French retail giant Carrefour has announced plans to expand further into Africa through a joint venture with consumer goods distributor CFAO. The deal will see the companies develop stores across eight countries and represents a new signal of intent from the world’s second-largest retailer to place down an early marker in what is becoming a fast-growing emerging market. Michelle Russell takes a closer look.
Carrefour’s deal with CFAO will see the companies develop stores across west and central Africa. Its focus will be on eight markets – Cameroon, Congo, Côte d’Ivoire and the Democratic Republic of the Congo, plus Gabon, Ghana, Nigeria and Senegal.
While the deal might not seem so surprising on the face of it – a retail behemoth looking to expand into new markets – it will actually be a first for both Carrefour and CFAO.
For Carrefour, it only has a limited presence in Africa to date, with franchise operations in Tunisia, Morocco and Egypt. The venture also comes at a time when Carrefour is scaling back its international operations in other parts of the world.
For CFAO, it will be the firm’s first entry into retail. The bulk of the distributor’s business is in cars and pharmaceutical distribution. It also distributes drinks brands from Coca-Cola to Heineken on the continent. It does, however, have an expansive knowledge of the African and French overseas territories markets, a vast distribution network with operations in 32 African countries and a deep understanding of consumer habits. Together with Carrefour’s expertise as a multi-format retailer and the strength of its banner, the deal appears to have every chance of success.
London-based Euromonitor retail analyst Raphaël Moreau says Carrefour is wise to team up with a local company experienced in the region, rather than on operating on a stand-alone basis. “[Carrefour] does not have to deal much with the supply chain, distribution centres and therefore large investments,” he says.
The retailer may have chosen its new target markets well. Many African countries are posting growth rates higher than in Europe and a middle class with new shopping habits is emerging.
Joseph Robinson, lead consultant at Conlumino, tells just-food there are signs many of the same trends that have driven the economic development of emerging economies in Asia and South America are beginning to take hold in Africa.
“Retailers are slowly coming to acknowledge that factors such as growing middle classes, mobile technology and improving infrastructure are slowly driving the continent to prominence,” he says.
Robinson believes the recent acquisition by Wal-Mart Stores of South African retail Massmart indicates how seriously established global players are starting to take the continent. “With the retail market across Africa being comparatively under-developed, there are significant potential opportunities from establishing first-mover advantage, capitalising on key emerging trends.”
Ian Luyt, owner and managing director at emerging market consultancy Novirost, claims Nigeria is “the big prize”. He says: “There is a lot of enthusiasm about Nigeria and it probably has the per capita income levels, the population size and the economic growth prospects to put it ahead of the others.”
For Carrefour to achieve success in Africa, however, will require a flexible and patient approach. The retailer will have to take into account the severe challenges of operating in less developed emerging markets such as the slow improvement of infrastructure, political instability and red tape.
Izaskun Bengoechea, research manager for Euromonitor in Cape Town, says the African markets also lack “strong formal retail organisation”. Modern retail is growing in Africa but the informal channel dominates. According to Euromonitor data, modern retail formats accounted for 1% of sales in Nigeria in 2012.
“If you look at the split between your traditional grocery retailer and larger retailers, grocery retailers still continue to dominate a huge chunk of the retail market, especially as we have a strong tradition of open market trading in Africa,” Bengochea says.
According to the United Nations Food and Agriculture Organisation, food retailing takes place mainly in large central markets controlled by the municipal authorities. Most cities do, however, have a fairly large number of supermarkets and self-service groceries that stock mainly imported foods and locally produced or imported fresh fruit and vegetables. It is the smaller shops that play a more important role in the distribution of local foodstuffs and manufactured consumer goods to low-income households.
Bengoechea says Africa’s growing middle class does offer some opportunities but points out spending still remains low compared to other continents like Europe.
“As much as there are around 1bn consumers in Africa, only a small percentage of those have spending power, so inequality is a big issue. Carrefour will need to look at affordability. The product it supplies in Europe might not warrant a premium price in Africa so it will need to tailor products to meet specific market segments, which is very important. They have a tricky job.”
However, a recent report from Euromonitor says Nigerian consumers are moving towards convenience, wanting to do their shopping in one place. Euromonitor forecasts modern retail will account for 5% of retail sales in Nigeria by 2017, still a small part of the market but a notable level of growth.
At present, competition with other modern retailers in Carrefour’s target markets is less severe in, say, South Africa, the continent’s largest economy.
South African supermarket operator Shoprite Holdings is present in four of the markets Carrefour is targeting and opened four stores in Nigeria in 2011 and 2012. Spar International has stores in some of the markets. Wal-Mart’s Massmart has no food retail presence in any of the eight, although it has discount non-food FMCG Game stores in Ghana and Nigeria.
However, Carrefour’s venture is seen as a wise move if it wants to benefit from the potential growth in the region. “If Carrefour wants to trial being present in these markets, they have to be an early entrant rather than wait until everyone else is there,” Euromonitor’s Moreau says. “So, now is probably as good a time as any rather than postpone any entry.”
In any case, Moreau suggests Carrefour’s initial investment is a cautious one. “They appear quite wary that this will take time and they’re not planning to open too many stores at once. They are aware of the pitfalls and will only target a few cities that have the consumers and right catchment areas. The risks for Carrefour here are pretty low.”
And for a retailer that has had its share of challenges in international markets in recent years, perhaps that is a good thing.