Success And Failure Of South African Firms In Nigeria A Matter Of Strategy
When retailers diversify into new markets, they’re conducting a balancing act between risk mitigation and risk tolerance.
Numerous South African retailers, for example, have been eyeing their neighbors for some time — the siren song of the “Africa rising” narrative coming as it did alongside the increasingly sluggish performance of South Africa.
But those plans aren’t always so easily executed.
For all the acknowledgement that each African market is decidedly its own, retailers eager to participate in economic growth can easily overextend and surpass their abilities in the process.
Ambitious projects can thus quickly devolve into speedy exits.
Take, for example, Truworths’ recent decision to pull out of the Nigerian market. The South African retailer closed its last two Nigerian outlets in January, bringing an end to an expansion experiment that was already a loss-maker three years ago.
It follows in the footsteps of Woolworths, another South African chain that closed its nascent Nigerian operations in 2013.
On the other hand, retailer Shoprite just celebrated 10 years in Nigeria, closing the second half of 2015 with a 12 percent rise in group net income and plans to support its growing Nigerian footprint with a new distribution center.
What a difference in strategy makes.
Doing business in Nigeria
Expanding a business into Nigeria is not an insignificant exercise on any level. It’s an undeniably attractive market: Africa’s largest economy has natural resources and human capital in abundance. Combined with its long-term growth trends and growing consumer base, it is a rare retailer who wouldn’t take interest.
However, these winning characteristics come at a cost. Nigeria is 169th out of 189 countries in the World Bank’s Ease of Doing Business Index. It ranks firmly in the bottom 10 on measures such as access to electricity, registering property, paying taxes, and trade across borders.
Business infrastructure matters, and it is not easy to come by in this market.
There is also a dearth of real estate available for retail, which makes existing locations exceedingly expensive. Both Woolworths and Truworths cited rental costs among their reasons for leaving the country. In 2014, The Economist reported that malls cost twice as much in Nigeria as they do in South Africa, and certain inefficiencies are built into the system: because cement imports are banned, for example, Nigeria’s biggest cement producer, Dangote Cement, enjoyed margins of 62% at the time of reporting.
Finally, in light of plummeting oil prices and deeply distressed government coffers, Nigerian policymakers have instituted a number of measures to sharply reduce access to foreign currency and imports. These rules are intended to protect the naira from further devaluation and reduce strain on national foreign currency reserves, but the spillover effects have been unkind to businesses, retailers among them.
Truworths chief executive officer Michael Mark told Bloomberg that the difficulty in getting stock to stores, coupled with difficulty in repatriating revenue made it such that “there was no point any longer.”
Build your own infrastructure
The economic crisis has been catastrophic, but it is apparently not a complete deal-breaker — after all, Shoprite continues to grow. The difference is a matter of putting down roots.
In the military strategy classic The Art of War, author Sun Tzu advises, “Bring war material with you from home,” while foraging on “the enemy” to ensure the army remains fed. There are parallels in the world of foreign business expansion.
In a way, businesses looking to come into the Nigerian market are compelled to essentially bring or build their own infrastructure.
Shoprite has apparently been eager to do so. In 2012, the retailer announced plans to invest $205 million in property development in Nigeria to help overcome a lack of appropriate retail space.
It reportedly keeps a warehouse stocked with flour just in case imports are held up (in 2013, Shoprite’s reported time between arrival at port and delivery to Nigerian stores was an astounding 117 days).
Looking at it from the perspective of the current economic and policy situation, this begins to seem like a highly prescient strategy.
When foreign currency dries up, import restrictions spike, and repatriation of profits becomes a deepening impossibility, a deep local presence in the form of several months-worth of raw materials, redundancies in provisioning stores, and ownership of real estate begins to seem like a sensible plan.
Indeed, with 76 percent of its stock produced or sourced locally, Shoprite is remarkably sheltered from such problems.
This was a strategic decision; in its 2015 annual report, the company notes that it honed in on targeting markets sizable enough to support a number of stores “to provide the economies of scale needed to justify establishing distribution centers and the additional infrastructure to service the stores efficiently.”
In other words, to “forage” effectively implies immersion — and setting down those roots. In comparison to Shoprite’s extensive investment in protecting its supply chain and ensuring its access to affordable space, Truworths and Woolworths begin to look like tourists.
Timing is everything
Of course, in strategy, as in life, timing is everything.
Shoprite didn’t open its Nigerian outlets all at once, and had today’s economic turmoil struck during Shoprite’s early days in the Nigerian market this story might have been different. But economic troubles are, again, just one challenging factor among many.
On the whole, both Truworths and Woolworths probably made the right call. The Truworths operation was already loss-producing in 2013, and the time and resources required to turn it around would have likely been inefficient on the whole.
Indeed, the company has enjoyed remarkably strong figures elsewhere, with profits for the latter half of 2015 up 21 percent.
As always, the viability of a project and the will to make it work are two separate but complementary factors. For Shoprite, Nigeria has been a methodical and long-term investment which appears to be rewarding the retailer despite recent volatility. For Truworths, the numbers — and perhaps quite simply the commitment — simply weren’t there.
Anna B. Wroblewska is the founder and principal of Augury Consulting and an expert in strategy and marketing for the financial services industry. She is a regular contributor to the financial press.