EXIT OF SHOPRITE: Should This be of Concern to Government?

Last week SHOPRITE announced it was pulling out of Nigeria and looking for local investors to take over the business. While the news may have caught some completely by surprise, others who have followed the difficulties the chain has had to contend with may have already seen the writing on the wall. To name one such difficulty: epileptic electricity supplies, a major problem for shopping malls that rely on freezers 24/7 and massive air conditioning during opening hours.

The withdrawal should be of great concern to us all. After all, retail business sector as at 2018 accounted for about 16% of the Nigerian GDP. In an era characterized by a drive for diversification, the withdrawal is alarming. It is a well-known fact that Nigerian shoppers prefer and want to see, feel, and try on products before making a purchase thus, having a variety of products under one roof helps to address that aspect of the shopping flair in Nigeria.

To jog everyone’s memories: Shoprite is a South-African owned chain which started operations in Nigeria in 2005 and now boasts 26 retail stores across eight states in Nigeria, making it the biggest retailer in the country. It offers its customers a variety of food products, household goods and small appliances at affordable prices. Moreover, it has structured the retail business in Nigeria to international standards to deliver a world-class shopping experience. Indeed, it has a minimum payroll of 2,000 with 99% Nigerian staff strength. It should be noted that about 80% of sales in Shoprite Stores in Nigeria consists of domestic goods which encourages local products. Shoprite has built relationships with over 300 leading Nigerian suppliers, small businesses, and farmers, securing a wide assortment of local brands. It is an example to follow. And it is renowned for its staff training. In a nutshell: SHOPRITE are the pacesetters of structured retail business in Nigeria!

No other retail company in Nigeria has been able to achieve what Shoprite has done in Nigeria in the last 15 years. In fact, none has achieved anything similar in terms of branch outlets, staff strength and establishing an immense network of suppliers, let alone maintaining such standards. This begs the question whether a successor company will keep things moving so well.

The intended discontinuation of SHOPRITE in Nigeria is not surprising, because, for some time, the retailer has been grappling with the twin evils of weak sales revenue due to logistics concerns (one needs think only of clearing goods at Apapa) and the economic downturn in Nigeria – which has been worsened by the COVID-19 pandemic lockdown and social distancing. Customer patronage subsequently fell by 7.4% owing to the pandemic lockdown.

Another reason responsible for the challenges that Shoprite is currently facing is the difficult and hostile environment it finds itself: Beyond COVID-19 economic consequences and fall of oil price, there are other factors that made the decision inevitable, some of which are:

Exorbitant rents and high taxes, costs that have to be passed on to customers along with energy costs.

Currency devaluation, as this eats into profits that want to be repatriated, with currency-induced inflation putting another nail in the coffin.

Fast dwindling consumer purchasing power which automatically resulted in a dip in sales of most businesses.

Lack of access to local credit finance given the unrealistic 20-plus percent interest rates demanded by banks

Infrastructure deficits (transportation, energy), making getting produce to the malls and keeping them operating and customers cool – incredibly challenging and/or very costly.

Xenophobia – Some Shoprite stores were looted and destroyed in Nigeria in response to the xenophobic attacks on Nigerians in South Africa, sparking an 8.1% loss in sales in H2 of 2019.

All these factors added up to making it unattractive to the would-be investor, be it foreign or local to invest in Nigeria. It is in this context that the Chief Executive Officer of Shoprite, Pieter Engelbrecht, noted: “…we have taken a number of immediate operational actions, all of which are on-going and include rent reductions, store closures, productivity improvements and de-dollarising costs. We are confident in the absence of further currency devaluations and any unforeseen circumstances that these operational measures will positively impact profitability.”

From the foregoing, it is obvious that the exit of the chain-store will adversely affect not just the staff, but the numerous suppliers and farmers. It is conceivable that some of these small business holders will go out of business. In other words, the exit will have a ripple effect on the economy. There  is also no assurance that new owners, assuming such are found, will want to retain the old staff. And who knows what the situation will be as regards the real-estate investors who developed the shopping malls and own the respective sites.

A 2013 McKinsey report estimated that from 2008 to 2020, Nigeria offered a $40 billion growth opportunity in food and consumer goods. Evidently, with the SHOPRITE announcement, at the latest that bubble has burst. In fact, in 2019, according to a survey released by A.T Kearney, a global management consulting firm, Nigeria’s global ranking in retail development dropped to 30th position out of 30 countries with the total national sales dropping from $109 billion the prior year to $015 billion. Yet if one looks at the above factors closely, then it emerges that at leave five of the six are open to influence by good policymaking (on import duty regimes, red tape, infrastructure, etc.), which can definitely positively affect the cost of doing business in Nigeria. Remember, government is there to enable business to take place, not to do business. In this case, it would seem to have failed in its enabling role.

Government should already be going into action. After all, there the risk of contagion effect. What will happen to Game and other foreign companies directly and indirectly involved in the retail sector? It is no longer news that one of the clothing brand retailers, Mr. Price, a popular affordable clothing, sport and home wear brand has already closed shop and left with all their investments while citing difficulties and challenges, such as repatriating profits. With the attendant consequence of the COVID-19 pandemic on the Nigerian economy and its populace which is resulting to massive job losses and decreased income, it is only a matter of time and will not be a surprise if other similar foreign retail stores follow in Mr. Price’s and Shoprite’s footsteps.

Retail business in Nigeria is viewed by many as a new frontier of growth and holds significant opportunities for local and international investors and if fully harnessed, the opportunities it avails the economy are vast. These include job creation, spurring industrial growth, infrastructure development, and thus ultimately contribute to GDP growth. So, if we keep allowing these investors to close shop and leave, it portends a huge loss to the economy. In this context, it should be of great concern to the Nigerian government that the Nigerian economy is growing slower than its population growth due to the hostile business environment.

On the other hand, neither the government nor the populace need worry about the exit of one or more foreign investors if there are no impediments to healthy competition, markets function efficiently, and if the decision to close shop is based solely on corporate decisions – and has nothing to do with the systemic challenges facing the retail sector. If this were the case, then the departure of Shoprite from Nigeria could spell more business growth for Nigerian retail supermarkets and businesses. It is a big ‘if’ as it assumes quite a lot being in place: appropriate competition policies and legislation; insignificant barriers to entry and exit; open borders; easy repatriation of profits and capital; ease of doing business; low transaction and indirect costs; favourable macroeconomic conditions (taxation, fiscal policies, interest rates, access to finance, and exchange rate regime); improved security and infrastructure. And last but not least, effective sector-government liaison (to convey challenges and feedback).

Now that is a hefty set of homework assignments for government… And we can comfortably contend that it is only once those issues plaguing the Nigerian business environment are tackled squarely and openly and appropriate policies put in place that government can sit back and no longer worry if a major company, be it foreign or local, closes shop.

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