Is Nigerian fast food industry at its Tipping Point?

Until recently, Sub-Saharan Africa (SSA) has long been ignored by the Western based brands, but now as growth opportunities in other emerging nations become saturated, SSA appears to be the ultimate destination. Particularly, the fast food businesses are gearing up for their next big move on the continent, but whether it will be easy for them, remains the question. SSA consists of 50 countries, in which Nigeria and South Africa are the major economies contributing tremendously toward the GDP of the continent; and the sooner the foreign brands harness the potential in these economies, the larger they can bite into the pie.

However, things are not as easy as they appear, and the reality could be easily referenced from the limited presence of The McDonald’s Corporation’s (world’s largest chain of hamburger fast food restaurants) outlets to just two economies in SSA region; South Africa and Mauritius. In one of its recent researches, Princeton University related the prominent presence of McDonald’s to the health of the economy. Similarly, Marc Faber has used McDonald’s as an indicator of the global economy. Thus, McDonald’s can be safely used as a proxy to measure the health of the Nigerian fast food industry’s dynamics.

The case of poverty in the region makes a strong case for McDonald’s limited presence in SSA, but then the fast food chain’s outlets in several other countries with per capita income much below that of the SSA economies rebuffs the idea. McDonald’s is not alone as it took nearly 38 years for the world’s second largest restaurant chain, KFC Corporation to settle down in the continent, particularly in Nigeria. In fact, KFC launched its first restaurant in Nigeria as early as December 2009.

Despite being a hidden treasure for restaurant business with a population of almost 170 million, Nigeria has an array of issues that are preventing profitability and viability of foreign brands in the region. Firstly, the presence of food chains is highly restricted to Lagos, Abuja and Port Harcourt, as other regions are not as developed. Secondly, the ban on chicken importation compels restaurateurs who continue to face a hard time in procuring fresh local chicken due to underdeveloped farm systems coupled with poor transport services.

Thirdly, power bills and free Wi-Fi facilities amid the epileptic power crisis eat into the profits of these brands in Nigeria. The round the clock power availability at KFC outlets definitely allures visitors but then the costs are ultimately passed on to the customers, making a decent meal at KFC worth $11, which is unaffordable to most Nigerians on a daily basis.

According to the World Bank, domestic credit to private sector in Nigeria is 11.8 per cent in contrast to South Africa’s 151 per cent. This implies that local investors or franchise owners have to manage significant part of the capital investment on their own. On the other hand, World Bank’s ‘Ease of Doing Business’ report ranked Nigeria at 147 out of a total 185 economies. Thus, even if investors succeed in raising capital, running a business in Nigeria is fraught with several challenges.

The next criterion is how safe the investment is, which ultimately depends on the crime rate in the region; government’s approach towards foreign investors and corruption levels. The Corruption Perceptions Index (CPI) for the year 2013 shows that the corruption climate has worsened in Nigeria. It slipped two notches to 25 from 27 last year. Furthermore, a Jones Lang LaSalle report has ranked Nigeria 96 out of 97, under the category of “opaque”, on the 2012-global real-estate transparency index. This indicates the country poses barriers to investing in its real estate, which is exposed to a high level of corruption, scarcity of fundamental data and lack of environmental sustainability plans.

The growth story of the seventh largest economy in terms of population could not be denied on the back of the prevalent challenges. Nigerians are rapidly embracing the western brands.

Poverty is fading away with disposable income increasing at a rapid pace resulting in an upliftment in consumerism. The success of brands like KFC followed by Domino’s and Cold Stone Creamery, which entered the oil-rich nation in 2012, has boosted the confidence of overseas brands in Nigeria. The latest addition on the block, Burger King, which entered SSA in 2013, is another testimony to the fact that the Nigerian fast food industry is soon approaching its tipping point.

RUCHI GUPTA