Cracking the Nigerian market
Posted on March 30, 2015
The opportunities to do business in Africa’s biggest market are massive, but then so are the challenges.
By Rodney Weidemann
Nigeria is Africa’s largest individual market, which would make it an investor’s dream but for a host of challenges. Despite the size of its population, the country is plagued by infrastructure issues, political turmoil and has been hit hard by the collapse of global oil prices.
Despite this, Nigeria still has much to offer investors. At a recent forum hosted by Frontier Advisory in Johannesburg, numerous experts weighed in on the outlook for the country’s business and economy. The good news is that most agreed that the Nigerian market is too big to be long ignored by international business.
Grand ambition
Speaking at the forum, Dr Gene Leon, Mission Chief and Senior Resident Representative for the IMF in Nigeria, outlined Nigeria’s vision of placing itself among the 20 largest economies in the world by 2020.
Eme Essien says that what Nigeria has achieved in power sector reform is unprecedented, including unbundling generation.
“Nigeria’s growth, which is currently around 6%, is not driven by oil, but there’s no doubt that oil pays the bills. To achieve its 2020 goals, however, this will need to change, as the current set-up is not sustainable. There is no way that something that contributes only 11% of production (oil) should be generating 60% of a nation’s revenue, while the other 89% only manages to create 40%,” he explains.
Leon admits that another major challenge to achieving the 2020 vision is the vast infrastructure gap that currently exists. Electricity production per capita in Nigeria is negligible, while basic infrastructure like road networks are also not at the level they need to be. Moreover, poverty and income inequality remain ‘stubbornly high’. Inequality, in turn, perpetuates social tension, which impacts upon growth.
Size does matter
It is the sheer size of Nigeria’s market that most often excites investors; the idea of targeting a population of over 170 million people is, after all, one that would appeal to most businesses. However, appealing to this mass market is not as easy as it seems, according to panellists discussing the issue at the forum.
Alex Okosi, MD, MTV Networks Africa, points out that although the mass market in Nigeria is huge, his company remains troubled by challenges like the impact of the oil price drop and the sometimes dysfunctional government.
“Nonetheless, things are changing for the better – the mass market today is fairly stable, while private businesses are thriving, thanks to new legislation. The cost of doing business in the country is also coming down all the time. When it comes down to it, the business appeal of Nigeria lies not just in the size of the market, but in the size of the opportunity.”
Better partnerships
Niezaam Davids, Business Development Executive for Tiger Brands, says that true success is not built so much on appealing to the large market as it is on building better partnerships with local businesses.
“There is no doubt that – despite some of the current challenges that exist – the long-term outlook for the nation is positive, but it is important to manage investor expectations. Ultimately, Africa is a long-term play for any organisation. To use a cricket analogy, Nigeria is a five-day test, rather than a T20 game.”
Gregory Heale believes that infrastructure is about a country's ability to move and produce, which means that a half-built bridge remains useless.
Chris Hart, Chief Strategist at Investment Solutions, adds that Nigeria’s real strength is its size and huge population. This, alone, ensures that any African strategy considered by an enterprise must eventually include Nigeria.
“But success here demands a deep understanding of the market and the ability to be strong and resilient. Appealing to the mass market here will mean appealing to the emerging working class, rather than the middle class, so your strategy will have to be tweaked accordingly.”
Hidden complexity
“Your business strategy will also have to take other issues into account, such as the fact that the federation of 36 states within the country can create complexity for multinationals, as working in different states can be like operating in a different country entirely,” suggests Hart.
Okosi disagrees, however, pointing out that organisations don’t need a different strategy for each state, provided they understand the basic fundamentals.
“For example, before setting up a supply chain, understand the market properly. Ensure you have the right partners on the ground and, in the end, be sure you fully comprehend the nuances of the country. Then, regardless of the differing federal laws, you will be able to operate effectively and tap into the mass market that exists.”
It is clear that the lack of infrastructure in Nigeria is one of the main challenges hindering investment in the country. Panellists considering the infrastructure gaps that exist and how these might be resolved, included Eme Essien, the International Finance Corporation’s Country Manager for Nigeria; Marie Francoise Marie-Nelly, Country Director: World Bank Nigeria Office; and Gregory Heale, Strategic Business Development Executive at Group Five.
Power deficit
According to Marie-Nelly, perhaps the biggest infrastructure challenge remains that of power. She suggests that while the current story is not a good one, there are certainly ambitious plans.
“Given the size of Nigeria, though, we reckon that the country will need to invest around $3.3 trillion in infrastructure over the next 30 years to catch up.”
Essien is of the opinion that the medium- to long-term view from an infrastructure perspective remains positive. What Nigeria has done in terms of power sector reform is unprecedented, including unbundling at the level of generation. There are also opportunities and challenges on the transport infrastructure side. Many projects are under way, although not yet complete.”
Unfortunately, says Heale, infrastructure is about a country’s ability to move and produce, which means that a half-built bridge remains useless.
“I would love to share the rosy outlook for Nigeria, but I don’t. In certain situations, Nigerian infrastructure needs a complete overhaul – such as the airport in Lagos. There is a lack of power, yet abundant natural gas resources. We could build multiple gas power stations that pay for themselves, but we need the authorities to allow the gas to flow.”
Marie Francoise Marie-Nelly says that Nigeria can no longer afford to have public sector-led infrastructure transformation.
Unrealised potential
“Another example is the fact that Shoprite reckons there is room for around 800 stores in Nigeria, yet only 10 have been built. The reason is because the lack of infrastructure means that too often, stock is unable to get through. My advice to the government is to consider what 20% change they could make that would make an 80% difference – this is the only way to get out of the current malaise.”
Marie-Nelly adds that Nigeria can no longer afford to have public sector-led infrastructure transformation. “The private sector must be given a free hand here. After all, we have already witnessed the success [of]such a policy in the telecoms sector. It is now time to do the same in other sectors.”
CEO of Frontier Advisory, Martyn Davies, adds that sustainability is the key to development. “Potential investors need to understand that in Nigeria’s case, informal is the normal. In fact, many industries and businesses in Nigeria thrive in spite of the infrastructure challenges, the government and its legislation.”
“Furthermore, everyone keeps harping on about the crisis due to the oil issue. I say let’s not waste a good crisis, and let’s use this as a platform for growth. After all, [al]though Africa is not going to be the next China, Nigeria could still possibly be the next India,” he concludes.
African Trader