The Nigerian retail sector has grown impressively over the past decade, from the emergence of modern malls in Abuja and Lagos earlier on, growth is beginning to spread across the country. A large rapidly growing population coupled with rising urbanization rates means that the country remains attractive to retail investors and retailers across the globe. Retail markets typically follow certain growth stages with an informal retail system usually being the first. This is subsequently followed by a shift to a more formal retail system, leading to a major retail structure and in some cases, the creation of a regional/global destination.

This report, developed by real estate investment firm Broll, charts Nigeria’s journey so far and its prospects.

Retail Roadmap

Before 2000, the retail market in Nigeria was largely characterized by an informal retail system. This was mainly dominated by street markets, few plazas and other unstructured retail offerings. As consumers became more sophisticated the market began to evolve.

In the mid-2000s, Ceddi Plaza and The Palms emerged as the first modern malls in Abuja and Lagos respectively. These centers became the benchmarks for modern retail across the country. After their success the appetite for retail and retail investment attracted interest from public and private sector players from 2005 and beyond, leading to the development of malls like Palms Polo Park in Enugu, Grand Towers in Abuja, Palms Ilorin in Kwara, as well as Adeniran Ogunsanya Mall and Ikeja City Mall in Lagos. At present, we are observing that the appetite is still growing aggressively; even in 2nd tier cities where developers are keen on establishing their footprint early to provide modern retail space for a more urban population.

Nonetheless, for Nigeria to have a mature retail structure or eventually become a regional or international retail hub, a considerable amount of groundwork is still required. Though developers are increasingly interested in creating larger retail centers, obstacles which include high costs of finance, scarcity of suitable development sites and unfavorable legislation can often hamper their success. Other factors relevant to retailers like security and high cost of doing business are outlined in greater detailed in the latter parts of the report.

Assuming that these obstacles are overcome in the next 5 years, it will allow for the growth of domestic brands and the mass entrance of international brands with the ability to cater to all segments, resulting in increased tenant depth. In the 5 years following, a Mature Retail Market where the local retail market adequately satisfies the demand for local consumers across the country will be established. If Nigeria’s underlying ability to attract retail and leisure consumers outside Nigeria is developed through the improvement/creation of tourist facilities and suppression of insurgency then Nigeria may evolve into a Regional Retail Hub, where its retail offering is enough to serve consumers outside national borders. In this case, the region could refer to Western Africa or bordering countries.

Unfortunately, the growth into an International shopping/retail destination for fashion and leisure seeking consumers globally is a stage only a few retail hubs are able to reach, especially since multiple fundamental factors are required for this to actualize. For instance, there are multiple mature and regional retail markets which have been established for decades, but only a handful including New York, Milan, Paris and London have been able to establish themselves as International Retail Hubs. See the graphic below for more.

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Then and Now

The infographic above puts the development of the formal retail sector in Nigeria – from its infant stage in 2006 to its projected capacity this year, in greater perspective.

In terms of Total Retail Space, from humble beginnings of 30,000sqm in just Lagos & Abuja as at 2006, the retail space will grow to 277,000sqm by year end 2015. Interestingly, 133,500sqm representing about 48% of the retail space will be located in other cities apart from Lagos & Abuja. This growth is remarkable considering there were no formal retail spaces outside Lagos & Abuja in 2006.

In 2006, the number of malls was pegged at just 2 – The Palms Lekki (Lagos) & Ceddi Plaza (Abuja). However, this number has grown by 1000% with 22 malls expected to be fully operational across the country by year end. The geographical spread of malls has also been another area of vast improvement, they were located in just 2 cities (Lagos & Abuja) but presently malls have spread to at least 10 cities in the federation with the likes of Port Harcourt, Ibadan, Kano, Enugu, Delta among others having malls now.

In the early stages of formal retail, Franchisees operating in Nigeria were mainly from Nigeria & South Africa. These franchisees were responsible for enabling the entry and operations of overseas brands in the country. South African franchisees leveraged on this and there was an influx of South African brands like Shoprite, Game, Nandos & Barcelos among others. Recently, the emergence of Middle Eastern franchisees has led to a wider range of Brands available at retail centers.

From a market dominated by Nigerian & South African brands with the odd American, British or European brand like Swatch, there has been an influx of European, American and Middle Eastern brands. These brands have expanded the service offerings with the likes of Pandora (Jewelry), Puma (Sports apparel), and Hugo Boss (Men’s wear) among others.

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Despite the rapid growth of the Nigerian retail sector in previous years, it has been not without its fair share of challenges which are constantly evolving with the global and local environment.

To highlight the key obstacles facing retail expansion across Nigeria, Broll conducted an in-house poll with members of our retail and research teams as well as high level management. The main challenges noted by our staff members were high financing and construction costs for retail developers, security concerns from typical new entry retailers and the perception of low purchasing power by luxury retailers. Infrastructural challenges especially in the provision of mass transport and road networks for supplier distributions as well as power/water were also raised as major concerns.

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Even so, Nigeria’s growing economy and strong demographic profile mean that there is still a sustained interest from retailers and developers in numerous locations. For developers, the expansion of brick and mortar retail would generally require suitable development sites and affordable finance and construction costs. On the other hand, a new retailer making an entry need an ideal location, affordable rentals, accommodating regulations, demographics to support their product range and a reasonable cost of doing business.

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In cases where one or two of these factors for any party are unfavorable, it can prevent the entry of certain tenants into the market. These factors apply pressure against the prospective expansion of existing tenants and prohibit the entry of new ones. A consistently expanding retail market will only be achieved when all these factors can work in synergy.

These issues hinder what we like to call Tenant Depth. It refers to the depth in the range of retailers available in a given market catering to different activities/segments. Simply put, malls in Nigeria are typically occupied by the same tenants. It’s good to see the growth and many retailers across the country, but it is also important that we see the growth in the variety of tenants on offer. In this, there is an inherent opportunity for retailers and investors in the improvement of tenant/retailer spread.

What is Next?

In Lagos, new initiatives including the trial of the electronic approval/consent from the Governor have the ability to loosen some of the legislative pressure on developers. Additionally, sustained pressure from investors and real estate market participants should lead to the largely bureaucratic process of land and title registration across the country being eased. On the other hand, other challenges like security and insurgency will require substantial input from the government. Purchasing power and GDP Per capita should continue to rise in the medium to long term despite the multiple challenges the country is currently facing.

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