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Superstores in Nigeria: Can SPAR and Shoprite’s business models keep them afloat?
The two superstores worthy of note in Nigeria are Shoprite and SPAR.
Business model has always been a key determinant in the success and longevity of any company. It is the method used by some organisations to capture value in their target markets. For a segment like the retail sector, for instance, there are two business models currently adopted by retailers. These models could either lead to their growth or demise.
The two superstores worthy of note in Nigeria are Shoprite and SPAR. Both are run by foreign companies and have been around long enough for us to measure their sustainability.
Therefore, in this article, we will be comparing both superstores. How easy are the supermarkets making our lives? Are they staying true to their promise of having “lower prices you can trust”? Moreover, are they truly one-stop shops, where all our needs can be found under one roof? And most importantly, how sustainable are their business models?
History of superstores in Nigeria
Before the success story of Shoprite, the retail industry was home to mega supermarket brands like Leventis Stores and UTC Stores. But the intensive capital required led to the closure of these brands. Other contributing factors that led to their demise in the late 1980s were currency depreciation, inflation and high store maintenance costs.
The shutdown gave birth to mom and pop stores, which began to cater for household needs. However, Nigerians soon grew tired of walking from one store to another, so the need for one-stop-shops began to rise, especially among millennials.
Today, Shoprite and Spar have found ways to rejuvenate the retail industry without compromising on quality and price. These superstores have redrafted the retail business plan, which in turn led to the revenue growth of both players. Shoprite already boasts of about 25 stores across Nigeria since its first establishment in 2005, while Spar accounts for 10 supermarket outlets, after eight years in operation in Nigeria.
Brief profile of both companies
SPAR in Nigeria has been operated by Artee Industries Limited, popularly known as Artee Group, since 2009. Unlike across many countries where SPAR operates on the sub-franchise model to independent retailers, in Nigeria, it operates its own stores located across Lagos, Abuja, Port Harcourt and Calabar.
SPAR’s innovation led to the launch of the first retail co-branded credit card under the Park n Shop Diamond Bank Credit Card, followed by the Plastic Gift Card. It is the only retail chain in Nigeria to offer a Loyalty scheme to its customers under the SPAR Reward Card program.
While for Shoprite, since opening its first store in Lagos in December 2005, the retail company has launched additional stores across eight states in Nigeria. But this is not news. What’s news is that Shoprite hasn’t birthed any innovation to improve its sales. The company is still betting on its brand name to continue doing the magic.
Financial strength of both retail companies
In 2017, Spar Nigeria reported an excellent year, operating 12 stores across the country. It recorded an increase in sales of 57% in constant currency values to N47.3 billion.
While for South African retail giant, Shoprite Holdings’, results for the year ended August 2018 showed that gross profit increased from N841 billion in 2017 to N864.3 billion in 2018. Profit before tax, however, dipped from N189.3 billion in 2017 to N181 billion in 2018. Profit after tax also dropped from N134.5 billion in 2017 to N129.5 billion in 2018.
Business models of both superstores
Asides their competing prices and market sizes, the respective business models adopted by both retailers have contributed to their growths; though while one model could lead its company to more success, the other could easily lead to the demise of its business.
When Shoprite began in the Nigerian retail market, the company adopted the business model of the likes of Leventis and UTC stores — independently procuring and stocking goods. But along the line, the company upgraded to international standards, contracting merchandise to independent and local suppliers rather than self-financing them, while taking on the burden of rental space management alone.
Today, 80% of Shoprite grocery items are sourced locally through its Made-in-Nigeria initiative. But this is not the same with SPAR Nigeria.
SPAR still operates with the old model of financing its merchandise and rental space management all on its own. This could spell doom for Spar as it did for the 80s supermarkets.
Though, in 2016, SPAR partnered with the Manufacturers Association of Nigeria, Bank of Industry and the Retail Council of Nigeria to host an SME seminar that allowed start-ups to exhibit their products to prospective customers at SPAR’s outlet located in Ilupeju Industrial Estate, Lagos, the superstore has not fully incorporated the support of local suppliers into its business model.
Your street is producing threats to Shoprite & SPAR’s growth
If you don’t know, now you know. In your area, there’s a growing threat that is being ignored, maybe due to its size; but you know what the adage says: “a drop of water makes a mighty ocean.” That ocean is gradually sinking the growth of your favourite superstores.
Location matters in business and supermarkets in Nigeria are situated along highways and industrial areas, far from the lower and middle classes. This distance might soon begin to cut into the revenue of superstores, thanks to the establishment of neighbourhood supermarkets in every nook and cranny of communities.
While they might not have all goods under one roof, they are perfect substitutes, tailored for the fast-paced urban lifestyles of Nigerians. People are gradually becoming impatient with the long journeys to the superstores and longer queues that often greet them when checking out — with some malls now requiring visitors to pay to park.
Nigerians are taking note of their expenses now and finding means of cutting costs. This is the advantage of having neighbourhood supermarkets built within communities, unlike superstores which are situated far away from residential areas.
Best of both worlds: If only we could merge Shoprite and SPAR
The best method to cover the lapses of Shoprite and Spar is to merge them, but since such an option is not available, these retail companies will continue to remain the best of different worlds.
Being a one-stop shop for household products at lower prices has been the slogan for superstores, even before Shoprite and SPAR began operations in Nigeria. But these superstores are not totally true to these slogans.
While Shoprite proudly brags about its lower prices, shoppers can’t do same, after their shopping experiences at its outlets. Often, shoppers complain that prices of goods in Shoprite are no different from the mom and pop stores on their streets.
Though, Shoprite struggles to match its slogan, the retail company, however, doesn’t disappoint in the availability of household products; Shoprite can be likened to Netflix due to its unlimited content library.
But for SPAR, the reverse is the case. Unlike Shoprite, its prices are affordable, but it fails to tally with its “everything under one tree” claim.
If only Nigerians could shop at Shoprite and proceed to SPAR to make payments, then would their claims of having everything under one tree at lower prices be true.
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Is Zenith Bank thriving on the strength of sound financial indices?
Zenith Bank posts N103.8bn profit in half-year financial result.
Sound financial indices have made Zenith Bank one of the largest banks in the Nigerian banking Industry. It was recognized as the Most Valuable Banking Brand in Nigeria 2019, in the Global Banker magazine Top 500 Banking brands; and Best Commercial Bank in Nigeria 2019, by the World Finance.
Zenith Bank has successfully bolstered this narrative even further with the release of its Half Year 2020 Financial Report, where it closed with a profit of N103.8 billion.
Growing profit position in these perilous times, speaks remarkably of the suppleness and elasticity of any establishment. A lull in economic activity caused by inflationary pressures, precariousness of the market, and the coronavirus pandemic has forced most Deposit Money Banks (DMBs) to cave in, and reveal achievements worse off than their 2019 results y/y – but not Zenith Bank Plc. The institution has showcased beyond reasonable doubt, that the apparent limitations are incapable of distorting its active growth pattern.
Zenith Bank closed H1 2020, 16.8% better off than it did in 2019 y/y, in terms of profit after tax. Although this massive leap, hugely resulting from tax paid as profit before tax, noted just a 2.2% growth. Further analysis of its HY’2020 results, demonstrates more efficiency, a focused cost of fund optimization, and an aggressiveness in generating income across its business heads and segments. This strategy had begun since 2018, and was shared by the bank when it disclosed planned implementation of an improved core banking system, hoping it would ultimately enhance efficiency while reducing costs.
Zenith Bank has thrived on the strength of its sound business model, corporate governance, conservative risk management, and strategic corporate social investment. The bank has been very forceful in the market, improving massively across all of its income generating segments, despite the plausible and obvious hindrances. This is a testament to its superiority, and sponsors its claim for supremacy.
The bank made N22billion from foreign exchange revaluation gains and despite evidence to the contrary, it endeavored in operating expenditure (OPEX). OPEX may have grown by 7.7%, but disclosures and note to the accounts shows that in virtually every expense head, costs dropped. The 7.7% was triggered majorly by Information Technology related costs, fuel and maintenance, and an increase in the compulsory banking cost fund, set up for the Asset Management Company of Nigeria (AMCON) by the CBN.
Now, like every hero susceptible to their hubris, Zenith has its own problems, which questions its position at the top. Yes, the bank may have an amazing and constantly improving interest expense to interest income ratio, but it does not possess the finest result in this regard as of yet. HY 2019 interest expense took as much as 33.6% of its income, while HY 2020 dropped to 27.4%. This is good, but still considerably high, if we carry out a peer-to-peer analysis with Guarantee Trust Bank Plc (masters of low-interest expenses), whose ratio stands at 16% for HY 2020.
However, Zenith has sustained the momentum of positioning itself as the crème de la crème in the Nigerian Banking Industry for quite some time. The bank’s pattern of growth and performance, strongly indicates its capabilities to manage its interest expense in subsequent quarters. It will be interesting to see how this pans out by year end.
In summary, despite economic difficulties this year, with most bank’s bottom-line at a worse position than the corresponding period last year, Zenith posted improved profit yet again. Could this be enough to portray supremacy?
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UBA Plc H1’2020 results, a true reflection of its rightsizing decision?
UBA’s H1 2020 result is yet another demonstration of the resilience of its business model.
The upward review in benefits of some employees and directors this year, coupled with the rising operational costs, constitutes the hot topics from the 2020 semi-annual results released by UBA Plc.
Widely regarded as the banking sector’s largest employer of labour in Nigeria, the bank in December 2019, embarked on a ‘rightsizing’ exercise, which partly resulted in new hires, as well as promotions, improved remunerations, and benefits for existing employees.
READ: Zenith Bank’s Profit After Tax in H1,2020 rises by 16.8% to N103.8 billion
The Group Head, Media and External Relations, UBA Plc, Nasir Ramon commenting on this said, “over 5000 staff of UBA Plc, started the new year with a lot of cheer, as the bank promoted to new grades, coupled with salary upgrades. Beneficiaries of this exercise will receive up to 170% increase in their salaries and benefits, whilst a good number have been moved to higher grade levels.”
Directors saw their emoluments amplify by 177.7% (Fees and Sitting allowances) as demonstrated in the financial statements of the bank. Rising to N50million in June 2020, from N18million in 2019 y/y.
READ: Access Bank posts Profit Before Tax of N74.31 billion in H1 2020
Now, Deposit Money Banks (DMB’s) might be adjudged to be honorable in all of their objectives, but the truth is they are neither self-sacrificing nor are they expected to be. DMB’s are established for profit, and would incessantly prioritize business good sense over social empathy, for the sake of their owners. The import of this is, UBA Plc expects its colossal investments in employees and directors to overwhelmingly reflect in its bottom-line.
Half-year 2020 results is clearly not in sync with this philosophy, as it reflects a weakened position compared to the corresponding period last year, despite the investments in human capital. Profit before tax dropped by 18.7%, from N70.3billion recorded in HY’2019 to N57.1billion in the current period. Profit after tax waned as well by 21.7% to N44.4billion from N56.7billion in HY’2019.
READ: Are tech talents Africa’s ‘new export’?
Interestingly enough, the top-line fared pretty well. Interest income and fee income showed improvements, albeit marginally by 0.3% and 6.7% respectively. This makes it illogical to attribute the entirety of the decline in profit to the recent austerity measures put in place by the CBN, reducing funds transfer fees and card maintenance charges.
The Coronavirus pandemic played a big role too, by widely stunting the economy in the second quarter of 2020, and negatively impacting profit. But even these do not provide substantial and sufficient convictions as to why the Tier-one bank did not hit the profit-bar it set for itself, from its truly emphatic 2019 financial year. Does this mean that UBA Plc got the decision wrong at the start of the year?
READ: FUGAZ; Nigerian banks considered too big to fail
Six months seem too short a period to immediately class management’s decision to jack up the benefits and emoluments of its internal customers as a failed one. Although, no one anticipated the travails of COVID-19 and its resulting consequences, investments in human capital is widely proven to yield tremendous growth in the long haul. Besides the fact that it has given UBA Plc a solid reputation in the market place, it also makes the company very attractive to the very best of industry talents. Furthermore, employee engagements of this nature, foster brand loyalty which ultimately trickles down to how passionately these personnel undertake their tasks and deliverables. The true bearing of this investment is expected to reflect in due course, in subsequent quarters.
Commenting on the result, UBA’s Group Managing Director/Chief Executive Officer, Mr Kennedy Uzoka said, “Our H1 2020 results is yet another demonstration of the resilience of our business model in an extremely uncertain and tough operating environment. We recorded commendable growth in our underlying business in terms of customer acquisition, transaction volumes, and balance sheet whilst inflation, depressed yield environment and exchange rate volatility impacted our net earnings as anticipated.”
READ: GTBank, Access Bank, 11 others pay workers N271.64 billion in H1 2020
Rising cost
In today’s increasingly aggressive marketplace, where consistently generating revenue, is paramount to preserving the longevity and going-concern status of any establishments, costs must also be accorded as much attention and significance. Tightening and managing costs with the aim to improve and generate profit is genius strategy especially in today’s banking industry. The banking industry is under threat from ruthless competitions. Multifarious streams that had hitherto been available for generating income for DMB’s are being severely hindered by the ‘austere’ policies (from the perspective of commercial banks) from the apex bank, making effective cost management a survival mechanism.
Explore the Nairametrics Research Website for Economic and Financial Data
Employee benefits rose by 20% from N37.2billion in HY’2019 to N44.6billion in HY’2020, while Directors’ emoluments (Fees and Sitting Allowance) as earlier stated, surged by 177% from N18million in 2019 to N50million in 2020 y/y. The total operating expenses increased 22.6% in 2020. UBA Plc, unavoidably expended N22.4billion on Banking Sector Resolution cost trust fund, in compliance with the CBN’s requirement to contribute to the cause of the Asset Management Company of Nigeria (AMCON). Security and other payments for core services experienced increase as well compared to the preceding year.
Avoidable expenses like Penalties and Premises Maintenance Charge, should be extensively reviewed and extinguished wherever possible, to improve bottom line. UBA plc has forked out N565million in penalties so far in 2020, representing 6177.7% increase from just N9million in 2019 y/y. This is a prime example of the operational brick walls, UBA Plc must properly address to improve its fortunes in subsequent quarters.
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Finding Balance: GTB’s impeccable gains versus its notable losses
Bank’s strategy of increasing gains while seeking out ways to decrease its losses is on a true course to growth.
Guarantee Trust Bank Plc (GTBank), over the past few years, has taken the Nigerian banking industry by storm, particularly through the foresight and strategic actions of its management.
The bank has, over time, tactically built its operations and expanded its market share, earning its spot as one of the credible names in the Nigerian banking space.
Faced with challenges like increase in the loan-to-deposits ratio (LDR) instituted by the CBN, and the COVID-19 pandemic that got companies in the financial sector thinking of new ways to survive, GTB may have found its way out.
READ: Nigeria’s inflation rate hits 13.22% in August 2020, highest in 29 months
Overview of its half-year results
Net interest income increased by 9.7% to N127.6 billion in H1 2020, compared with N116.4 billion in H1 2019. Its Profit before income tax stood at N109.7 billion in H1 2020, compared with the N115.8billion in the corresponding period in 2019 – a decrease of 5.2%.
Somewhere in-between the good and the not-so-good, the bank has been able to round off its earnings to a balanced output for H1 2020.
READ: Even with a 939% jump in H1 Profit, Neimeth still needs to build consistency
The good: Foreign Exchange gains
One of the best happenings to investors this year, is the extreme volatility of the forex market – among other currency and commodity plays. In H1 2020 period, the company’s financial assets at fair value through profit or loss, was up by 91.6% to N140.8 billion, when compared with N73.5 billion in H2 2019.
Interestingly, this was due to 129.2% increase in treasury bills from N56.9 billion in H1 2019 to N130.5 billion in H1 2020. Through forward foreign exchange contracts and currency swaps, they were able to increase derivative assets by 49% from N188.6 billion (notional contract amount) in H1 2019 to N280.9 billion in H1 2020.
Explore the Nairametrics Research Website for Economic and Financial Data
Foreign exchange revaluation gain in the half-year period was significantly boosted, from N2.6 billion in H1 2019, it attained 723% growth to N21.9 billion H1 2020, and it was a major reason for the 28% increase in other income within the period under review. Deposits from customers were also higher by 18.5% to N3 trillion. While loans and advances to customers increased in line with the apex’s bank directive. This could be both a bad thing and a good thing, depending on the level of credit risk.
(READ MORE:GTBank, Dangote Cement, CAP record gains, Investors post N7 Billion gain)
The not-so-good: Impairment losses, CBN’s penalties
Following CBN’s issuance mandating commercial banks to increase the percentage of customer deposits that were loaned to 65%, so as to effectively stimulate the economy, stringent penalties had been imposed on non-compliant banks by the apex bank.
Consequently, the company’s restricted deposits had increased to N1.054 trillion, owing to its limitations in full compliance. While its increased cash balance of 27.8% in the period under review, could signify that the worst of the challenge is over (particularly following the comparative reduction in cash in Q1 2020), a cursory look at the reason for the strengthened cash position, is the 75.7% increase in money market placements to N333.5 billion – another positive for the bank.
READ: Jaiz Bank reports 45.3% profit increase in H1 2020, involved in 21 litigations
Loan impairment charges in the half-year period, increased by 209.7% from N2.1 billion to N6.8 billion, and this was as a result of increased provisions for expected credit losses on financial assets extended to its customers, no doubt as a result of the economic uncertainties, synonymous with the period under review.
Commenting on the half-year results, the CEO, Segun Agbaje, noted that; “Going forward, our focus is not just to survive this pandemic, but to thrive beyond it. That is why we are going ahead with our plans to re-imagine how we create value for all our stakeholders.
“We know that making financial services work for customers goes beyond banking, and in line with our long-term strategy, we will seek to create and drive innovative financial solutions that go beyond banking.”
READ: Access Bank posts Profit Before Tax of N74.31 billion in H1 2020
The bank’s Return on Equity (ROE) of 26.8% is currently one of the best in the industry, and a testament to this promise. Its strategy of increasing gains by focusing on its strengths, while also seeking out ways to decrease its losses, is one that will set any organization on a true course for growth. GTBank is certainly on that path.
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Eric
March 21, 2019 at 7:33 am
While I appreciate the fact your were able to establish the distinctive business models of the 2 in terms of their procurement systems, you were silent in their customer strategy. As a retail insider, i know spar has a different target market and different retail focus – narrow assortment, but highly profitable, which informs its buying depth and elimination of middle men. Its average basket value remains solid and almost 3 times that is ShopRite.
Akinwusi Folusho
March 21, 2019 at 8:34 am
Insightful, Solving the issue of long queues for payment will really help and bringing there services closer to the lower classes as well..