Nigeria Vs South Africa: The African Consumer Boom
Nigeria and South Africa not only make up half of Africa’s GDP in the sub-Saharan region but they also have two of the largest consumer markets in the continent. In fact, both economies enjoy a healthy competition – Nigeria beat South Africa as the largest economy in Africa in 2019 and maintained the lead in 2020 as well (Bloomberg 2020).
Cut to the year 2021, while the various factors affecting the economy in the post-Corona era can’t be overlooked, the economic indicators suggest that the situation remains positive for 2021 too.
As per the UN’s World Economic Situation and Prospects 2021, the GDP is projected to expand by 1.5% in Nigeria and 3.3% in South Africa in 2021.
This is a clear indicator that both Nigeria and South Africa continue to offer attractive propositions for companies that are looking to do business in the consumer market at the moment.
In fact, as per the same report by the United Nations, Africa, as a whole, is projected to achieve a modest recovery, despite a contraction of 3.4% in 2020, with regional GDP expanding by 3.4% in 2021 and 3.6% in 2022.
But before we even look at challenges that COVID-19 could and is posing, we must look at the how consumers and their patterns impact the market.
African Consumers and the Market: The Challenges
Now, the African consumers become a critical point here. The same UN report states that the recovery is directly tied to “domestic demand” and the “pickup of exports and commodity prices.” And this where the Nigeria and South Africa, two of the largest markets in Africa step in.
Thus, Sonia Galat, Co-founder and Director of Africa Business Venture spoke to two leading businesswomen, Dianna Games and Bolaji Sofoluwe, about the challenges and the opportunities that companies can have in the dynamic consumer markets of Nigeria and South Africa – the two of the largest consumer markets in the continent.
Both businesswomen bring decades of experience on African markets on the table. Games heads her own consulting firm, Africa At Work, and also runs the Johannesburg-based South Africa and Nigeria Business Chamber whereas Bolaji Sofoluwe is the Managing Director of the UK-based Enterprise Trade and Knowledge Group.
Bolaji Sofoluwe who has a decade-long experience in assisting British businesses stepping into African markets and African customers go into other African markets, felt that businesses looking to tap in these two markets have to have a nuanced approach, considering the sheer size of their economies and their markets.
She added that in Nigeria, while it is the game of numbers, it also depends on the consumer products and the market. The outcome may depend on what sort of consumer products you’re thinking about taking into the market.
South Africa is a more sophisticated market, but it’s one of the reasons why a lot of African companies shy away from South Africa as the level of competition is very high.
However, the South African market, she said, is a preferred option for a number of their clients, particularly for foreign companies, as it offers a softer landing in the continent.
Games echoes Sofoluwe views on South Africa. She says, in the retail sector, South Africa is a more sophisticated market, but it’s one of the reasons why a lot of African companies shy away from South Africa as the level of competition is very high. The retail market already has well established retailers and strong brands like ShopRite, Checkers and Woolworths and such who have been in the market for years now. Thus, they are direct challenge for new retail chains coming into this market.
However, while this doesn’t apply in every sector in the country, it certainly applies in financial services and other similar sectors. This, Sofoluwe said, is a big factor in why South African retailers are exploring opportunities for expansion elsewhere. This suggests that there IS saturation in this market, particularly in this area.
However, this also doesn’t mean the country doesn’t import goods. This is supported by the fact that there ARE two different kinds of consumer segments, considering the very high import levels from China and others as well as other countries in Africa.
Hence, in South Africa, one sees that retail stores are spread across the country. You will see shopping malls and shopping centres of different sizes across the country, in small towns from end to end. Whereas in Nigeria, both Games and Sofoluwe agree, you don’t see that.
This is because Nigeria has a highly unstructured market where there are pockets of formalized segments are concentrated in the bigger cities and around commercial and political capitals. It’s a “fragmented space” where
there are several small shops.
And this is where supply chain and distribution become priority if a business is mulling over entering the Nigerian market. Another factor is product stocking and storage and how one engages with distributors.
So, finding and selling to one large distributor becomes a challenge and this leads to fragmentation in the chain. So, while you may get large supermarket chains like Shoprite and Checkers in Nigeria, it loses out when compared to South Africa where there are many large chains like Sainsbury’s and Tesco.
The above is the direct result of the consumer behaviour in these two dynamic countries. So, what’s next?
What do we know about the trends before COVID-19 and after COVID-19?
CORONA, LOCKDOWN AND SUPPLY CHAIN: WINNERS AND LOSERS
It is true that Nigeria witnessed a recession 2016-2017, due to low oil prices. So, it was a double hit seeing that the situation was precarious even before COVID-19 came knocking in Nigeria. There are also factors such as disposable income, consumer spending and jobs. It was observed, Sofoluwe said, that the consumers began to start spending, about 121 Billion Naira or, say, about US$4-5 billion, when the virus hit. So, considering Nigeria’s largely segmented and fragmented sectors, the shutdown was bound to happen as the system wasn’t uniform.
Thus, when we analyze the supply chain distribution and formalized sector in South Africa and compare that with Nigeria, we see that the latter was hit harder because of two factors:
1. Nigeria was already in recession as opposed to South Africa which was on the cusp
2. The country’s smaller stores and the distributors had a harder time dealing with lockdown because of its fragmented market
This is because, Games says, the former had a lot of big chains like Woolworths and Checkers that were allowed to open for essential goods. So, while the markets in South Africa didn’t make as much money as they wanted to, they survived and did decent business on the whole, especially as the restrictions started dropping.
Thus, a formalized sector like South Africa which always has had quite a strong retail market, had a relatively easier time with COVID-19, as opposed to Nigeria. And that’s why South Africa also has a sizeable country penetration of chains, stores, shopping centers and such. It did good business!
But another interesting development took place in Nigeria during this time when we look at it in terms of consumer spending. While the consumer spending dropped in retail, it surged in food because of stocking up of less perishable and processed food items by the people, leading to a great surge in imports and spending in one sector.
So as the phrase goes, “There are winners and there are losers.”
Because similar trends were observed in developed countries like the UK where the spending increased during the early months of COVID-19 which was earlier was only seen during Christmas. It’s all about demand AND supply!
INNOVATION, NECESSITY AND LIMITATIONS: THE INEVITABLE
Besides the food sector and imports seeing gains, there is another interesting factor in both economies – innovation and necessity.
While delivery of goods in e-commerce in Nigeria was seeing a sea change because of technology, it was being held back because of failure of the payment infrastructures in the country. But because of the lockdown, it accelerated the development as the businesses were forced to change and innovate.
Necessity is the mother of inventions and people had no choice but to put faith in online payment infrastructures.
The CEO of Ibadan–based Foodco too told Games that they did have a plan to shift online but at a later date and the pandemic accelerated that. But despite that the time in delivering is an issue. Customers expect delivery on the same day.
So, while online consumer spending saw a surge, there is another infrastructure issue – transport and logistics. Even a big city like Lagos has that problem – bad traffic management.
So again, besides a budding online payment infrastructure, transport and commuting places another limitation on e-commerce.
In South Africa, while there are advanced customers, issues with e-commerce, like it is in Nigeria, are similar. Consumers are spending online but supply chain distribution still takes 2-3weeks for delivery as big retailers too took their time in gauging the market. However, this still led to a lot of activity in seeing the growth of small startups in the food sector.
So, even as the lockdown persists and there is a reluctance in spending, online payments structures and e-commerce sector are seeing a lot of activity in both countries despite different challenges and limitations.
NUANCE AND COMPLEXITY: OPPORTUNITIES FOR FOREIGN COMPANIES
So, what does these consumer spending patterns and infrastructure challenges mean for foreign investment in Nigerian and South African consumer markets?
It is said, “Out of adversity comes opportunity.”
Now, Foodco is a promising brand in Nigeria and as discussed before, there are gaps that can be plugged. Games says that this is an opportunity for a big brand to partner with the brand and expand the franchise – maybe do even more!
Another one is ShopRite and now that it is discontinuing its 25 stores in Nigeria, there lies a glaring gap in grocery retailing. And, looking at Nigeria in terms of its sheer size of its market, there are always opportunities in Nigeria.
In South Africa, however, because of the presence of big retail chains, the market IS saturated. However, logistics are still an area to be improved. Also, the stock can always be expanded upon. Sofoluwe recalls how a South African cereal manufacturer that had a UK sales office approached her firm to get into South Africa. The latter is a competitive market.
So, what is the solution? How do foreign companies enter these two dynamic markets?
Sofoluwe says that people need to start looking at market entry from a more sophisticated perspective in South Africa – piggybacking! To put it simply – partnering with existing companies that need to scale up their operations to meet demand in their local market. Another similar way is to tie-up with complimentary services – car manufacturers and tire manufacturers, for instance.
She said that manufacturers can certainly benefit by looking into those areas where there is an existing distribution network. This would certainly get their foot in the door!
And then, the other way is licensing or franchising. In terms of retail or consumer products, you get the license and have somebody in South Africa to manufacture your product or produce your product in that local market and then put it into distribution. These, she said, are the two easiest ways for this particular sector to get into South Africa.
In Nigeria, she opined, since the market is fragmented, it’s always the distributors and agent mechanism where you can find not just one, but several big importers in the local market that can bring your product into the market. Another way, she said, is to set up a sales office. And here comes nuance and market research!
For instance, if you look at Nigeria as Lagos, for instance, or South Africa as Johannesburg and Cape Town, you will have to be very narrow about your approach as to what is available in that market because the demographics are quite different at the end of the day.
Because the fact is what the consumers will consume in the North of Nigeria might be very different from what you will find in the Eastern parts of Nigeria and to what you would find in a place like Lagos.
Also, another interesting thing with Nigeria is that a foreign company will have to face price competitiveness because of the number of Chinese and such products that go into Nigeria on a day-to-day basis; the latter has flooded the markets with their products.
So, besides nuance and market research, one needs to start thinking about how they can be creative about their approach to pricing and competitiveness.
Games cited the MTN as a case study and expressed a varied view on foreign investment in South Africa considering the challenges presented by COVID-19, volatile currency, currency restrictions, regulations, local demand and of course, competitive market due to the big players in the country.
However, she put her money on free trade area being launched and the resultant spotlight on South Africa and its exports business as compared to other rival economies in the region.
Sofoluwe agreed but went on to add that while various opportunities exist in these two dynamic markets, the two countries need to up their game in terms of government policies, taxes, logistics, compliance and the nightmare that is the red tape. To put it shortly, the ease of doing business is a major factor too!
However, she added that while the private players cannot control the above, what they can control is their preparedness and hence reiterated her support to the distributor-agents model as the way forward for foreign companies looking to tap into the great African Consumer Boom.
She cited how her A-listers clients in business, instead of finding a strong local brand, insist on getting distributors and agents that are a small company with an entrepreneurial drive and are flexible to be able to drive the product in the local market. Creative approach, she reiterates!
Games echoes the same creative approach for Nigeria considering its fragmented market but with caution as trust is something that has to be built in an informal sector. Citing the reception of Woolworths in Nigeria and South Africa, she also cautioned against the cut-and-paste approach to market strategy, adding that what brand may work in a particular market doesn’t mean it will work in another.
Also, considering that 90% marketing happens through platforms like Instagram in Nigeria, Games too recommended tying up with smaller retail companies as a way of testing the consumers and target audience.
So, if a foreign company wants its foot in the door, it is important that, they study the market complexities in terms of local culture and financial dynamics and then devise an entry strategy, she says.
Sofoluwe ended the session by saying that everyone needs to start thinking with this question, “How can I research the local brands that are doing extremely well?”
To conclude, instead of broad-based macroeconomic, indices, or market research information, the major pointers for both markets remain due diligence, marketing strategies, and a good partner on the ground.
The cookie-cutter approach just doesn’t seem to work in a vibrant and dynamic economies like Nigeria and South Africa.