The early success of the Nu Metro Media Store in Lagos, which opened in June this year, selling books, music CDs and DVDs, was the first proof of the massive pent up demand for world-class retail that exists in Nigeria.

Until then, the largely-untapped buying power of Nigeria’s 130-million strong consumer market (15 million in Lagos alone) had gone untested. In the face of a maddening number of challenges of setting up business in the country, it is this virgin market that is one the greatest draw cards. Before Nu Metro, there was nothing in the retail space that could be described as modern let alone world-class.

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For Nu Metro’s owners, diversified South African media and entertainment group Johnnic Communications (Johncom), the push into Nigeria – which includes taking a stake in local newspaper Business Day – has not been without frustration. Nigeria’s ban on certain imports jeopardised the procurement of necessary shop fittings that were not available in the country, as well as merchandise stock. Delays in passing goods through the ports and customs delayed the project by months. Plus Johncom’s planners had to go head to head with Nigeria’s vibrant counterfeit market.

Undaunted, Johncom is now planning to open a four-cinema complex in The Palms shopping centre, a $40m, 23,600sqm retail development on the Lekki Peninsular in Lagos. The first-of-its-kind mall is being financed by local developer Tayo Amusan, private equity specialists Actis and the International Finance Corporation.

First movers

Financing discussions only began in earnest once Mr Amusan had secured buy-in from a number of experienced and internationally reputable anchor tenants. He dryly notes being laughed out of the offices of some the UK’s high-street retailers: “I don’t think they just dismissed the idea; I think they actually shredded the proposal.” He was eventually compelled to turn to South African retailers, which are logical partners for a development on the African continent but relatively inexperienced given that their expansion northwards seldom pre-dates the 1994 end of Apartheid.

“Frustratingly, UK retailers did not realise that they already enjoyed high brand recognition with the target market for our shopping centre, Nigerians who travel abroad regularly. The South African companies are less well-known,” he points out.

After an exhaustive process of convincing potential partners, food retailer Shoprite and durable goods retailer Game signed on. Johncom followed soon afterward.

Game, a mid-market retailer in southern Africa and Mauritius, is establishing its first Nigerian store at The Palms shopping centre. “Investment in The Palms shopping centre offers a potential gateway to a portion of the large market in Lagos,” says Game MD Fanus Nothnagel. “The establishment and start-up of the store will [cost] approximately $15m. And, over a 10-year period, it is expected that a minimum of $126m (inclusive of import duties, VAT, corporate taxes, staff salaries and rental to the Nigerian landlord) will be injected into the local economy.”

Mr Amusan readily admits that The Palms project, which is due to open in December, has been an uphill battle. “I started on the project in 1999. It has taken years off my life getting it here.”

Learning curve

For everyone – the South African investors, Nigerian retailers and government bureaucrats – it has been a steep learning curve. Local retailers have had to be cajoled into seeing the value in best-practice store design and layout in addition to merchandise positioning. “Their first instinct is to have a door into their store that opens and closes. We have had to start from scratch educating them on the benefits of having wide-open entrances so that passing-by shoppers can see all the way into the store,” says Mr Amusan. “You must understand, this development and retail environment is unprecedented in Nigeria.”

But it is the lessons learned by South Africa’s trailblazing companies – which have led foreign investment into non-oil sectors of the Nigerian economy – that are most relevant to foreign investors. Mr Amusan suggests that it has taken them a while to understand the norms and customs of doing business in Nigeria, and by that he does not mean bribing corrupt middlemen to grease the wheels of progress.

Previous experience

South Africa’s most successful investor in Nigeria, mobile network operator MTN, stormed the telecommunications market when it launched in 2000, quickly building a sizeable lead on its rivals. It was first to market, invested more in its backbone infrastructure and designed a slick marketing campaign that resonated with customers. But as its success has grown, its reputation has come under fire. Allegations of profiteering and “not putting enough back into Nigeria” fly about in the local press, and whether or not the perception is true (it is probably not – profits are reinvested in network expansion to meet burgeoning demand), the risk is real.

If rumours are true of a lobby to block MTN’s stated intention to buy the soon-to-be privatised state-owned telco Nitel, the risks are not only real but potentially massively damaging.

“Nigerians are the first to acknowledge our need for foreign investment, and that means technical assistance as much as it does financial capital,” says Mr Amusan. “But the moment Nigerians feel they are being taken advantage of or exploited, the relationship will sour.”

Pioneers praised

Still, Mr Amusan praises the pioneering role of the South African companies, and wishes for greater private sector involvement in the economy. “A strong, organised private sector is a counterbalance to government or labour [organisations], and is able to press for quicker improvement to the various obstacles facing investors,” he says.

Mr Nothnagel says Game is still working to overcome some of these obstacles. An import ban has affected the company’s capital goods, particularly shop fittings, metal fixtures, and corporate forms and documents. At the end of August 2005, Mr Nothnagel was still awaiting a concession, pursued by the Nigerian Investment Promotion Commission (NIPC) on the firm’s behalf, that will need the president’s signature.

Similar difficulties have also been encountered by Johncom. As Brian Pottinger, CEO of Johncom’s Africa division, comments: “A ban on imports has led to problems with sourcing materials that fit the brand.”

Mr Pottinger has already had to work around the import ban, learning from the experience of opening the first Nu Metro Media store. “The opening of the store was delayed because of the import ban on certain goods, including shop fittings,” he says. “The company made representations to the government because it is possible to get bans waived. However, in the end, the company had to get and install local products, which created additional costs and delays.

“In spite of this, the store has received a warm response from the Nigerian public and media, which validates our strategy of developing a business to meet the needs of the growing middle class, who have the money to spend on leisure and would prefer to buy quality products.” The company is now facing a similar issue with cinema seats for its development in The Palms shopping centre. “So far, we’ve renewed applications to the government and are working through all necessary paperwork,” he says.

Getting through port

Businesses operating in Nigeria report that the government has identified its ports and customs as a key problem because they are notoriously slow. The government has told businesses that it is committed to improving the situation.

“Lagos Port Authority, in particular, is extremely overworked,” says Mr Pottinger. “One answer is a trans-ship phase through another port. However, this adds time and risk to imports.”

Mr Pottinger thinks that, generally, if formalities are in order, getting through port authorities is not a problem. “We have assistance from experienced clearing and freighting agents to ensure that goods get through the system relatively easily,” he says.

Game’s first imports are currently going through the port clearance process. “Game – together with a variety of clearing agents in Nigeria and with interaction with officials from the customs authorities – has identified the potential stumbling blocks in the process and has ascribed possible solutions,” says Mr Nothnagel. “However, this is being tested with the first series of imports. The next few weeks should give a better indication as to whether Game has managed to bridge some, most or all of the pitfalls.”

Infrastructure costs

Like most developing countries, Nigeria’s infrastructure has had a fairly significant impact on business. As Mr Pottinger comments: “Infrastructure costs are quite high, mainly because of the weakness of the national electric grid. As it’s not reliable or predictable, we have to rely on generators, which are mainly powered by diesel.”

For Mr Nothnagel, the main costs associated with the infrastructure concern how long it takes to conduct business. “Thus far, the impact has been centred on travelling times in Lagos, obtaining the desired levels and clarity of feedback from authorities, and the bureaucracy involved with registrations and formal applications for business start-up,” he says.

Supply and logistics

 

The quality of supply lines has been a challenge. However, both companies report they are working to address this problem. Game is working with manufacturer information from the Standards Organisation of Nigeria, as well as a business directory, and is using a focused team of buyers to find adequate suppliers of Fast Moving Consumer Goods as well as plastic-ware products.

“The challenge for Game lies in the prohibited categories of clothing, shoes and self-assembled furniture,” says Mr Nothnagel.

Mr Pottinger reports: “The logistics chain has been tested with our Silverbird Galleria site. Here we found logistics weren’t able to match product demand, so we’ve had to freight in stock, which is reflected in our margins. Logistics should be much improved by mid-October when our new factory producing DVDs and CDs comes on stream [in Nigeria].”

Human resources

Like most multinationals in Nigeria, Game and Johncom rely on a predominantly local workforce and a handful of expatriate workers. “The Nigerian workforce is hugely enthusiastic, but not experienced in terms of the level of the project,” says Mr Pottinger. “We’ve found that Nigerians have a very high level of technical knowledge and a reasonable level of financial knowledge. However, their retail knowledge is very limited as many have never worked in – or visited – a first-class, world-standard, retail complex.”

The two companies have mixed experiences of obtaining visas for their expatriate workers. According to Mr Nothnagel: “The process took approximately three months. Game asked for more positions than it required [10] and the approved quota was in line with the Game requirement [five].”

Johncom says it has not experienced any particular problems with arranging visas, however. “If you go through the processes carefully, get all documents correct and keep immigration authorities informed of what you are doing, the process is no worse than experienced elsewhere. In fact, Nigerians probably have a harder time getting visas for other countries than we have in getting visas for Nigeria,” says Mr Pottinger.

With the end in sight, Mr Amusan bristles with confidence. He cites the case of MTN and its South African mobile network competitor Vodacom, which is part-owned by global giant Vodafone. “When MTN first said it was investing in Nigeria, Vodacom dismissed the move as crazy. Now Vodacom is scrounging around the market for a way in but, as it’s so far behind, it will be hard to catch up,” he says.

Betraying his admiration for the UK’s high-street retail brands, he adds: “I want to send invitations to Body Shop, Zara and H&M, so that they can come out here and see what they are missing.”