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The retail sector has seen tremendous growth in the past decade in both East and West Africa with more formal retail space coming onto the market.
A growing population, rapid urbanisation, the growth of middle-income earners, and interest from international retailers has been the catalyst for driving the growth of formal retail developments.
“Despite the growth of middle-income earners, this has not filtered into consumer spend. “Traditional spending habits remain pegged on small scale purchases and not on arbitrary leisure shopping. “In countries where formal retail is still evolving, the process of changing buyers’ shopping habits still has some way to go – it is a process,” says Leonard Michau, Director and Head of Africa Operations.
Formal versus informal retail
Although the last decade has seen growth in the formal retail market, informal retail continues to dominate in some markets across Sub-Saharan Africa.
“The informal sector which includes plazas and open air markets still represents a larger proportion of the retail market in Nigeria. “Informal markets offer price points that the formal sector cannot compete with,” says Bolaji Edu, Broll Nigeria CEO.
He says typically, formal retail is burdened with higher operating costs such as rental, service charges, labour, and in many cases, higher direct costs due to a legitimate supply chain. This all results in higher stock prices, he notes. Formal retail therefore competes in other areas by creating a unique shopping experience under one roof that is safe, clean and includes a tenant mix that caters for shoppers’ needs and aspirations.
“The threat posed by the informal market to formal retail is typically cost driven. “The formal retail sector has higher occupational costs such as rent and service charges for example and higher price of stock,” says Bolaji Edu, Broll Nigeria CEO.
In Ghana, a larger part of the population is still categorised as low income earners, which means that there is a general preference for informal retail, says Kofi Ampong, Broll Ghana CEO.
“In informal retail, shoppers have the option to negotiate prices which allows some flexibility, something malls do not offer. “These informal trading places are located closer to consumers which make them the first choice for purchasing daily needs,” says Ampong.
According to Peter Small, Managing Director for Broll Kenya, the informal sector holds a large share of the retail market because consumers prefer informal retail for every day small scale shopping. As a result, he says this reduces foot fall in every day shopping for formal retail.
“Product pricing in the formal retail sector experiences difficulty in consumer attraction and retention owing to the significantly lower pricing models adopted by the informal sector. “Consumers prefer flexible prices as opposed to the fixed pricing models adopted by most retailers located in formal outlets,” explains Small.
In Ghana, foot traffic in formal malls is reportedly high, however, this unfortunately does not always translate into sales, a major complaint made by several retailers.
Ampong says malls do not offer the products that make up most of the daily meals of the average Ghanaian home, such as dried fish, fresh fish, corn dough, cassava dough, and locally grown food stuffs. This is one of the main reasons informal retail dominates and will continue to dominate the retail sector in the country.
The informal retail market should not be seen as a threat to the formal sector but rather as an opportunity to tap into a large segment of the middle class as shopping habits progress from informal to formal retail, says Edu.
“Additionally, retailers who might consider an entry into the formal retail market are forced to realign their strategies due to cost of expansion.”
Challenges and opportunities
Michau says the growth in the retail sector in both East and West Africa hasn’t been without challenges. Although many mall developments and investments have been seen in cities such as Accra, Nairobi and Lagos, the current tough economic climate has resulted in some newer malls experiencing high vacancies while the established malls have managed to record high occupancies amid tough times.
There is still appetite from international retailers wanting to enter these markets, however, the current tenant base remains shallow and fragile and is unable to support the growth/expansion in the market.
Consequently, many of these malls have a large majority of tenants that are common and hence, a lack of product differentiation is noted. The process of acquiring tenants for new developments is increasingly becoming difficult as seen in the delays in opening some malls due to failure in securing the required pre-let percentage.
“In such markets, the tenants have the upper hand when it comes to lease negotiations and have the ability to negotiate more favourable lease terms,” notes Michau.
In both East and West Africa, we expect the slow take-up of retail space to continue for the remainder of 2017 as retailers remain cautious with regards to taking up more new space.
Currently, Ghana has an estimated 122,555m² of formal retail space with 61,728m² of space expected to be added onto the market in the next 18 - 24 months.
Michau points out that Kenya has an estimated 8.2 million ft² (761,805m²) of formal retail space with an estimated 2.7 million ft² (250,000m²) expected to enter the market over the next 18 to 24 months.
Nairobi currently has approximately 73% of the total number of shopping malls in the country with two of the biggest malls in the East Africa region, Garden City (34,175m²) and Two Rivers (67,500m²).