Mr Price exiting Nigeria, Shoprite may follow

South African retailer Mr Price will exit Nigeria. The affordable clothing, sports goods and homewares retailer has said it will exit in H1 of its 2021 financial year. It has already closed four of its five stores in the country. Trendtype believes that Shoprite could be the next South African retailer to announce its exit.

Mr Price CFO Mark Stirton has said the company will concentrate on its South African operations. Mr Price has previously exited Poland and Australia. South Africa accounts for 92.5% of Mr Price’s sales. Its sales in Nigeria account for just 4% of sales, and sales in Nigeria shrank by 26.6% in the financial year to March 2020.

SA made up 92.5% of Mr Price sales anyway in the year to March 2020. Kenya, Botswana and Namibia are the only sizable operations the group has outside of SA. Nigeria contributed 4% of the group’s sales outside of SA and that business shrank 26.6% in the past year.

In Kenya, Mr Price spent R19m ($0.9m) in 2018 to acquire 12 stores as part of its buyout of the franchise from former partner Deacons East Africa. Deacons had previously been Woolworths partner in Kenya. Mr Price’s Kenyan business recorded a loss of Sh84m ($0.79m) in the 10 months ended March 2019, as a result of start up costs.

Last week South African homewares and clothing retailer TFG last week also announced it would leave Kenya and Ghana. The company still has two stores in Lagos, Nigeria.

Trendtype believes that Shoprite may be the next South African retailer to exit Nigeria. Woolworths also left in 2013, while Pick n Pay’s new store in Lagos shows no sign of opening.

Shoprite’s operations in Nigeria have struggled since 2016, hit hard by currency devaluations that make it lossmaking in Rand terms. Even as far back as 2016, Shoprite was having to go on record denying it would exit because of challenging conditions caused by soft oil prices hitting the Nigerian economy.

In March 2020 we learnt that Shoprite lost 8.1% of its sales in constant currency terms at the end of the second half (H2) of 2019. CEO Pieter Engelbrecht has already warned that the retailer is looking to exit underperforming countries. Shoprite opened its first store in Nigeria in 2005. It has since built a network of 24 stores in the country, and is the clear market leader.

Sales in Nigeria were also hit by a wave of reprisal attacks against Shoprite, a visibly South African brand, because of xenophobic attacks on Nigerians in South Africa. In Onitsha, Lagos, Ibadan and Kano attacks on Shoprite stores included arson attempts and threats of violence. A meeting at the time between President Muhammadu Buhari’s Senior Special Assistant on Foreign Affairs and Diaspora, and the National Association of Nigerian Students (NANS) ended with a resolution that MTN Nigeria, MultiChoice, Shoprite and other South African companies in Nigeria should cease operations in Nigeria. It is hard to overstate how strongly the feeling was received in South Africa that Shoprite would be vulnerable to political interference as well as its existing financial challenges.

That sentiment was confirmed in May 2020 when a Lagos appeal court affirmed the judgment of a Lagos High Court that awarded $10m damages against Shoprite in a suit filed by AIC Ltd that Shoprite had breached an agreement to set up its Nigerian arm. The court also directed Shoprite to pay 10% per annum on the damages with effect from the date of judgment until final liquidation of the entire sum. It could be the straw that broke the camel’s back.

Shoprite has also, we understand, been intensely targeted by Nigerian regulators over minor trading issues that smaller Nigerian retailers are not picked up on, effectively creating an uneven playing field.

When Trendtype has previously spoken to Shoprite about international expansion, the company has talked about how its investment positioning is driven by economic forecasts. The record lows for oil prices in 2020 will hit Nigeria savagely. For the government to be able to achieve fiscal breakeven, oil prices need to be $133 a barrel. At the time of writing oil prices are $38.5 a barrel.

Shoprite exiting Nigeria would be a major blow to investor confidence in Nigeria, and would put a dent in Shoprite’s credentials as a pan-African supermarket chain. It is also struggling in Kenya, where its store opening programme has ground to a halt and it has closed a store in Nairobi.

The key question is what an exit looks like. Would it be a complete cut off, as Shoprite has done in Zimbabwe, Egypt and Tanzania previously. Or would the South African retailer leave the door open to come back when trading improves?

We think a partial exit is on the cards.

If Shoprite goes it will leave reluctantly, having invested a huge amount of management time and energy into building its market leading position and supply chain. It will be hard to give that up for little value.

A partial exit would see Shoprite leave Nigeria, but retain a financial interest in the entity that takes over its store estate, operations and picks up its supply network. It would get rid of two of Shoprite’s biggest headaches – being targeted as a South African business and trying to repatriate Nigerian earnings as Rand.