The death knell for organised retail in Nigeria may have just sounded.
In the last two years the beautiful story that is organized retail in the country started going a bit sour. It started with the exit of foreign (read South African) retailers from the country. Citing high costs of doing business and the difficulty in sourcing forex, these continental retail juggernauts tucked their tails between their legs, swallowed their pride and left the much desired Nigerian retail sector.
Meanwhile the local Nigerian retailer kept moving on, I guess because they have no “home base” to run to. They pledged to weather the several storms waging against their financial souls, chief amongst which are –
- High mall rental rates – these are dollarized and for the average Nigerian retailer constitutes about 20% of sales. Some unlucky souls are contending with rental rates as high as 30% of Sales. This can be compared to a standard rent/sales ratio of 10% or less for Global or even South African Retailers
- Doubling of the cost of purchasing inventory for sales. 75% of retailers in the organized retail sector import the items they retail. And they usually source from the “black market”. In the last 18 months the price of buying one dollar has increased by over 100% from N175 to N350. Meanwhile extreme buyer resistance has made it impossible for the retailer to increase selling price by the same ratio. This has led to drastically reduced margins.
- Outright reduction in Sales, the economy is in trouble, this is affecting everyone and the general population is responding appropriately by reducing consumption in any way they can, hence the general reduction in sales.
All these issues have always been present, but the Nigerian retailer has somehow survived albeit with lower net margins. Most contend with net margins of between 5 to 10% of sales, in good times.
Unfortunately, in the last 30 days something has happened that if not addressed by all stakeholders will lead to the end of Mall based organized retail in Nigeria.
The official exchange rate of the dollar was floated by the government and within 24 hours the Naira lost 43% of its value. This figure is very important to the Nigerian retailer because his dollar rental rates are converted to Naira using the official bank rate at the time of payment. By this devaluation the rent element of his costs just increased by 43% for all retailers. Since rent constitutes between 20% to 30% of sales, the total non-inventory expenses will also have increased by between 9% and 13% of sales
This is HUGE
This singular occurrence will wipe out the profit earned from Malls by the entire retail sector and send 60% of the retailers into a loss position, the remaining 40% will barely break even, no one will make a sustainable profit.
From a cash flow perspective, about 40% of all the retailers in the Mall ALREADY have challenges paying their rent as at when due, most are owing backlog of rent and have resorted to monthly payments to try and reduce the rental indebtedness. This percentage will likely increase to 75% with at least 40% choosing to exit dollar rental based malls.
With the exception of 2 malls every other mall in the country may end up with less than 50% occupancy, leading to their failure, especially since the main anchor tenant in each mall usually has a minimum occupancy agreement that ensures that they don’t pay rent when the occupancy rate is below 70%. So with the possible exception of two malls as stated, every other Mall may become a failed Mall. As at today we already have three failed malls in the country whose occupancy rate is well below 50%. And the three were opened within the last three years
The situation is even more dire for newly opened or upcoming malls. Every mall opened in Nigeria in the last 12 Months has an occupancy rate of less than 50% with some as low as 20%. This is not about to change as retailers are very reluctant to open new locations, they are currently struggling to keep their businesses afloat with the outlets they have open, and they appear to be losing the battle.
So there you have it, the emperor really has no clothes on. The much trumpeted organized retail sector in Nigeria is heading into serious trouble and is about to blow up.
To solve this problem all stakeholders need to come together and hammer out a solution that keeps organised retail afloat during this economic downturn. Mall developers, financiers, management teams and the retailers need to face the reality of the moment and figure a way out. If they fail to do this, everyone loses, the malls will fail, financiers will lose their money, mall management companies will go out of business, retailers will lose their businesses or pivot to non mall locations to survive, but most importantly the economic reputation of Nigeria will take another bashing.
This in my opinion is another avoidable economic crises, but will we avoid it?