An Assessment of Nigeria as Potential Market for Wal-Mart Stores, Inc

Table of Content

1. 0Introduction This report aims to examine Nigeria, a country Wal-Mart stores, Inc. is looking to invest, in order to identify opportunities and threats in the proposed market and to ascertain whether or not to proceed with investment plans. This report contains an analysis of Wal-Mart stores and its identified strengths and weaknesses, as well as the risks it will face and opportunities it has in the proposed host country which have been identified through macro and micro environmental analysis the country.

Based on findings from the analysis, recommendations will be made to management and the end of this report. 2. 0Methodology A qualitative approach was adopted for this report and data used were obtained from secondary sources including reports, journal articles, online sources and textbooks. Supporting tables and charts used for analysis have been included in the appendix. This report adopted the use of SWOT analysis to audit Wal-Mart’s existing strengths and weaknesses and to investigate potential strengths and weaknesses as identified in the findings of the host analysis.

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SWOT analysis is a model for developing marketing plans. It assesses what an organisation can do (strengths) and cannot do (weaknesses) in addition to the organizations favourable and unfavourable conditions otherwise known as its strengths and weaknesses. SWOT analysis is based on information gathered from the organizations internal and external environment (Ferrell, et al. , 1998). PEST analysis was used to examine the macro environment of the host country.

This analysis looked into the political (legal), economic, socio cultural and legal factors of a country’s macro environment. The micro environment of Nigeria was examined using Porter’s diamond of competitive advantage. This theory explains why certain companies and industries are able to perform better in some nations than others and attributes it to four basic reasons including factor endowments, demand conditions, relating and supporting industries and firm strategy, structure and rivalry (Porter, 1999 cited in Hill, 2009, p. 189). 2. Company Analysis: Wal-Mart Stores, Inc. 2. 1. 1. Company Brief Wal-Mart opened its first store in 1962 but was incorporated as Wal-Mart Stores, Inc. in October 31, 1969 in the United States. It presently has about 8,158 retail units in 15 countries and the number keeps increasing. The company’s sales for 2009 fiscal year is $401 billion and its employees and associate worldwide are over 2. 1 million (Wal-Mart, 2009). Wal-Mart is the largest multinational retailer in the world, both in retail value and number of outlets (Euromonitor, 2009).

Best known for low pricing and a vast array of products, Wal-Mart sells everything from food, clothing, footwear and accessories, consumer electronics, toys and game, cosmetics and toiletries, sporting goods, furniture, home furnishings, etc. Most products as well as online music and films are sold through its website, Walmart. com. 2. 1. 2. Wal-Mart’s Objectives, Strengths and Weaknesses Objectives Wal-Mart’s main objective is to save people money so they can live better by providing high quality products to customers at the lowest prices.

Other objectives include investing in emerging markets due to saturated local market in the USA and adjustment of operations to enable the launch of smaller stores in various locations (Wal-Mart, 2009). Strengths Wal-Mart is known to provide high quality goods at low prices, shopping convenience and ability to offer a wide range of products from a single outlet. This is good for the Nigerian market because Nigerians tend to shop in places where everything they need can be obtained at the same time and Nigerians look for low prices and high quality.

Also, substantial growth and global expansion has given Wal-Mart international recognition and a highly esteemed reputation. Another strength that Wal-Mart has is that large scale operations and profits would enable economies of scale and bargain advantage with suppliers. Wal-Mart’s ability to source from local suppliers and stock locally produced goods allows for easy adaption to global markets. This would be very beneficial for Wal-Mart in Nigeria because the government encourages the use of local goods and suppliers. Weaknesses

Wal-Mart heavily depends on US market which is mature with little expansion potential. Another weakness is the lack of presence in Africa’s emerging markets which makes Wal-Mart unfamiliar with the region. Due to Wal-Mart’s lack of investments in Africa, everything they do in the region and in Nigeria in particular would be a new experience to them. Also the continuous use of large format outlets such as hyper markets contradicts the growing need for smaller discount and convenience stores in such developing markets as Nigeria’s.

A huge mix of products being offered makes Wal-Mart less flexible than competitors who are more focused on certain products in terms of different range of a similar product. Wal-Mart does not operate through franchises, which is common form of investment in Nigeria. 2. 2Host country Analysis: Nigeria 2. 2. 1. Country Brief The Federal Republic of Nigeria is the most populated nation in Africa with a population of 148 million and accounts for 47percent of West Africa’s population.

With over 200 ethnic groups, 500 indigenous languages, and two basic religions – Muslims and Christians, Nigeria is made up of diverse cultural and religious ideologies that affect their shopping habits. (World Bank, 2009). Nigeria is structured as a federation with 36 states, one Federal territory, and 774 local governments (CIA, 2009). 2. 2. 2. Macro Environment Analysis (include data, tables, trends and charts) 2. 2. 2. 1. Political Analysis Nigeria practices a Federal system of government with government arms divided into executive, legislative and judicial arms.

There are various political parties, pressure groups and trade unions the country including Nigerian Labour Congress (NLC), Nigerian Union of Journalists (NUJ) among others. Nigeria is a member of several international organizations such as the World Trade Organization (WTO), the United Nations (UN), International Monetary Fund (IMF) and a lot more (CIA, 2009). Recent reports indicate that the political environment is relatively stable with preparations being made for the next federal, state and local government elections due in 2011 (EIU, 2009).

The Federal government is focused on development and this is evident in its seven point agenda, some of which include development of human capital; critical infrastructure; food security; national security; and wealth creation. Investing in a country with a stable government is a good opportunity for Wal-Mart because there would be nothing to worry about when investing in the economy. The federal government of Nigeria through the Nigerian Investment Promotion Act established the Nigerian Investment Promotion Commission (NIPC) in 1995 as an indication of its desire to promote foreign direct investment.

Foreign investors must be incorporated through the Corporate Affairs Commission (CAC) before registering with the NIPC, excluding those companies operating under export processing status or in established in export processing zones. The minimum investment currently allowed is a share capital of N10 million (about $70,000) (UNCTAD, 2009). The NIPC partners with other government agencies such as the Central Bank of Nigeria (CBN), Nigerian Customs Service (NCS) amongst others to support foreign investors.

Government Policies and incentives to promote FDI include the amendment of Income Tax Act to reduce current tax to 30% in all sectors apart from petroleum, Investment Promotion and Protection Agreement (IPPA) with foreign countries including the United States, Liberalization of ownership structure allowing 100% share ownership of companies by foreigners, full repatriation of profits and guarantees against expropriation (NIPC, 2009) Moves to improve bilateral trade between Nigeria and the United States have been on since 2002 when both countries agreed to support each other in the World Trade Organization (WTO).

This trade relationship is also fostered by the African Growth and Opportunity Act (AGOA) and its amendments till date. The Nigerian Governments reviewed tariff structure comprises a tariff band of 0% to 35 % (Trade Invest Nigeria, 2009) (see Table 1. 1). 2. 2. 2. 2. Economic Analysis Nigeria’s Gross Domestic Product (GDP) for 2008 was approximately $216. 8 billion as per the official exchange rate and real GDP growth was 6. 2% and 6. 1% in 2007 and 2008 respectively. This has resulted in a steady growth in the GDP per capita (OED, 2009) (see fig 1. ). A decline in 2009 was due to the economic recession and decline in oil production and exportation. Nigeria currently has one of the highest GDPs when compared with other African countries (See fig 1. 2). In 2007 Nigeria’s expenditure on its budget exceeded the revenue it generated leading to a budget deficit of 6% (Library of Congress, 2009). Similar forecasts have been made for 2010 and 2011 (Economic Intelligence Unit, 2009). Agriculture and petroleum have continued to be the dominant sector in terms of GDP contribution but holesale and retail is a close third and is growing at a very fast rate as compared to the other sectors (World Bank, 2009) (See figure 1. 3). Inflation in Nigeria has been high in the past except for 2008 due to recession in the global economy. In 2009 the inflation increased by over a 100% (CIA, 2009) (see table 1. 2. ) Forecasts suggest that the inflation rates will decline gradually and will stabilise around 8%. Exchange rate has been stable apart from a decline in late 2008 and early 2009(EIU, 2009). In 2005 Nigeria was under a debt of $37 billion.

By entering into an agreement with the Paris and London Club of lending nations Nigeria has nearly eliminated its entire debt (Library Of Congress, 2008). The current external debt stands at $9. 5 billion (EIU,2009). This reduction indicates that the economy is turning into a stable one. 2. 2. 2. 3. Socio cultural Analysis The official language in Nigeria is English. Cultural context in the country is very high and family values are highly respected. The main religions practiced in Nigeria are Islam and Christianity with Islam predominantly practiced in the Northern parts of the country.

Life style and consumption habits are influenced by religion to a certain extent. Food and groceries constitute a major portion of Wal-Mart’s stocks, thus its worthy of note that Nigerians are delighted by food and there has been gradual shift from the consumption of traditional food to western food such as rice and pasta. While Nigerians are not really into consumption of readymade food, there has been increase in the consumption of packed and processed food (Euromonitor, 2009). A major portion of disposable income is spent on food and bulk purchasing is common among upper class citizens who can afford it.

Others shop more frequently and are less prone to impulse buying as they already know what they want. The absence of entertainment options makes drinking an immediate and cheap alternative to Nigerians and it is seen as a social activity common among the youth. This has lead to increased consumption of alcoholic and non-alcoholic drinks and a boost in the industry. Nigerians are brand loyalist as they respond positively to advertisements and promotions. Nigerians are trendy and fashion conscious, thus there has been a boom in clothing and footwear retailing.

Local production is on a small scale and more personal basis due to the absence of a fully developed clothing industry, thus there is heavy importation of clothing and shoes. Where it is too expensive, low income earners opt for imported second hand items or counterfeits of the original items. Most household goods and home improvement items are imported and highly priced, and are bought less frequently. Again, there is the incidence of sub standard and used products being consumed by low income earners who have to equip their new houses, especially when new apartments are not pre-furnished in Nigeria (Euromonitor, 2009). 2. . 2. 4. Technological Analysis: The telecommunication market in Nigeria is one of the fastest growing in the world with an monthly growth rate of 1. 1 million subscribers since 2000 and telecom density of 42. 3 per cent in 2008. GSM technology is the major form of mobile communication and is currently provided by over six mobile networks; MTN Nigeria; Globacom; Etisalat; Zain; Visafone and M-tel. Competition among these network operators has led to a decrease pricing. This sector has attracted investments of about $12 billion from foreign and local investment since 2001 and has contributed to government revenue as well. AEO, 2009) The State Accelerated Broadband Initiative (SABI) and Wire Nigeria (WiN) project are moves by the Nigerian Communications Commission (NCC) to boost broad band internet service throughout Nigeria. The existing mobile communication companies and Internet Service Providers (ISP) provide internet service for both domestic and commercial use at an appreciable level. Availability of adequate information technology will be of use to Wal-Mart due to its heavy dependence on IT for marketing, logistics and other operations. (AEO, 2009) . 2. 3. Micro Environment Analysis 2. 2. 3. 1. Factor Endowments: The availability of cheap labour in Nigeria is an opportunity that Wal-Mart needs to take on board. The minimum wage in Nigeria is 15,000 Naira per month which is just less than $100. If you compare that to other countries and you see that you are sitting on a gold mine with respect to cheap labour which is an opportunity for Wal-Mart. There is also an availability of skilled and unskilled labour, which means that Wal-Mart would have a wide choice of labour to pick from.

The unofficial estimate for unemployment in Nigeria is about 40% (Euromonitor, 2009) so Wal-Mart would not have problems attracting people to work for them , they would be able use this opportunity to get the best people that are suitable for the jobs they offer. The abundance of land makes it easier for Wal-Mart to pick strategic locations to build their stores and it is also a positive factor for production as the acquisition of land for manufacturing would be really affordable, compared to other parts of the world.

The only obstacle that Wal-Mart might face in the acquisition of land is that there has been a lot of misdirected land policies and years of underinvestment which has made it a bit difficult than usual for companies to acquire land (UNCTAD, 2009). The electrical power supply in Nigeria is highly unreliable because of daily shortages and blackouts (threat) leaving households and business to source for more reliable power sources like petrol or diesel generators (Nations Encyclopaedia).

This increases operation cost for businesses in Nigeria. Roads serve as the main means of transport even though a large portion of these roads are still unpaved (CIA, 2009). This has caused the manufacturers dearly as delay in deliveries can cause shortage of goods. The railway system provides a means of transport for goods but only between the major cities and it has been suffering a progressive decline because of poor maintenance, inadequate funding and declining profit in this sector . (Nations Encyclopaedia, 2009).

Nigeria’s biggest port is in the city of Lagos which is well connected via road and rail links to the other major cities but connection to the smaller cities is lacking (Library Of Congress, 2009). The Information technology (IT) industry in Nigeria has improved over the years, with telecommunications contributing about 3. 7 % to the country’s GDP in 2009 (NBS, 2009). 2. 2. 3. 2. Demand conditions: The estimated population for Nigeria is 148 million (World Bank, 2009), which indicates the existence of potential market for consumer goods.

A major portion of disposable income is spent on food, and this is closely followed by clothing and household goods; a major portion of Wal-Mart’s product offers. In the second quarter of 2009, the whole sale and industry contributed 15. 68 per cent to the country’s GDP (NBS, 2009). Increase in output and growth rate of supporting industries such as packaged food industry and agriculture indicates potential demand for Wal-Mart’s product offers. Amidst the above opportunities, demand is affected by the heavy presence of neighbourhood super stores and smaller shops which often meet the customers’ needs. . 2. 3. 3. Related and supporting industries: The supporting industries present for Wal-Mart are internationally competitive. This is good because “The benefits of investments in advanced factors of production by related and supporting industries can spill over into an industry, thereby helping it achieve a strong competitive position internationally” (McGraw hill, 190). Due to is business nature, Wal-Mart will depend heavily on the agricultural industry in order to stock locally produced food items.

Agriculture currently accounts for over 30 % of the country’s GDP (OED, 2009), (see fig 1. 3). Other supporting industries include packed food and drinks which has recorded significant growth over the years. The fashion and electronic industries are not fully developed and they rely heavily on imports. 2. 2. 3. 4. Rivalry / Competition: Wal-Mart has a few competitors in Nigeria, the major ones being ShopRite and Park ‘n’ Shop. ShopRite, a South African owned company opened its first store in Lagos in 2005 and is currently the largest super market in Nigeria.

It’s product offers are similar to that of Wal-Mart. Park ‘n’ Shop, a member of the Artee group is another rival in Nigeria’s retail industry with outlets in various parts of the country that sells multi-brand products. This poses a threat to Wal-Mart as it has to compete with these retailers for customers and suppliers. Also, these existing retailers have been in the Nigerian Market for long and have proficient knowledge of the Nigerian market and its consumer needs, a factor that Wal-Mart cannot boast of at the moment.

The presence of existing retail firms provides Wal-Mart with late mover advantages; the existing information about the market gathered by these companies can be used for analysing the market’s current position. The awareness of large scale retailing and transformed shopping orientation created by these retailers has prepared the market for Wal-Mart, thus saving cost on research and development. Logistics and supply chain is a problem for existing retailers, but Wal-Mart can be more competitive in this area as ts supply chain management is efficient due to its heavy use of Information Technology in its operations. 3. 0Conclusion The report has identified several opportunities in the proposed host country. Political stability and governments support for foreign direct investment are major opportunities. Others include GDP growth, stable exchange rate, growth of the retail sector, improved IT infrastructure, land and labour availability, and the presence few other retail companies which provides late mover advantage.

Risks are not left out, as poor monetary policies and persistent inflation were identified in the analysis. Other identified threats include poor infrastructures, heavy reliance on imports of consumer goods and the competition from the existing firms who have captured a major portion of this emerging market. Based on the analysis so far, the identified opportunities outweigh the threats and these threats are not impossible to deal with. Therefore, this report recommends that Wal-Mart stores, Inc. hould proceed with plans to invest in Nigeria provided it is willing to consider the proposed strategies that will enable it manage the identified threats and risks in the host country. 4. 0Recommendation Having identified various investment risks from the above analysis, strategic approaches must be taken in order to manage these risks. A joint venture with an existing indigenous company, preferably a retail company, is highly recommended in order to benefit from the firms existing advantages such as customer base, supply network, ease of access to land and other facilities.

Capital and intellectual input from Wal-Mart will boost the competitiveness of the partner company. It is highly recommended to source products locally, and where not available, import be should from countries that have existing trade relationship with Nigeria in order to avoid difficulties such as trade barriers (import tariffs). Location is very important because transportation is haphazard in the country and can affect logistics, thus nearness to suppliers and sea ports is essential. Local logistics companies who are aware of the transportation networks should be used as well.

Attention should be paid to income and consumption patterns in order to understand demand in short and long terms. References Africa Economic Outlook, 2009. Nigeria – Innovation and ICT [Online] (Updated July 2009). Available at: http://www. africaneconomicoutlook. org/en/countries/west-africa/nigeria/#/annual_theme [Accessed 25 Nov 2009] Central Intelligence Agency, 2009. The World Fact Book – Nigeria. [Online] (Updated Nov 2009) Available at: https://www. cia. gov/library/publications/the-world-factbook/geos/ni. html [Accessed 28 Nov 2009]. Economic Intelligence Unit, 2009.

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