South African retail giant, Shoprite, announced that it was seeking investors to take over its Nigerian subsidiary. It disclosed this in its Operational and Voluntary Trading Update, published on Monday.
The group said that it would be selling its stake in the subsidiary, Retail Supermarkets Nigeria Plc, to interested buyers. There were already parties indicating interest in buying its assets in Nigeria, the company said in its report.
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It suggested that the process of divesting its stake had already begun.
“Following approaches from various potential investors, and in line with our reevaluation of the group’s operating model in Nigeria, the board has decided to initiate a formal process to consider the potential sale of all, or a majority stake, in Retail Supermarkets Nigeria Limited,” the report said.
“As such, Retail Supermarkets Nigeria Limited may be classified as a discontinued operation when Shoprite reports its results for the year.”
Why is Shoprite Divesting from Nigeria?
A look at the report gives us a few hints.
First, the company had declining sales over the past operating year (July 2019- June 2020). Sales fell –8.1% in the second half of 2019. This was related to reprisals following Xenophobic attacks on Nigerians in South Africa, Shoprite’s home country.
Sales have shrunk this year as well, due to the local lockdown and social distancing restrictions arising from the COVID-19 pandemic. Its usual customers turned to retail chains and stores that were either closer to their homes or offered delivery services.
That second point– rising competition –has been touted as one reason why Shoprite is giving up its stake. While Nigerians have more options than they did a decade ago, it’s not clear that competition from local stores was enough to make Shoprite sell its assets in the Nigerian market.
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Government policy may have played a role. Restrictions on imported products may have handed Shoprite the short end of the stick; some of its popular sells were either manufactured abroad or made with largely imported ingredients. Resultant cost issues may have hurt its balance sheets a bit.
Beneath these possible causes, there are more fundamental issues that may have informed Shoprite’s decision.
The middle class, which the company targets in Nigeria, has shrunk since the last recession in 2016. The purchasing power of a large portion of the country’s population has fallen; sales have now gone in the same direction.
If there’s growing competition in the retail space, the competitors are fighting for a pie that isn’t getting any bigger.
Shoprite’s board may also be privy to economic forecasts that suggest a slow recovery from the current economic situation. Given such conditions, a strong rebound in sales over the next couple of years may be unlikely.
This ‘economic situation’ owes its existence in part to the coronavirus pandemic. But it’s also brought on by falling oil prices. It’s telling that Shoprite’s business in Angola, another oil-producing country, hasn’t performed very well either. Sales there fell -1.2% in constant currency terms between July 2019 and June 2020.
In the end, it all comes down to whether consumers are buying and paying enough to keep the business viable. They aren’t, and may not be doing so for a while.
Featured Image Source: The Guardian NG
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