Power, construction cost, low car ownership slowing retail development

CHUKA UROKO
At less than 5 percent, formalised retail development is still very slow in Nigeria and this has been blamed on the challenges of power supply, high construction cost and retail consumers’ low car ownership rate which generally constrains investors to developing neighbourhood malls.
Before the development of The Palms in 2003 and the completion in 2005, there was no formalised retail in Nigeria save for big stores that could qualify as formalized retail like Kingsway Stores, Chellarams, etc, which died away for reasons of poor economy and difficulties in importing items.
Presently, about 95 percent of retail in Nigeria is informal unlike South Africa where about 70 percent of their retail is formalised because they have been investing in building physical retail structures and also because they have long-term capital.
“Nigeria presents the biggest retail opportunities in the whole of Africa. An average Nigerian household spends between 60 and 70 percent of its monthly total expenditure on food and beverage consumed at home and this is estimated at $211 billion annually”, noted Michael Ch’udi Ejekam, CEO, Atreos (retail investment holding platform).
He recalls that when Actis, a private equity firm, was to develop the Ikeja City Mall with its local partners they sat down and did their home work. “They found out that within the eight kilometers radius of the mall, there were 4million people; each of the household had robust spend which gave the developers the confidence that it was going to succeed”, he said.
He noted that the retail market is driven by strong fundamentals including a large population growing at 2.7 percent annually, a sizable consuming class and urbanisation, which is high at 4 percent, while the demographics are encouraging and compelling.
But investment in this market, so far, is still not enough to attain 20 percent formalised retail which Ejekam says is just at introduction stage, adding that if the market goes 20-40 percent, it is said to be in acceleration stage; at between 40 and 60 percent, the market is said to be at maturing stage while at 60 percent and beyond, it is at consolidation stage.
He pointed out that because of the challenge of power, consumers cannot afford to buy large quantity and store with refrigeration, meaning that they have to go out frequently to buy their stock. “Again, there is low car ownership rate in Nigeria which means that shoppers cannot go far for their shopping. They want to be able to work short distances to do their shopping. All these influence the kind of mall that the developer has to build. He has to do something within the neighbourhood,” he said.
Continuing, he said, “besides the challenge of getting the right size of land which could be very challenging, scarce and expensive in this market, there is also the issue of high construction cost. It costs times 2.5 percent here of what it costs to develop a mall in South Africa.
“What this means is that a $40 million mall in South Africa will cost times 2.5 more in Nigeria. This is because over 70 percent of construction materials in Nigeria are imported. This high cost is a major issue to both the retailer and the consumer because it affects product pricing. To reduce this cost will involve playing with the design in a way that will reduce the size. Not going multi-storeys is also another way of reducing cost.”
The challenge, which the retailer faces in the market, also contributes to the slow development. Because the investor incurs high cost in developing the mall, the retailer is affected because high construction cost trickles down in terms of rents charged.
Another challenge for the retailer is importation because he has to import almost everything he sells and with the devaluation of the local currency, he is squeezed. He is also challenged by the pricing because he doesn’t have to charge too high. He does not have to charge so much that the consumer may not be able to afford.