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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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Why SEC should support democratization of sale of foreign securities
In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position.
The directive of the Nigerian Securities and Exchange Commission (SEC), issued 8th of April 2021, has been met with consternation and a straightforward (but hopefully simplistic) interpretation that; “the government is out to stifle innovators, again.”
These perspectives aren’t unfounded, as innovators of all shades have taken a heavy beating lately due to a number of direct government policies or interpretations of these policies – irrespective of how well-intentioned these policies may be. On the contrary, micro-investment platforms deserve a fair shot within Nigeria’s capital market.
This is especially true considering that the recent regulatory fervour coincides with a period where the innovation ecosystem is recording new milestones and gaining traction, solving problems for users in all walks of life, democratizing wealth creation, and creating high-value jobs, all of which Nigeria desperately needs.
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In the last six months alone, Nigerian startups have gained the confidence of some of the best investors locally and globally, leading to never-before-seen innovations, acquisitions, and investments into the economy. This promotes interest in the Nigerian innovation ecosystem from foreign market actors and increases its relevance as a high-value job creator. Some now wonder if our regulators want more or less of this positive momentum.
This latest notice from the SEC warned Capital Market Operators (CMOs) to desist from selling securities not quoted or registered, as only registered securities in Nigeria can be issued, sold, or offered for sale. Ostensibly, the directive requires CMOs registered with the SEC to offer only securities listed on any exchange in Nigeria to the public.
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The challenge here is that High Net worth Nigerians (HNIs) have always had access to foreign securities offered or acquired through registered CMOs for the apparent benefit of the upside available in markets such as the United States. This should be democratized to allow Nigerians with smaller incomes to have access to valuable global stocks within fair rules, and this is what the likes of Trove, Chaka, Bamboo, and Risevest have done. In fact, this democratization should be applauded as one of the outputs of a thriving innovation ecosystem that provides practical
palliatives for the stifling inflation and erosion of value we have all experienced as Nigerians.
After all, what is suitable for Dangote should also be good for Musa, who earns NGN50,000.00, and thanks to any of the apps mentioned above, can today invest in shares of Dangote sugar while also adding a quarter of a Google stock to his portfolio every month. This “magic” of innovation is a poverty alleviator that should be encouraged and nurtured while ensuring that the public is protected from any harmful financial practices.
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It is important to acknowledge at this point that the SEC has been a positively progressive regulator, generally engaging its public fairly. The issuance of the guidelines for crowdfunding and accommodation of FinTechs within the capital market was encompassing and engaged stakeholders of all hues. This should be commended. The SEC’s position classifying crypto as an asset class is also fair, refreshing, and proactive. We need more of this and not less.
At a time when we are exploring how the Nigerian capital markets can become a viable option for listing tech startups, this latest body language of the SEC, and the Nigerian government as a whole can be further misinterpreted.
In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position, as these innovations are widespread, publicly accepted, and valuable. Furthermore, these innovations support some of the registered and regulated CMOs by offering white-label solutions that are accelerating the ability of these legacy CMOs to better serve their HNI customer base, with local and foreign securities. The emergence of these innovative micro-investing platforms has triggered investments into local Nigerian securities in multiple folds. The volumes these innovative platforms channel into Nigerian stocks are arguably the most significant development in Nigeria’s capital market in a decade.
By virtue of the existence of these innovators, their combined strength has introduced over 150,000 new market participants who are primarily millennials: a majority of whom purchased their first set of stocks through these platforms. Before now, they had no active interaction with the capital market. These new entrants are now trading in excess of NGN10,000,000,000 (Ten Billion Naira) monthly through these apps. Note that a good chunk of the highlighted trade volume is routed through local CMOs to purchase Nigerian securities on the Nigerian Stock Exchange(NSE). Long term, these innovations would also serve as a channel to offer Nigerian guarantees to a global audience which would be a massive positive for the economy.
The quest for diversification of portfolios to include foreign securities can only be good overall. It underscores the global trend in cross-border trade in securities as disintermediated by technology and the need to enhance portfolios’ value globally.
Rather than curbing the practice of offering Nigerian and international stocks in a basket, this micro-investing trend should be allowed to flourish within reasonable regulatory frameworks. These platforms make investments attractive, easier, and affordable. Micro investing will curb the menace of pyramid and Ponzi schemes while introducing a new generation into Nigeria’s securities market in parallel with their appetite for global securities. Regardless of what we decide, the world has gotten smaller, and information that enables people to easily seek the best economic outcomes is readily available. While other nations gain from micro-investing, shouldn’t our people do too?
The ultimate beneficiary of increased wealth for Nigerians is the Nigerian economy. Rather than shutting Nigerians off from the rest of the world, we should be accelerating global access for our millions of people; hence this is the time for dialogue, not shutdowns.
Kola Aina is the Founding Partner at Ventures Platform and writes from Lagos, Nigeria.
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Buy what? Dangote vs BUA Cement
Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization, but does size win?
I want to review the performance of the largest quoted companies in Nigeria.
On the Nigerian Stock Exchange, they don’t come any bigger than Dangote Cement (Dangote) and BUA Cement (BUA). Only MTNN stands with both cement companies in terms of market capitalization. Dangote and BUA are both blue-chip companies, in the same sector and both enjoy federal import protection, they also both serve a local market with huge demand for cement.
Which is a better investment? Let us assume I have N100,000.00 (One Hundred Thousand Naira,) which should I buy? Let us review both stocks with FY 2020 results they posted. For consistency, I am going to use my trading view terminal numbers.
READ: Dangote Cement joins MTN in the trillion-naira club, as 2020 revenue surpassed N1 trillion
Market Capitalization
First, we talk about capitalization, (Market cap is the number of shares issued x market value of shares ). Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization. Does size win? Dangote is bigger? Not yet!
Market Price
With N100,000 I can buy about 465 shares of Dangote at N215 a share and 1,360 shares of BUA at N73.50 per share. Is BUA cheaper? do we have a winner? Not quite. Let us dig deeper.
Dangote Cement posted a Net Income figure of N276 billion, if we divide this earning by the number of issued shares which is 17 billion, we get an Earnings Per Share (EPS) of N16.14, so every share of Dangote Cement earns (not pays) the investors N16. Similarly, the Earning Per Share of BUA is N2.0
READ: BUA Cement loses N162 billion in market value in a week
Thus when I buy Dangote Cement N215 per share, I am buying 16 times the earnings of Dangote. We can simplify this by simply comparing the price I pay per share of Dangote to the EPS of Dangote (Price to Earnings Ratio), thus I invest my cash of N215 to buy 16 times the earnings of Dangote, thus the Price to Earnings Ratio of Dangote is 13.31 (P/E). Using the same calculation, the price for each earnings of BUA (the P.E.) is 35.38. This means even though I am paying more cash for each share of Dangote, I am paying less to buy the earnings of Dangote, thus Dangote is cheaper than BUA.
So our first milestone is reached, we have used the Net Income, Market Price, and Number of Issued shared to get the Earnings Per Share, we have then determined what amount of earnings we are buying to determine which stock is at a bargain.
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What else?
Let us look at the earnings that will be paid in cash. Remember, Earnings, is just the Net Income of Dangote, we as equity holders have the opportunity to share in any portion of the Net Income.
Dangote in 2020 paid out from earnings N272.69 billion as dividends, this translates to about N16 per share or in terms of returns 7.44%. We get this Dividend Yield return by comparing the dividend paid to the market price per share (D/P). BUA also in 2020 paid out N59.26 billion as dividends from earnings, this translates to a dividend yield of 2.81%.
So, if I invested N100,000 in shares of Dangote Cement, I would earn a cash return of 7.44%, if I did the same with BUA I would earn a cash return of 2.81%.
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Let us go a bit deeper…
When you buy a stock, you are buying into the earnings and cash flow. Dangote Cement in 2020 earned N276 billion and paid N272 billion as dividends meaning they retained about N3 billion for that FY while generating over N248b in Free Cash Flow. Similarly, BUA earned a net N71.52 billion, paid out N59 billion in dividends, retained N19 billion but posted a negative Free Cash Flow of (N95.49 billion). Should BUA cement have simply used that cash to finance working capital rather than paying it as dividends? Perhaps. Let us speak more of Cash flow.
Cash retained is cash not paid to you the investor. You have to ask how well your company is utilizing that cash retained. Should it all be paid out as dividends? Or retained in the company to fund expansion and growth?
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Look at it this way, if Federal Government Bonds were offering a Yield of 15% and we see that Dangote is offering a yield of 7.44%, then as shareholders you should demand that Dangote pays more cash to you to allow you to invest in FGN bonds because you get a higher return (at lower risk). The point is any company retaining cash or paying cash at a lower yield than the market is hurting the investors, who are missing the opportunity of investing higher elsewhere.
Let us score both company managers by how well they have managed the revenues and capital of the companies
| Return on Assets % | Return on Equity % | Return on Invested Capital % | EBITA Margin % | Net Margin % | Debt to Assets | Long Term Debt to Assets | |
| Dangote Cement | 14.62 | 31.21 | 26.92 | 44.04 | 24.31 | 0.24 | 0.08 |
| BUA Cement | 11.15 | 19.12 | 15.35 | 41.87 | 32.03 | 0.36 | 0.23 |
FY 2020
Across the board, the management of Dangote Cement has done a better job when compared to BUA Cement in managing the assets of the company. Dangote Return on invested capital is higher with a much lower recourse to debt and of course a higher FCF number.
Overall, on Earning, Returns and Efficiency, it appears Dangote Cement posts better fundamentals…
Disclaimer
There is a wealth of information that should help decide whether you should buy a stock or not and how long you can hold on to it. Our recommendation is based on the information we currently have and is wholly the opinion of the writer
This article is an investment guide and as such you should conduct extra analysis before deciding whether to buy, sell or hold a stock. The decision to buy, sell or hold a stock is solely yours.
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