Business and Finance

What does the failure of Woolworths say about Nigeria?

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For foreign companies looking to expand their business in Africa, Nigeria is a country that has certainly been brought to their attention. In recent years the West African country has seen a rush of multinational companies enter the space. Nigeria has the largest population in Africa, with a growing consumer class which offers an attractive motivation for retail companies to expand in the market.

However, the announcement by South African retailer Woolworths in November that it would be pulling out of its three stores in Nigeria, a mere year and a half after it first entered the market, questions how lucrative the country is for retailers.

The reasons cited by Woolworths were high rental costs, duties and supply chain challenges in Nigeria.

“When an investment no longer generates viable returns, difficult decisions have to be made to contain costs,” CEO of Woolworths Ian Moir said in a statement. “The Woolworths clothing and general merchandise business in Nigeria has not been successful, despite several attempts to improve performance.”

The attraction of Nigeria

According to EY, Nigeria is one of the world’s rapid growth markets, which the firm defines as countries with economies and populations of a certain size that display strong growth potential and are, or could be, strategically important for business. This, alongside the prediction that Nigeria will overtake South Africa as the largest economy on the continent with the rebasing of its GDP this year, is enough to turn investors’ heads.

Both Europe’s largest retail network, Spar, and South African-based Shoprite Holdings has also been aggressive in their expansion in the market.

For example, according to Resilient Africa, a joint venture between South African companies to build shopping malls in Nigeria, Shoprite will secure the anchor position in 10 of their malls.

The lifting of an eight-year ban on the import of garments in 2011 has also opened the door to foreign brands. The move has seen South African clothing retailers, such as Mr Price, Pep, Truworths and Foschini enter the market, with the Edcon Group planning expansion this year with its brand Jet.

Holden Marshall, managing director of Resilient Africa, told How we made it in Africa that the interest they have seen from South African retailers looking to secure spots in Resilient Africa’s malls in Nigeria has been quite substantial, including from the Edcon Group, Foschini Group, Mr Price and Massmart.

“At this point probably 40% of our malls will be occupied by recognised South African brands. And about 60% by Nigerian established retailers but most of them trading under master franchise agreements with European brands… you know, the Pumas, the Nikes, the adidas… The major sort of UK/European fashion brands are starting to establish themselves through master franchise arrangements with existing Nigerian retailers.”

Carlo Matta, CEO of Laurus Development Partners, a real estate development company focused on Ghana and Nigeria, said South African retailers are generally important leaders in Africa’s development.

“They are the first movers. They are brave, I have to say, [and] they understand the African risk better,” he said.

Woolworths’s failure: Is Nigeria really lucrative for retailers?

According to Bloomberg, while Woolworths is withdrawing from Nigeria, the company plans to continue its expansion into other African countries. This provokes the question: why not Nigeria?

Dianna Games, CEO of Africa @ Work, a South African-based company that aims to facilitate and improve business in Africa through the provision of research and networking opportunities, said there are a number of factors that led to Woolworths’s failure in the challenging market of Nigeria. However, she believes these failures are more likely due to poor business strategies than simply Nigeria’s difficult operating environment.

“Woolworths’s withdrawal from Nigeria, and that of Nando’s, Telkom and others, should not be interpreted as a story only about Nigeria’s challenges, but also about specific problems created by the choices the firms themselves made.”

She added that one cause of Woolworths’s failure is likely due to poor marketing.

“Because South Africa’s retailers are household names at home, there seems to be an expectation that Africans elsewhere will be familiar with the brands. This is not the case. Wealthy Nigerians travel extensively, but their favoured shopping haunts are in the UK and US. As a result, they are more familiar with the down-market Woolworths brand in the UK that went out of business a few years ago than with the more upmarket brand so beloved by South Africans.”

Games also suggested that the layout and ambience of Woolworths shops might have led Nigerians to believe that goods were expensive.

“Cost is an issue with this much-trumpeted new emerging middle class, the bulk of which is at the more unstable end of the definition… Nigerian consumers are brand savvy. If they are going to pay higher prices for goods, they want global brands they recognise; brands that tap into their aspirations. Woolworths, and some of South Africa’s other clothing retailers, simply do not fit into that category. That makes their marketing job more difficult — but not impossible.”

According to a report by Nigeria-based Business Day, Edcon will enter Nigeria with its more cost sensitive brand Jet, as opposed to its brand Edgars.

“We normally go into a new country with Jet‚” said Edcon’s CEO Jürgen Schreiber. “In Zambia though‚ we went in also with Edgars‚ which is working well‚ and then we will go into Ghana next year in the second half with both Edgars and Jet because the market is quite strong.

“Nigeria would be a discount approach and not an Edgars one at this point. We have more learning experience and it’s a little bit more of an easier format,” he explained. “Other clothing retailers have been very successful in Nigeria‚ especially when they work in the discount space‚ so we are comfortable and confident on the Jet side.”

A challenge for retailers in Nigeria could be that there are only a few malls available. “There are [currently] probably five malls throughout Nigeria; malls as we would recognise a mall,” Marshall told How we made it in Africa. “The Nigerian market to date has working informal markets and department stores that are sort of standalone Nigerian traders. They are starting to get the feel now for malls and there is a massive growing middle class in Nigeria… So the demand for more formalised, call it Western modern shopping, is massive.”

Games pointed out that the current handful of available malls in Nigeria is not enough to change the shopping habits of the consumer masses. However, she added that as more malls are constructed, more people will get a taste for them.

“Companies investing [in Nigeria] have to understand the minutiae not just of the risks and challenges but of the market, the culture and the consumers. Models have to be constantly fine-tuned and adapted… But it is glib to blame a country for a company’s failure to make an investment work rather than the firm’s own strategies, unsuitable models, poor choice of partners and so on,” Games concluded.



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