The African retail market is poised for a remarkable transformation in the coming decade, driven by several factors that promise to redefine the industry. From the rapid expansion of the middle class to the increasing adoption of technology and the operationalization of the African Continental Free Trade Area (AfCFTA), the stage is set for significant growth. According to Euromonitor International, retail sales in Africa surpassed US$500 billion in 2018, and this figure is expected to experience exponential growth, particularly under the AfCFTA, with its vast market of over 1.2 billion people and a GDP of US$2.5 trillion.
However, it’s essential to approach this growth with a nuanced understanding of Africa’s diverse retail landscape. The continent’s 55 independent states each have their unique retail markets, economies, and consumer behavior, which differ significantly from one another. In this article, we will delve into the complexity of the retail industry in Africa and explore the emerging trends that are poised to shape its future.
Traditional Retail Dominance
In the global context, a higher GDP typically correlates with a higher market penetration of modern retail. In Africa, however, traditional and informal retailing still dominate the market. According to a recent report by Boston Consulting Group (BCG), African consumers, on average, continue to purchase more than 70% of their food, beverages, and personal care products from the continent’s 2.5 million small, independent shops.
The term “traditional retailer” varies from one country to another. In Morocco, it’s known as a “hanout.” In Egypt, it’s a “bakkal.” In Kenya, it’s a “duka.” In South Africa, it’s a “spaza.” The diversity in nomenclature reflects the variations across the continent. For instance, in Nigeria, more than 600,000 small retailers account for 97% of national sales. In contrast, only 30% of sales come from “spazas” in South Africa. Despite having established hypermarket and supermarket chains, Morocco, Kenya, and Egypt rely heavily on traditional retailers for 82%, 77%, and 75% of all retail sales, respectively.
Traditional retailers remain resilient for several reasons. They provide proximity, flexibility, and convenient operating hours that cater to their communities. Additionally, they often extend credit to customers with limited incomes, facilitating small quantity purchases. For instance, in Morocco, a significant proportion of consumers prefer to buy from “hanouts,” where credit is offered in nine out of ten shops.
Despite their resilience, traditional retail in Africa faces numerous challenges. These include the expansion of modern retail, the growth of e-commerce, and shifts in consumer behavior accelerated by the COVID-19 pandemic. To address these challenges, a growing number of traditional shops are embracing digital retail services. In Kenya, for example, the percentage of retailers offering remote ordering increased from 27% in early 2019 to 39% in late 2021. A similar trend is observed in Egypt, where around one-third of traditional retailers offer remote ordering, delivery, and bill payment services.
Startups Bridging the Digital Gap
As the transition to digital becomes inevitable, a wave of startups is emerging to provide traditional retailers with innovative digital solutions. These startups address bottlenecks and accelerate the transformation of traditional shops. Many of them focus on solving inefficiencies in distribution systems, which often hinder traditional shops from obtaining sufficient inventory.
For instance, Nigerian B2B digital marketplace Alerzo enables over 100,000 users to purchase inventory directly from manufacturers, make cashless payments, and track their revenues efficiently. Another popular strategy is the adoption of small trader shops as agents for larger e-commerce startups. In Kenya, Copia Global leverages the trust consumers have in shopkeepers to persuade them to buy products from their e-commerce site. Once an order is confirmed, Copia delivers the products to the agent within 48 hours, allowing even non-tech-savvy consumers to order online, while small shop owners generate income through commissions.
The Rise of Modern Retail
Despite the dominance of traditional retail in many African nations, modern retail holds vast untapped potential. In countries like South Africa, modern retail is well-established, with supermarket chains like Shoprite, Pick ‘n’ Pay, and Spar accounting for over 70% of retail sales. However, in other African nations such as Morocco, Egypt, and Nigeria, the reach of modern retail falls below its potential.
For example, modern retail in Morocco accounts for only 18% of total trade, despite the presence of well-established retailers like Marjane, Carrefour, and BIM. In Egypt, the market is warming up to modern retailers, particularly locally based ones that have posted substantial annual growth from 2015 through 2020. The Kazyon discount supermarket has expanded rapidly in Egypt, while other successful Egyptian supermarket chains include Awlad Ragab and Seoudi.
Kenya presents a similar case to Egypt, with homegrown brand Naivas leading the expansion of modern retail. French supermarket brand Carrefour, operated by UAE-based Majid Al Futtaim, has also rapidly expanded its store network in Kenya. In 2023, Carrefour Kenya reported annual sales of KES 40 billion (US$290 million). Kenya boasts more than 20 large supermarket chains, accounting for over 25% of all retail sales in the country.
Investments, Mergers, and Acquisitions Drive Growth
In recent years, the modern retail segment in Africa has witnessed increased investment by retail chain owners. LabelVie, which operates the Carrefour brand in Morocco, made substantial investments in the supermarket chain’s expansion. In Egypt, Carrefour Egypt, owned and operated by Majid Al-Futtaim (MAF) Retail, has announced plans for significant further investment in the Egyptian market.
Private equity capital has played a crucial role in the growth of modern retail in Kenya. In 2020, Naivas Limited raised KES 6 billion (US$49.8 million) from a consortium of investors, allowing the supermarket chain to expand its network significantly. Quick Mart, a close competitor to Naivas, also benefited from private equity backers Adenia Partners.
South Africa, on the other hand, has presented both opportunities and challenges. Shoprite, the largest retailer in the country, closed its operations in several African countries but embarked on an expansion drive in South Africa. Walmart Inc made a substantial offer to acquire the remaining 47% of South African retailer Massmart it did not already own. Choppies, the largest retailer in southern Africa outside of South Africa, encountered financial difficulties and decided to refocus its efforts on its home market.
Lessons from Diverse Markets
The struggles of Choppies and Shoprite to replicate their success abroad highlight the diversity of the African retail landscape. Success in one market does not guarantee success in another. Carrefour franchise owner Majid Al Futtaim has found successful formulas that address the unique needs of different African markets. Its achievements in Kenya and Uganda serve as examples where both Shoprite and Massmart struggled to turn a profit.
A Future of Modern and Local Retail
BCG analysts envision a future where the retail trade in Africa becomes increasingly modern as the middle class expands in many countries. Morocco has already set a precedent with a growing middle class that prefers modern trade due to increased incomes. As modern retailers expand their store footprints, we can expect a similar trend to occur across the continent. However, it is essential to emphasize that modern retailers must be local to succeed. They need to adopt formats—whether big or small—that cater to the specific needs of their communities. Despite the potential of modern retail, traditional retailers are expected to continue playing a dominant role in the sector due to the value proposition they offer customers. The traditional retailers of the future will likely have more sophisticated business models that leverage digital solutions to offer new services aligned with the present and future needs of African consumers.