Local retailers have edge in frontier markets

Local retailers have edge in frontier markets

Growing retail markets in Africa and parts of the Middle East carry vast potential for local retailers, if they can manage to break into them.

In much of the developing world, demand for high-quality, typically western, consumer products has increased. In many African and Middle Eastern cities, malls that sell designer brands are thriving.

But international retailers have not entered these markets in great numbers.

Like other sectors in frontier markets, challenges continue to abound in retail. Purchasing power is growing in these markets, often fueled by natural resource exports, at a faster pace than bureaucracy can be improved, logistics networks can be streamlined, and infrastructure can be developed.

But an international retailer wanting to open its doors in Iraq would first have to find real estate, navigate bureaucracy and bring in management and apply for a business license.

For customers, practical challenges such as traffic and parking make getting to stores, once open, a hassle in itself.

Retail is a relatively low-margin business. The prospect of rules or regulations changing under new governments, economic growth numbers slipping, or other unpredictable factors can dictate whether an investment will be recouped.

Regional retailers lead

These are some of the reasons for the growth of regional powerhouses that dominate local retail. Majid al Futtaim (MAF), a UAE retail giant, has expanded into 14 countries across MENA. Landmark Group, also of the UAE, has expanded into 20—with presence seeping beyond MENA into Central Asia and Sub-Saharan Africa (SSA). Shoprite and Woolworths, both of South Africa, are leading the charge north into SSA’s more challenging markets. Companies such as these know the terrain they are moving into and can concentrate on developing regional expertise in a way that bigger, global retailers cannot.

Should global retailers want to enter these markets, however, these companies can be powerful partners. The successful spread of Carrefour, the French grocery giant, throughout MENA can largely be attributed to its franchise agreement with MAF in the region.

Where Amazon lags, local e-commerce shines 

However, e-commerce in these markets is in the process of a sharp end-run around brick-and-mortar for the retail market. As Internet access and technical literacy skyrocket across Africa and the Middle East, customers have increased as well.

Frontier market e-commerce is not without its own challenges. These include a lack of proper addresses in many cities and countries, largely unbanked populations, and logistical and distribution challenges. It is no wonder that Amazon has no local real operations in Africa or the Middle East. However, this has not stopped locals from filling the e-commerce vacuum.

In Africa, Jumia, a Nigerian online retailer is shaking up retail across the continent. Using tightly controlled vertical integration, the company controls each step of the online shopping value chain. Its tight grip on operations allows it to build trust with its costumers, ensuring that deliveries are on time, and as described.

The company has seen double-digit month-on-month growth since it opened two years ago. As Jumia takes market share, Woolworths is closing stores in Lagos.

The company is already spreading into complimentary sectors, with a new site allowing African expats in the UK to send remittances home, avoiding high wiring fees.

New markets, such as this analyst’s home of Iraqi Kurdistan, have seen smaller upstarts emerge. Amabox, for example, allows local customers to buy items from the US, pre-pay in cash by buying Amabox credit at local stores, similarly to how one might buy phone credit, and pay a fraction of what shipping would typically cost. The start-up addresses both country’s poor, expensive logistics system, as well as its underdeveloped banking sector.

Retail packs huge potential in many frontier markets—but there are also good reasons why Amazon and Wal-Mart, Nordstrom and Macy’s have not moved into the space. The best way to take advantage of the retail supply gap in these markets is with local assistance.

Categories: Economics, International

About Author

Brady Jewett

Brady has spent the past two years in the Kurdistan Region of Iraq, analyzing investment and business in the region, and is currently based in Washington, DC. Brady holds a BA from UC Santa Barbara and an MSc from the London School of Economics.