International Investors See Market Opportunities in Africa

15 October 2010

International investors are showing a growing interest in Africa's retail market. American retail giant Wal-Mart is in preliminary talks to buy South African wholesaler Massmart for more than $4 million. And the Dutch-based supermarket network SPAR recently opened a new outlet in Nigeria.

If Wal-Mart's offer to buy Massmart goes through, it would give the world's largest retailer a major foothold in Africa. Massmart with chains such as Dion Wired, Game and Macro, is the third largest distributor of consumer goods in Africa with 288 stores in 14 countries. "It shows other people that there is a lot of confidence in the real economy in South Africa. It's certainly a meaningful investment outside of banking and mining where we have seen most foreign activity in the South African economy," said Economic analyst Mike Schussler.

Analyst Alan Gelb at the Center for Global Development in Washington also sees the deal in a favorable light. "The entry of supermarkets into African countries is a very favorable development. The first thing it does is that it brings in a whole new set of standards for marketing [and] for products," he said.

But Wal-Mart faces opposition from South Africa's largest labor group, which accuses the company of being against workers' rights. Wal-Mart officials say they would honor pre-existing union membership and abide by South African labor laws. Gelb also raises concerns about the impact on local food producers for example. "Some of the local producers may not be able to access this channel of distribution especially smaller companies... because they can't always produce to the qualities or the standards or just the reliability of supply that these organizations need," he said.

Wal-Mart said it gets the majority of its products from local sources near its stores.

Dutch-based SPAR is seeking to break a long tradition in Nigeria where shoppers traditionally purchase goods from street vendors and in open air markets. But Nigeria also has a fast growing middle class and the company sees market potential there. "Retailing is the next revolution and it is so large that it would outpace our existing economic drivers, be it telecoms be it banking, etc," said Haresh Keswani, managing director of SPAR Nigeria.

Keswani says SPAR Nigeria hopes to open 200 stores in next 15 years. "Many who have never ever visited Nigeria have formed a strong opinion about this nation and they have practically shut their minds to ever even considering Nigeria to be a potential business opportunity or destination," Keswani said.

Keswani concedes international investors face many challenges in Africa. And Gelb emphasizes the need to adapt to local realities.

"They'll have to deal with the fact that some of these countries are less stable macro-economically. They are more dependent on primary commodities. The exchange rates may move up and down. They'll have to deal with the fact that transport and logistics is not always as good as they could be even though they have been improving. Sometimes they might find trade and administrative barriers. That's what they'll have to deal with. But it's much better than it was few years ago," Gelb said.