Global strategy: Nigeria's Retail Market October 2012

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Nigerian EconomicsGlobal Strategy: A new world order…?

October 2012A complimentary publication of Straplan (Research & Planning)

Global Strategy: A new world order…?

Focus on Africa, Nigeria … the Next Retail Frontier..? Part One

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Global economy weakens as euro area continues to wobble..

The euro area is still deep in recession, despite the ECB’s intervention

measures, and there appears no end in sight, even as the US grapple with its

huge debt logjam. This gloomy trend continues to weaken global economic

growth, as even growth in emerging market countries, such as China, India

and Brazil continue to falter.

China and India are expected to offset imbalances in external demand and

close up economic ties with sub-Saharan Africa (SSA), further enabling

growth in trade and consumption in both regions, albeit the pressures from

the wobbling euro area and expected tightening in US demand.

Investors show more interests in sub-Saharan Africa … we think it is a clear

opportunity to emerge as a retail frontier

Summary


opportunity to emerge as a retail frontier

Perhaps the euro crisis is SSA’s opportunity to emerge as the next frontier of

global economic growth, as more investors (local and international) show

interests in entering or expanding their operations in sub-Saharan Africa. We

see demographics in the SSA and Nigeria (our main interest) as opportunities

for a sustainable (30-50 years) retail play. With an estimated $2.2trillion

spending potential by 2020, and a rising, strong youth population, the sub-

Saharan African market is a potential retail haven.

Please check out the appendix for foot prints of some international

companies investing in SSA.

St ra p la nBeleaguered Euro Area Impedes Global Growth …

Accounting for only 1.1% of euro area total trade in 2011, sub-Saharan

Africa (SSA) has been able to ride relatively smoothly through the global

effects of the euro area economic crisis. The euro area is still deep in

recession, despite the ECB’s intervention measures, except for

Germany which has experienced marginal growth. This trend continues

to weaken global economic growth, as even growth in emerging market

countries, such as China, India and Brazil faltered. Although data on the

United States have been mixed lately, a risk to global economic growth

is the country’s huge fiscal deficit logjam which signals an ensuing

tightening that could lead it into recession and further reduce global

trade levels. There are no clear answers to solving these crises as yet,

likewise there appears no end in sight.

As uncertainty spreads in advanced countries and consumption and

trade activities slow down, sub-Saharan Africa maintained strong

growth, above 5%, making it one of the fastest growing regions in the

2.1

0.2

8.2

65.7

3.6

-2

0

2

4

6

8

10

12

14

2007 2008 2009 2010 2011 2012f 2013f

World Output %

US Euro Area China

India Sub-Saharan World

China

IndiaSub-Saharan Africa

World (Aggregate)

United States

Euro Area


Sources: IMF, Eurostat, EIU

growth, above 5%, making it one of the fastest growing regions in the

world.

-14

-11

-8

-5

-2

1

4

7

10

13

16

20

08

20

09

20

10

20

11

20

12

20

13

20

14

World Trade

World trade Developed countries Developing countries

13.8%

13.3%

9.5%

6.6%

4.4%

3.7%

3.6%

2.5%

2.3%

2.1%

1.1%

United States

China

Russia

Switzerland

Norway

Turkey

Japan

India

Brazil

South Korea

Nigeria

12

34

56

78

91

02

1

% of (EU) Total TradeRanking

St ra p la nNo obvious end in sight… sovereign debt-weak banks perplexity .. Although the

euro crisis is more pronounced in the PIGS (AKA peripheral countries excluding

Spain), the entire region faces higher credit risk and uncertainty. The IMF

estimated in its Global Financial Stability Report that European banks could

shrink their balance sheets by US$2.6trn over the next 18 months, while the

rating agency, S&P had reported that the long term refinancing operations

(LTROs) of the ECB did not result in significant improvement in loan

origination. About 30% of Greece is below the poverty line. As part of its

efforts to ameliorate the situation, the EU announced on Thursday that it will

introduce a new banking supervisor to prevent a systemic collapse, and the

ECB pledges to do ‘anything’ to stabilize the financial sector. America is on the

edge of a fiscal precipice …expectedly, the US will eventually slow down on

current consumption to offset its huge debt. Investors and trade partners to

seek alternatives.. austerity and other fiscal consolidation measures across

the euro zone (household deleveraging is incipient in certain countries)

Euro Crisis: ‘No Obvious End in Sight…’

-8

-6

-4

-2

0

2

4

6

2008 2009 2010 2011 2012f 2013f

EU Output

EU-27 Euro area-17 Germany

Ireland Greece(p) Spain

France Italy Portugal

UK United States


17.9%

25.8%

86.3%

81.5%

160.8%

99.2%

68.1%

105.0%

120.1%

106.8%

68.5%

82.5%

82.5%

102.9%

Nigeria

China

France

Germany

Greece

Iceland

India

Ireland

Italy

Portugal

Spain

UK

EU

US

Debt/ GDP %

8%

11.40%

5.50%

10.60%

10.70%

15.90%

15%

24.40%

25.10%

United …

Euro …

Germa…

France

Italy

Portugal

Ireland

Greece

Spain

Unemployment

the euro zone (household deleveraging is incipient in certain countries)

invariably suggest continued slow down in consumption, output and trade.

Source: EuroStatAs publicly published by national sources without independent verification

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Chinese FDI in Africa

China-led Asia Buoys Continental Shift?

China and India continue to lead world growth … the second largest economy slows down further in

Q3 2012 but its officials indicate it is ‘the slow-down on the transition to transformational

leadership.’ China’s slow down is largely caused by weaker external demand linked to the euro area

crises. Albeit the deceleration, China is expected to lead global growth in 2012. China’s economy

has taken a big-brother position in world economy as the foremost bearer of the United States’

debt, major supplier of relatively cheap labour to global companies, and provider of ‘customised,

affordable’ retail goods and services to the global market. It is a voracious consumer of natural

resources and key investor in the African mining sector. China is the world’s largest exporter and

has since the last decade continued to strengthen its trade partnership with Africa. Its position in

Africa is characterized by a strong demand for natural resources and rising supplies of bottom of the

pyramid goods and services. We expect to see stronger ties between China and Africa (and other

emerging markets) as the former offsets the dent to demand for its exports from the euro area.

Similarly, waning external demand is partly responsible for India’s flagging economic growth,

nonetheless we expect forthcoming structural reforms in the Indian economy towards

infrastructure investment to lead to readjustments in its trade and consumption in favour of the

Agricultur

e, 7

Services,

18.3

Manufact

uring ,

46.3

Mining,

27.6

Others,

0.8

2000 (%)


9.7 9.6 9.4 9.2

8.17.6 7.4

0

2

4

6

8

10

12

Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12

China's GDP

Source: National Bureau of Statistics of ChinaSource: eiu.com

infrastructure investment to lead to readjustments in its trade and consumption in favour of the

SSA. India, like China, continues to strengthen its economic ties with Africa. The Bharti-Airtel initial

investment of US$10.7bn to acquire Zain’s operations across 15 countries in Africa in 2010, signal

India’s confidence in Africa, hence the SSA.Agricultur

e, 3.1

Services,

42.3

Manufact

uring , 22

Mining,

29.2

Others,

3.4

2010 (%)

4

5

6

7

8

9

10

11

2007 2008 2009 2010 2011 2012f 2013f

India’s GDP

Source: IMF WEO October 2012

St ra p la nSub-Saharan Africa – From Cynicism to Optimism

Contour Global

Cummins

Archer Daniels

Midland Co.

3M

Apple

Entries and further expansion into Africa

BT Group

Yum!

Brands

A Retail frontier … the demographics play

Beyond its natural resources, sub-Saharan Africa’s over 850 million people

have become a strong attraction to investors and lent to its presence as an

emerging frontier for retail investments.

Within the strong, youthful population is a burgeoning middle class with

increasing financial resources. The AFDB estimates the middle class at 34% of

the population, and projects the region’s annual spending power by 2020 at

$2.2 trillion annually. This segment is characterised by demand for branded

and sophisticated products.

On the other hand, Africa has a wide informal market, typifying the poor and

illiterate which possess a residual but relatively strong spending power for

affordable consumer and social goods. Poverty levels are relatively high in

Africa but observably they are much more pronounced due to infrastructural

constraints which when overcome by large corporate companies yield

enduring results.


Dow Chemical

General

Electric

Unilever

Nestle

Midland Co.

Starwood Hotels

enduring results.

Over 340 million are 14 years and below, indicating a strong, youthful

population and potentially sustainable consumer market over the next 50

years. This category is comparable to about 260 million and 370 million in

China and India, respectively. Accounting for approximately 40% of total

population, this segment will sustain Africa’s population boom and

strengthen its economy, provided these human resources are well developed

and trained to be intellectually assertive. Applying the basic economic

question of what and how to produce to this next generation highlights a lot

of interesting possibilities and scenarios.

‘Consumerism’ and sophisticated demand increases as SSA becomes more

urbanized. About 315 million, approximately 37% of the population now live

in urban centres, driving the region’s growth in mobile technology, banking

and finance, alternative delivery channels, building materials, consumer

goods, oil and gas etc., thus positioning the SSA as a potential retail haven.and more …..

St ra p la nPreviously, sub-Saharan Africa was considered an insignificant part of the global

economy. Today, there is a new dimension to its outlook due mainly to more

discoveries in natural resources and its population boom, and more so, it is one

of the regions with the strongest economic growth at over 5%. As corporate

giants seek regions that offer growth opportunities and sustainable consumer

demand, the question is, “Has the euro crises created an opportunity for SSA to

emerge as the next frontier for global investments and growth opportunities? “

Many companies continue to show interests in introducing or expanding their

operations in SSA, especially for a retail play on its demographics. Typical of a

less advanced region, there are enormous challenges facing the average

investor, but well-researched strategies, adequately funded and organized

operations, and ethical business approaches have recorded considerable

returns.

In the mid-term, investors willing to do business in Africa must be ready to

invest in education, skills training and infrastructure. We think SSA’s emergence

0

2

4

6

8

2007 2008 2009 2010 2011 2012f 2013f

SSA Output

Sub-Saharan Africa – from Cynicism to Optimism

Please see appendix for companies investing in SSA.


Source: The World Bank

Source: NBSinvest in education, skills training and infrastructure. We think SSA’s emergence

is possible, and rapidly so, if constituent economies remain assiduous and keep

focus on improving infrastructure, health and education.

2007 2008 2009 2010 2011 2012f 2013f

17

13

20

38

4346

44

30

13

19

30

18

0

10

20

30

40

50

UK

Ge

rma

ny

US

A

Gh

an

a

Nig

eri

a

An

go

la

Ga

mb

ia

So

uth

Afr

ica

Jap

an

Ch

ina

Ind

ia

Fra

nce

% of Population Age 14 and below (2011)

35%

35%

36%

36%

37%

34%

35%

36%

37%

2007 2008 2009 2010 2011

700

720

740

760

780

800

820

840

860

MillionsSSA Population and Urban Population Growth

SSA Population SSA Urban Population

St ra p la nSSA PECR

Potential Enablers

• Economic growth

•Improving macroeconomic conditions

• Growing consumer market

• Rising sophisticated demand

• Young population

• Technology innovation

• Natural Resources

•Population Boom

•Urbanization

•Mobile Technology

• Macroeconomic Reforms

• External Demand from China and India

Challenges Risks


Challenges Risks

• Access to finance

• Infrastructure

• Corruption

•Weak Work Force-underdeveloped human resources

• Teething problems associated with inchoate democracy, stop-

go policies, etc.

• Poverty and illiteracy

• Inflation

• Weak Human Resources

• Growing urbanization without commensurate expansion and

improvement in infrastructure

• Mono-cultural economies, vulnerability to oil price shocks

• Deviation from or macro-reforms

• Issues of asset bubble and hot money following surge in

capital in-flows

• Political Instability (low)

• Illiteracy

St ra p la nNigeria – Once a Pariah, Now a Bride?

Agriculture,

40.21

Solid Mineral,

0.36

Crude

Petroleum &

Natural Gas,

14.78

Manufacturin

g, 4.16

Telecommunic

ation & Post,

5.71

Finance &

Insurance,

3.45

**Wholesale

and Retail

Trade, 19.36

Building and

Construction,

2.08

Hotel and

Restaurants,

0.52

Real Estate,

1.78 Business and

Other

Services, 0.92Others, 6.67

Share of GDP (2011)

Nigeria leads the population boom and retail market potential in SSA, accounting for 19%

of the region’s population in 2011 at over 160 million (compared to 51 million in South

Africa). Evidently, Nigeria’s robust trade (retail and wholesale) sector accounted for

about 19% of its GDP in 2011.

Typical of the SSA region, Nigeria has a youthful population with over 65 million age 14

and below, representing 40% of its population. Nigeria’s demographic play becomes

more promising as its urban dwellers gradually rise beyond 80 million, supporting the

gradual emergence of a middle class with significant financial resources and sophisticated

demand.

Conversely, there is high poverty and illiteracy levels (largely due to infrastructure

deficiencies) followed by a large informal sector (retail market) with residual, but strong

spending potential directed towards affordable, customized ‘economy-pack’ products.

The efficiency of the Nigerian retail market will be reinforced by the rise in mobile

technology, fuelling its integration with the global economy and helping to alleviate some

A Retail frontier … the demographics play


Source: NBS

120

130

140

150

160

170

2006 2007 2008 2009 2010 2011

Million Population

7.137.61

7.37.68

6.17 6.28 6.5

0

1

2

3

4

5

6

7

8

9

Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 2012f

Growth (quarterly)

technology, fuelling its integration with the global economy and helping to alleviate some

of the challenges of doing business. The spread of mobile telephony (over 100million

active mobile lines by Q2’12) has also increased internet penetration with about 45

million on-line and 24million (56%) of them via their mobile phones.

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Great potential… but lacks a grand national development plan/strategy to guide its political economy in driving a focused transformation

process. 'If the economic system is the gun that solves the problem, the political system is the hand that pulls the trigger-Anonymous.’

The current administration has just presented the medium term expenditure framework (MTEF) 2012-2015 to its parliament, signaling

its administration’s commitment to fiscal prudence and restructuring, while keeping focus on strengthening the fragile infrastructure

base, especially the supply of electricity power. Since Nigeria’s democracy is still inchoate, macroeconomic reforms have progressed

albeit slowly due to the absence of an overarching framework that clearly spells out the priorities of the nation and effectively

coordinates the affairs of its institutions. Therefore, significant structural improvement and socio-economic transformation, especially

in infrastructure development, appears far-fetched in the near term until the country has developed and instituted a national

development programme-in part, a derivative of the much touted constitutional review, which is the pillar that would support and

define the political economy.

Scale is an important consideration for investing in Nigeria in order to overcome challenges of access to finance and infrastructure.

Investors interested in doing business in Nigeria should be ready to invest in education, skills training and infrastructure. Nigeria’s

labour force is weak on two accounts, the human resource is under-developed and then is constituted by a mere 40% of the population,

compared to Africa’s average of 55% and China’s 70%. These deficiencies however signal potential improvement in local spending

Nigeria – Once a Pariah, Now a Bride?


compared to Africa’s average of 55% and China’s 70%. These deficiencies however signal potential improvement in local spending

power when eventually the work-force becomes more efficient.

The outlook on the economy is generally positive owing to rising commodity prices and on-going attempts at reforms. Nigeria’s

resilience to the euro area crises has been buoyed by its economic ties with China and India which is continually being strengthened.

26.2

10.9

7

6.4

US

India

Brazil

Spain

Leading Markets % of Total Exports

17.5

9.1

4.9

4.7

China

US

Netherlands

India

Leading Suppliers % of Total Imports

Source: EIU

St ra p la nNigeria- PECR

Potential Enablers

•Economic growth

• Stable financial sector

•Improving macroeconomic conditions

• Growing consumer market

• Rising sophisticated demand

• Young population

• Mobile Technology Growth

• Natural Resources

•Population Boom

•Urbanization

•Mobile Technology

• Macroeconomic Reforms

• External Demand from China and India

We believe that a realistic overarching national development plan, transcending and connecting all levels of government and economic

structures would keep Nigeria above a double-digit growth. Infrastructure deficiency tends to deepen poverty levels, widen the income gap,

sustain corruption, increase cost of living and doing business, and push lower the standard of living, but a strong infrastructure base will reduce

inflation drastically and free disposable income, as noted with slight improvement in electricity power.


Challenges Risks

•Access to finance

• Infrastructure

• Corruption

•Weak Work Force-underdeveloped human resources

• Teething problems associated with inchoate democracy, stop-

go policies, etc.

• Poverty and illiteracy

• Inflation

• Oil price shocks

• Labour unions

• Political risk (still manageable)

• Management of surging inflows and possible asset bubble

• Under-developed human resource

• Growing urbanization without commensurate expansion and

improvement in infrastructure

• Price adjustments on successful delivery of sustainable

infrastructure, especially power and transportation

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• 3M

Technology conglomerate 3M announced a big expansion to its African business in June and set up subsidiaries in Nigeria and

Kenya. The new operations will set about distributing the company’s existing products in the region. Eventually, they hope to

develop new products, specifically designed for the African context. Management believes Sub-Saharan Africa could develop

into a $500 million market for the company over the long-term.

• BT Group

UK-based telecom, BT Group, plans to nearly double its African operations by 2015. The company already serves 600 African

commercial customers and is hiring 100 additional staff at its regional head office in Johannesburg. Other investment includes

the construction of data centers and the purchase of internet bandwidth on a Cape Town to Johannesburg.

• France Telecom

The telecommunications giant has made a huge push into Africa with its “Orange” mobile and broadband brand. During the

first half of 2012, revenue from Africa and the Middle East grew 5.8%, propelled by a stabilized Ivory Coast (+34%) and an

impressive performance from Niger (+20%).

Appendix: Companies Investing in Africa… Culled from www.investinginafrica.net


impressive performance from Niger (+20%).

FTE also devoted considerable resources to building its mobile customer base in Niger (+28%), Cameroon (+25%), and Senegal

(+18.5%). Mobile broadband usage increased 83% in the region.

• Koninklijke Philips Electronics

Dutch electronics maker, Philips, said its second quarter Africa sales increased nearly 30%. Much of the growth stems from the

company’s distribution of high-efficiency lighting in South Africa. It’s in the midst of a program that will see 200,000 50W

halogen bulbs at South African banks, shopping malls, and other commercial establishments replaced with Philips’ 7-10W LED

lamps.

• Moneygram

Remittances from the US to Africa have surged of late as the pain of recession begins to ease. There’s also been a big upswing

in transfers within Africa and between Africa and China.

To take advantage of this opportunity, fund transfer company, Moneygram, is building out its branch network as quickly as it

can. In July, it announced that it could now process transfers to South Sudan. It also added nearly 500 additional locations in

Ghana and over 500 locations in Nigeria.

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• Starwood Hotels

Hotel operators are beginning to reap the benefits of their African investments. Starwood Hotels’ Middle East and Africa

revenue per available room (REVPAR) bounced back after last year’s tough Arab Spring, increasing 11% in constant dollars.

The chain’s Nigerian properties performed particularly well, with revenue up 43%. Starwood operates 84 hotels across Africa

and the Middle East.

• Visa

The global payments company that’s everywhere you want to be is finally realizing that some people want to be in Africa. It

opened its Sub-Saharan regional headquarters in Nairobi in June.

Visa sees significant potential in East Africa’s mobile payments market and in processing inter-bank ATM transfers. A wider

Visa network would also be a boon to the international tourism industry. It aims to generate $14 million worth of revenue

from Kenya alone by 2015.

• Western Union

The money transfer service reported “strong” results in Africa in spite of foreign currency headwinds. Its Middle East and

Appendix: Companies Investing in Africa… Culled from www.investinginafrica.net


The money transfer service reported “strong” results in Africa in spite of foreign currency headwinds. Its Middle East and

Africa segment grew revenue by 3% during the second quarter. It now accounts for 15% of total sales and total transactions

in the region grew 9% — more quickly than anywhere else in the world.

• Yum! Brands

We’ve highlighted Yum! in Africa before, but on its second quarter conference call, the purveyor of pizza (Pizza Hut), tacos

(Taco Bell), and fried chicken (KFC) reiterated its plans to be in 20 different African countries by the end of the year. It sees

“tremendous growth potential” on the continent, especially in Nigeria with its rapid population growth.

The company’s expansion will be driven primarily by the KFC chain, which has proven extremely popular in South Africa. It

bought 70 restaurants in South Africa last year, building its base in the country which it will use as a springboard into the rest

of the continent

and more …..

St ra p la nDisclaimer


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the written consent of Straplan Research. The report is available primarily electronically.

St ra p la n

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Global strategy: Nigeria's Retail Market October 2012

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