The retail industry in sub-Saharan Africa remains a vast opportunity with a burgeoning consumer market. The region is now home to more than one billion people, which is expected to account for nearly one-fifth of the world’s population by 2025.
The consumer class continues to expand, further aided by the rising number of Africans emerging from poverty in recent years. Yet the players in the retail space continue to struggle, with the positive trends failing to push them forward.
The Kenyan retail sector has been plagued by store closures and troubled balance sheets. Struggling retailer Nakumatt has been evicted from some of the malls and recently dropped its fights to retain other outlets across the country, particularly in major cities such as Mombasa and Nairobi.
The layoffs are high and the scenes of (forceful) evictions with locals looting some of the goods in the stores are concerning to investors.
Uchumi, another Kenyan retailer, recently exited Tanzania and Uganda and started closing several branches in Kenya, with outstanding debt and supplier payments piling up and limiting their ability to find a structural and consensual solution with lenders and suppliers.
Other retailers, including Tuskys and Naivas, are proving resourceful in paying debt and suppliers, but their balance sheets also present an emerging problem if changes are not made.
The talk of Nairobi is also how many suppliers are on the verge of financial turmoil, largely because they are suppliers to the struggling retailers in the country.
Conservative estimates place the outstanding payments to suppliers in the country north of $400 million. Sizeable overdue payments are fast becoming the main reason that investors are avoiding putting capital in retailers and suppliers alike.
Political instability can hold back a sector. The election challenges for Kenya in 2017 were a disaster for the economy, with investors sitting on the sidelines for nearly six months as they waited for the first election and the second (re-run) election to pass.
Investor idleness largely left many retailers starved for cash, adding debt to the balance sheet and pushing out supplier payments. Those companies today are asking investors to step into a situation that worried investors pre-2017 and bewilder investors in 2018.
The same scenario is a worry in Nigeria and South Africa. A drawn out election in Nigeria will stall the economy and undercut a relatively nascent retail market. The oil price drop exposed the fragility of the Nigerian economy…a bad oil price and slow politics can easily shock the system and create turbulence for the retail sector.
Smaller African economies are further exposed to uncontrollable headwinds associated with unsure politics. Stagnation with the development of the liquefied natural gas (and a debt fiasco) burdened Mozambican retail in recent years.
The Arab Spring laid wrath on the northern African retailers, with many Tunisian retailers slowly rebounding and many Egyptian retailers seeking restructuring.
Markets remain very fragmented with many Africans (and foreigners) shopping at neighborhood shops or independently owned kiosks. The nature of the demand from the consumer-base does not reflect the quickly advancing nature of the markets.
Large malls in the middle of many African business capitals are flooded with consumers who are not spending the money reflective of the costs associated with the building they are walking through. Bringing those consumers into the formal retail market is easier said than done.
The African middle class largely cannot access affordable credit, which stunts the growth of spending power for an ever-growing amount of individuals.
Lending institutions unapologetically avoid the new middle class because incomes and jobs remain unsecure. The manifestation of these factors is a rising amount of foot traffic across major and medium-sized cities with a lower increase in spending at checkout.
Retailers may have to scale back the ‘grand’ dreams and better target markets. Targeting the fastest growing cities or city clusters will better help to capture the “spenders” in the market.
The focus on urban centers, including the likes of Nairobi, Lagos, Addis Ababa, and Johannesburg, taps into the power of African urbanization and reduces the added costs of sprawling expansion across countries unable to underwrite the growth of many retailers through its local population.
Over expansion, particularly through debt (see Nakumatt), is a fragile model for retailers. Global retailers entering these markets are themselves targeting specific urban pockets within the larger sub-Saharan African region (and doing it at a lower cost).
The headwinds remain favorable to local retailers, but can these local retailers situate themselves in the midst of struggle and ride the wave (albeit in rough waters)?
Kurt Davis Jr. is an investment banker with private equity experience focused on Africa and the Middle East. He earned an MBA in finance, entrepreneurship and operations from the University of Chicago and J.D. in tax and commercial law at the University of Virginia’s School of Law. He can be reached at kurt.davis.jr@gmail.com.
