Shoprite came to Nigeria in Dec 2005 when Naira was about N127 to a dollar; the South African Rand was about 7 rand to a dollar then. Today, one dollar buys you N380 or 15 rand. So, over that period, Naira has lost 200% of its value to the dollar, keeping dollar value constant. The rand has lost 114% of its own value. But the lost value on Rand is not a big problem since Shoprite reports its financials in Rand, being a South African firm. The biggest problem is not the N380 of today but the fact that Nigeria does not have the fundamentals to strengthen Naira in the short term. For a retailer in a tight margin business, it cannot command price control to overcome the currency deterioration, and create any value for investors! Personally, I model that Naira will hit N502 by May 2023. If that happens, a foreign retailer might be wasting time here!
This may be an overly simplistic analysis of the situation. It is hard to imagine that earnings for a single quarter over a 15-year investment period is responsible for the exit of Shoprite. And while exchange rate exposure is a key factor in any business operation, smart businesses often find ways to ameliorate its effect. For instance, they could have hedged this risk by exporting local produce with their earnings to receive payment abroad in a foreign currency (eg dollar).
I imagine the Shoprite exit decision had more forces at play. Perhaps they had a pre-determined investment horizon, maybe they are consolidating operations in certain parts of the world to focus on others, maybe the company is reducing its retail footprint and expanding something else, what if they were bought out and are yet to disclose, maybe the company is waking up to the global reality of the death of ‘brick and mortar’………..
In fact, there are a thousand possible reasons why they are pulling out.
And this is not to say that exchange rate issues played no role in the matter. Simply that it hardly paints a holistic picture.
Shoprite imports most of the things it sells. Except for the fruits and veggies, most are imported. So, exporting from Nigeria is not an option because nothing is made in Nigeria. Also, when you model they can be paid in USD, you do not account that Nigeria has many substitutes like open markets. As I noted in the blog, while it collects taxes, open market competitors do not. Largely, it may not be easy to expect Nigerians to pay for produce at black market rate to enable Shoprite warehouse funds in London or New York. That is very theoretical to suggest in a retail sector.
More so, if you look at the numbers from their financials, sales dropped 6.7% despite the Naira losing about 25% of its value. Largely, if currency has been flat, Shoprite was growing. In absolute terms, Shoprite was growing revenue in Naira but struggling in rand. Unlike other sectors, margins are right in retail. It cannot make enough margins to overcome our currency issues.
Personally, our grocery ecommerce is non-existent to affect brick and mortar stores yet. Out of $301 billion spent yearly in the consumer domain, only 3% are electronic. Simply, atoms rule Nigeria. Shoprite was not outcompeted by any company; it simply lost to Naira. Had other competitors be foreign, they would follow the same trajectory.
It came when Naira was about N127, Nigeria is N380 today. It sees no future.
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