated in other African markets.

But this also means stiff competition, which is what has made the rest of Africa an attractive proposition. Improving economies mean higher disposable incomes and a more discerning buying public. The pervasive effect of satellite television across the continent is creating different expectations about retail as people become exposed to goods available in other markets.

Profile: Freshmark

Buying locally makes good business sense when the exorbitant cost of transport from South Africa to the rest of Africa pushes prices up. Transport can make an item about five times more expensive than it would be back home.

Freshmark is the fresh-produce division of South Africa’s Shoprite Group, both in South Africa and in its African operations. It is the point of entry for farmers who want to sell produce to the supermarket chain, and it advises its agricultural suppliers on quality and quantity needs.

In South Africa, where Freshmark has been operating for more than 20 years, it deals with 600 to 800 suppliers working through nine distribution centres to deliver to the company’s 440 supermarkets and hypermarkets around the country.

The company aims to get its other African operations to the same level over time. It has already made inroads in Zambia, the very first country outside South Africa in which Shoprite invested, and where it has 60-80 farmers on its books. While the firm used to import about 80% of its fresh produce in the 1990s when it was new to the market, it is now self-sufficient in the full spectrum of vegetables, according to Freshmark’s managing director Johan Van Deventer. “Vegetables are a short-term crop and easy on cash flow,” he says. “Within three to four months you have your money back. This is very attractive for farmers.”

The company has also contracted farmers to supply its stores in Malawi, Zimbabwe, Mozambique, Tanzania, Uganda, Angola, Mauritius and Ghana. The only country in which it does not operate alongside Shoprite is Nigeria, because of its ban on the importing of fruit and vegetables, although Shoprite itself supports 39 farmers, who are growing items such as sweet corn and butternut squash for sale in its Lagos supermarket. This number will grow as the company’s operations expand.

Freshmark doubles as a source of agricultural advice and expertise, where required, to support suppliers, telling farmers what is needed, and how to grow it most effectively, providing inputs such as seeds and teaching post-harvest discipline. The idea is to ensure that standards established in South Africa are maintained at all its other operations.

Van Deventer says the company is now moving to the next level in its African operations outside the home base, importing certain crops grown in other African countries for its South African supermarkets.

The supermarket phenomenon, while still relatively new in Africa, has changed consumers’ buying patterns and provides a ready market for a range of locally-made goods in economies that were, and still are, mostly reliant on informal markets and unreliable supply chains.

In some countries, the supermarket phenomenon has spread beyond the cities and into smaller towns. A notable case is Zambia, the first market outside South Africa penetrated by Shoprite, and still one of its major success stories with 18 supermarkets.

The lack of competition from anything but relatively small local operations has allowed the South African chains to dominate the retail sector – and many other sectors – in most of the countries in which they operate. The exceptions are Kenya and Zimbabwe, both of which have strong local players that have held onto their markets.

In Zimbabwe, the main competition, TM Supermarkets, owned by the Meikles Group, has a South African link – a minority stake held by South Africa’s Pick ‘n Pay. Shoprite has one store in Zimbabwe – in the second city of Bulawayo – and it stopped further expansion after the economy took a downturn in the late 1990s. Even though it is poised to look at the market again whenever normalcy returns to the economy, TM and the local Spar group have invested heavily in the market, limiting room for new players.

In Kenya, two chains have dominated the retail landscape – Nakumatt and Uchumi – and foreign groups have had little presence. Nakumatt is to spend $5m to set up four branches in Tanzania this year and is also looking at opening up in Rwanda and Uganda. In 2006, Uchumi, a listed company with 28 stores countrywide, was buried under a mountain of debt and applied for statutory management with its shares suspended on the Nairobi Stock Exchange. Earlier this year, however, it announced that dozens of foreign and local companies were lining up to buy a stake, and it may yet be revived.

Local supply factors?

In Zambia, the South African chains are facing increased competition from the locally-owned Spar group, which has a base in The Arcades shopping centre in Lusaka, in direct competition with the much older and original shopping complex in the city, Manda Hill, which has both Shoprite and Game as key tenants. Spar recently opened a store in the tourist centre of Livingstone and is busy with expansion in the rapidly growing Copperbelt town of Kitwe.

Although in the case of South African chains, many goods are imported from the home base, an increasing percentage of goods are sourced locally where the quality and regularity of supply conform to their specifications. But there are constraints on just how much can be supplied locally.

The emphasis on protectionism in African economies deprives consumers of many of the goods the supermarkets would like to offer. Economies of scale in South Africa mean production costs are generally lower and the companies can sell South African goods cheaper than many locally-produced ones, even including transport costs.

Where constraints do not apply, the companies are trying to source as much as possible locally. For example, Shoprite has a scheme, through its subsidiary Freshmark, to help African farmers produce for their supermarkets (see box). Local sourcing has been extended to products such as sugar, flour, cooking oil, pasta, fruit juices and locally-bottled water.

Among the challenges for retailers in Africa is the tendency of governments to introduce ad hoc import bans. The reason behind these is often protection for local producers, as in the case of goods such as cooking oil and poultry, but in many cases, the goods are simply not produced or are not produced in the range available elsewhere. Such restrictions are usually imposed by refusing import permits for certain goods, often without notice or consultation. In the case of Nigeria, there is a total import ban on a wide range of goods including foodstuffs, plastics and furniture. Many goods on the list are not produced in the country and it is not clear why they are on the import-ban list. But the government, in its attempt to push local production, particularly in the manufacturing sector, has been inflexible on the matter for the most part, despite the fact that it contradicts World Trade Organisation provisions.

Permits and honeymoons?

Applying for licences and permits on all imported goods and running the stores are costly and time-consuming exercises for retailers. Another challenge has been the rapid penetration of cheap Asian goods, particularly from China, alongside the existing problem of illegally-imported second-hand goods, many of them also from Asia.

The retail chains hope that when the China honeymoon wears off, their offer of quality goods with a strong support network will give them a competitive edge over the Asians, who compete strongly on price but not on quality.

Despite the problems, the growing retail pie presents spin-off benefits for both companies and suppliers in local economies. In Nigeria, for example, Shoprite has 280 local suppliers just for its one store. With its future expansion, this will increase exponentially.

Zambian company Zambeef, which linked up with Shoprite in its home base to provide a chain of successful butcheries, has moved with the group to Nigeria, where it is setting up a feedstock plant, and to Ghana.

The procurement demands of the multinationals have put pressure on local producers to examine issues such as packaging and pricing, and to start changing the way they do business. Bar codes, for example, are a new phenomenon in Nigeria, but it has not taken long for suppliers to come to the party, particularly given the efficiency benefits they provide.

The retail chains have also precipitated another wave of business in related areas such as franchising, property development and supplier services. The high visibility also allows greater scrutiny from local competitors and consumers that companies in most other sectors do not have to endure. In general, standards are being lifted in retail as a result of competition and a desire to take part in the opportunities becoming available.

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