The recent announcement that South African retail company Massmart was selling off its once-prized Game stores in five African countries rang alarm bells about the future of consumer opportunity in Africa.
For the past decade and more, a consumer boom has been driven by demographics, the growth of the middle class in Africa, high growth in a dozen or so countries, increasing demand for quality goods and products, and a taste for more modern shopping environments.
But in the past year, there has been a retreat of South Africa’s biggest retailers from many African markets. Shoprite announced last year it would sell its 25 stores in Nigeria and later revealed it would also shed its stores in Uganda, Kenya and Madagascar. Mr Price closed its last store in Nigeria in early 2021 and in August this year, Tiger Brands said it was selling its 49% stake in UAC Foods, one of Nigeria’s biggest consumer companies.
Massmart follows the trend but remains in Southern Africa
Massmart announced recently that it was busy selling off 14 stores in five African countries as part of a group turnaround strategy to stem losses in its Game chain both in African markets and at home. Five stores will be sold in Nigeria, four in Ghana, three in Kenya, and one in each of Uganda and Tanzania. Massmart CEO Mitch Slape told investors, “The performance and the complexity in running those businesses is something that, frankly, we needed to address.”
This leaves it with its investment concentrated in Southern Africa: Botswana, Lesotho, Malawi, Mozambique, Namibia, Swaziland and Zambia. Retailers were struggling even before the pandemic course, the Covid-19 pandemic has changed many forecasts for African growth as lockdowns and global paralysis in 2020 affected jobs and incomes and precipitated general economic hardship. This had a knock-on effect on consumer demand in many African markets. However, the investment story was already taking strain by the time the pandemic arrived. Covid-19 has hastened, rather than caused, the pullback of South African retailers from far-flung regional markets.
Game and Shoprite have been the main anchor tenants in many of the shopping malls built in Nigeria and other African markets. They were the tenants in the first western-style mall in Nigeria that opened in 2005. Both chains also entered the highly competitive Kenyan market later, with their early expansion strategy focused more on markets with obvious gaps in the retail sector. Game tried to enter through acquiring local firm Naivas, but it was unsuccessful and opted instead to roll out its own brand. Shoprite only entered Kenya in December 2018, taking advantage of a gap in the market provided by the collapse of the country’s biggest chain, Nakumatt. However, it announced the closure of its two stores there during 2021, saying they were underperforming.
Competing with local informal markets
Massmart’s drive to expand was similar to that of other retailers: increasing competition and low growth at home, as well as the expectation of a rapidly growing consumer market in other African cities, which lacked the formal retail long enjoyed by South Africans. But Game’s value proposition has always been challenging in African markets. At home, consumers knew the brand and it slotted into the retail ecosystem alongside Shoprite, Makro and others. It was a different story in other African markets. Its pitch as discount household goods and general merchandise store was not clear-cut in countries such as Nigeria, where people are used to shopping for similar goods in the huge markets that exist in all major cities.
The prices at Game were not necessarily competitive, nor was the merchandise particularly novel. Much of it was imported from China, from where local entrepreneurs also sourced their goods. A similar situation exists in Kenya where an estimated 70% of shopping is in the informal sector, known as the ‘kadogo’ economy, according to market research firm Nielsen. This leaves formal retailers scrambling for the remaining 30%.
High rentals, low spending power and other challenges
The convenience of comfortable, air-conditioned shopping malls have its attractions, but rentals are high, which can result in uncompetitive pricing even within economies of scale enjoyed by South Africa’s large retail chains. It is likely the South Africans have made incorrect assumptions about the size of the addressable market, shopping habits and the likely disposable income of consumers in African markets. The South African retail market is not a good indicator of what lies north of Limpopo. Its formal retail sector is much bigger and more entrenched than it is in any other sub-Saharan African country.
The size of the middle-class in Africa has been over-estimated by strategists. While it has been growing, many of those defined as middle class by one or another measure is at the unstable end of the definition and prone to disruption by economic shocks like high inflation and low growth as well as exogenous shocks, such as the drop in the oil price for crude-dependent countries such as Nigeria and even Ghana.
Game did not have strong brand recognition in other African markets and probably assumed, as some other retailers such as Woolworths did in other countries, that its reputation as a household name at home would be enough. It chose not to rebrand under the more recognised Wal-Mart name after the US giant bought Massmart in 2010. The look and feel of the stores, along with the choice of merchandise in them, has also been criticised. Analysts believe the company has tried to replicate its success in South Africa rather than reshape its business model to suit local conditions.
One observer, on a Kenyan social media thread on Game’s sale in the country, wrote, “In the lakeside city of Kisumu, Game is next to local supermarket brand Naivas. At any given time, Naivas is crowded while Game sits forlornly. There’s something about product mix, strategy and marketing that Game simply didn’t get right.”
There is no doubt that retailing in regions far from home is complex and expensive. Ports are often inefficient, infrastructure deficits make logistics challenging, supply chains are long and vulnerable to disruption, and over-zealous bureaucracy and regulation compound the problems. A key challenge has been currency issues: both devaluation and volatility. This has at times turned profits in host countries into rand losses back home.
Undoubtedly the extent of disruption caused by the Covid-19 pandemic has forced a rethink of cross-border expansion and where to focus efforts. There are also shifts at home where Massmart’s food business has been struggling, also contributing to losses at Game stores. To stem losses, Massmart has announced the sale of its food brands, including Cambridge Food and 12 Cash and Carry stores, to the Shoprite Group, which is investing in the South African market as it pares down its African operations.
Game has not only battled on the continent; the chain has also, along with Cambridge Foods, been a drag on group performance in recent years at home. In the first half of 2021, its sales dropped 7.6% compared to already poor performance in 2020. Massmart is focusing on the stores that are working well, including Makro and Builders. Its Builders store in Kenya does not form part of the disposal. Strategy has become more risk averse as new corporate leaders across many sectors navigate uncertain waters. For the retailers, this means markets far from home just don’t seem to be worth the effort right now without a clear contribution to the bottom line.