Millions of small, independent shops are the cornerstones of African commerce. Now they’re diversifying, digitizing, and partnering with modern retailers to reach the next level.
In Morocco, it’s known as a hanout. In Egypt, it’s a bakkal. In Kenya, it’s a duka. In South Africa, it’s a spaza. In the Yoruba language of Southwest Nigeria, it’s an oja. By whatever name, the traditional retailer is the cornerstone of socioeconomic systems across Africa. Despite the advance of supermarkets, convenience stores, and other modern formats, African consumers on average continue to buy more than 70% of their food, beverages, and personal care products from the continent’s more than 2.5 million small, independent shops.
Yet traditional retail in Africa faces many imposing challenges, including the expansion of modern retail, the nascent rise of e-commerce, and changes in consumer behavior that were accelerated by the COVID-19 pandemic. So, what does the future hold? For answers, we studied more than 4,500 small retailers in five of the biggest African markets: Egypt, Kenya, Morocco, Nigeria, and South Africa.
We concluded that the traditional retail sector will remain at the core of African commerce in all but a handful of nations, such as South Africa, for the foreseeable future. But there is strong momentum for change in the traditional retail experience.
Our research revealed several factors driving this transformation. One is the profile of African shop proprietors, who are typically more educated and digitally savvy than the general population. Another is that small retailers are willing to modernize their businesses in response to a challenging, shifting landscape. Finally, a growing digital ecosystem in Africa is enabling small retailers to offer new online solutions for payments, procurement, and last-mile delivery.
This evolution will take different shapes across Africa—and will depend on each nation’s level of digital maturity and economic development. The strategies of modern retailers, such as supermarket and convenience-store chains, and solutions provided by tech companies will also influence the future of traditional retail. The opportunities for various players in the retail ecosystem, therefore, will vary country by country. Still, we expect that traditional shops will account for 65% to 75% of sales in most of the region through at least 2030. The expansion of e-commerce and payment services, moreover, might provide small retailers with a new role in digitized trade and payments.
Traditional shops not only dominate retail in all but a handful of African markets—their share is high even when considering African nations’ level of development. Globally, there is a strong correlation between per capita GDP and the market penetration of modern retail. In many African nations, including Morocco, Egypt, and Nigeria, the reach of modern retail is well below its potential. (See Exhibit 1.)
Several factors make traditional retailers remarkably resilient. Small shops offer the proximity, flexibility, and convenient operating hours needed to serve their communities. They also often allow customers with limited incomes to purchase small quantities on credit.
By comparison, many modern retailers in most of Africa have failed to devise a winning model that can be scaled up to address the needs of most customers. Their locations and value propositions primarily cater to upper-class consumers. And while modern retailers in Africa are embracing e-commerce, particularly since the onset of the COVID-19 pandemic, they are not doing so as quickly as in Southeast Asia and Latin America.
Africa’s retail landscape is far from monolithic. It is evolving at different speeds across the continent. The five markets in our study illustrate these differences.
In Nigeria, the more than 600,000 small retailers account for 97% of national sales. Traditional retail essentially consists of small kiosks and open-air markets. Modern retail remains very fragmented and is led by international hypermarket brands, such as Shoprite and Spar, and a few small local chains, such as Hubmart, Justrite, Addide, and Foodco. Modern chains are struggling to expand due to currency devaluation, underdeveloped and inefficient transportation infrastructure, poor logistics capabilities, inadequate electrical power, and other complex challenges.
Traditional retailers still account for 82% of sales in Morocco. They also play an important economic role, since 90% of them offer credit. This partially explains their resilience despite the expansion of modern retailers such as Marjane, Carrefour, and BIM. We estimate that the most affluent 15% of Moroccans account for around 65% of modern retail sector sales. To expand further, modern retailers will need to find the right formats that address middle- and lower middle-class consumers.
In Egypt, more than 120,000 small grocers and kiosks account for 75% of retail sales. But modern retailers, particularly locally based ones, are emerging rapidly across all formats. Modern formats posted 21% annual growth from 2015 through 2020. Their market share over that period rose from 15% to 25%, one of the highest growth rates across the continent. The Kazyon discount supermarket has expanded rapidly in Egypt since 2014, with small-format stores in underserved low- and middle-income areas. Other successful Egyptian supermarket chains include Awlad Ragab and Seoudi.
Consumers in Kenya buy 77% of their goods from more than 250,000 small stores. Kenya has several well-established hypermarket and supermarket chains. Modern sector growth has been sluggish in the past few years, however. Several players have exited or gone bankrupt through a combination of poor management, overly rapid expansion, and inappropriate formats. The nation’s dynamic digital technology ecosystem and the significant penetration of mobile money are stimulating a transformation of both traditional and modern stores.
South Africa is an exception on the continent. Its modern retail sector is quite mature, with less room to grow. Supermarket chains such as Shoprite, Pick ‘n’ Pay, and Spar account for more than 70% of retail sales, although traditional shops retain a very strong presence in townships.
Despite their differences, in each market there is momentum toward the modernization of small retailers. Several factors account for this: the profile of the retailers, their willingness to diversify their businesses in response to a challenging environment, the growing availability of digital solutions from technology start-ups, and supportive government policies.
Until now, there has been little data on the owners of traditional shops. We conducted our survey to gain a better understanding of who they are, their needs, where they are located, how they operate, the major trends affecting them, and how they envision their future.
The proprietors of traditional African retailers are generally young and educated. Their average age runs from 31 years in Egypt to 39 in Morocco. In the nations we studied, an average of more than 70% of traditional retailers had high school, vocational, or university education—a level that is higher than that of the general population.
More importantly, the digital maturity of shop proprietors is also substantially higher than the national average. In Kenya, for example, 91% of proprietors we surveyed in Nairobi and Mombasa are equipped with smartphones, compared with 68% of the general population in those cities. The level of financial inclusion varies widely across the region, however, and is generally in line with the general population. While 85% of Kenyan shop managers have a bank account, only 40% of their counterparts in Nigeria have one. (See Exhibit 2.)
We also found that the level of optimism among traditional African retailers is mixed. Seventy-nine percent of Kenyan retailers and 88% of Nigerians reported that they believe their business will grow in the years ahead, for example. But only 43% of traditional Egyptian retailers and 32% of Moroccans expressed optimism, perhaps because of the growth of small modern formats in their countries.
This market segment faces a number of challenges. The portion of retailers who said their business was hurt by the COVID-19 pandemic ranged from 19% in Nigeria to 43% in South Africa. High numbers of African retailers also reported that they feel under pressure from modern retailers.
In response to such challenges, traditional shops are diversifying well beyond daily essentials, such as fresh and packaged foods and home cleaning and personal hygiene products. Many small retailers now sell telecom products, such as prepaid cards and SIM cards.
In Egypt, for example, 69% of traditional outlets said they sell such products. A growing portion also offer digital services—and around one-third offer remote ordering and delivery and bill payment services. In Kenya, 97% of the small retailers we surveyed said they accept mobile money. Digital adoption is lowest in Morocco, where only 1% percent of respondents use mobile money and 29% use other digital services.
The COVID-19 pandemic has accelerated adoption of digital retail services in several markets. In Kenya, for example, the portion of retailers offering remote ordering rose from 27% in early 2019 to 39% in late 2021.
A growing number of new technology providers in Africa are providing the region’s traditional retailers with innovative digital solutions that can resolve bottlenecks and accelerate their transformation.
Several digital technology providers are addressing inefficient distribution systems that often force retailers to close their shops for several hours so they can go purchase goods from wholesalers. This often makes it hard to obtain sufficient inventory. The Nigerian B2B digital marketplace Alerzo, for example, enables more than 100,000 users—90% of whom are women—to purchase inventory directly from manufacturers, receive and make cashless payments, and better track their revenues. Alerzo also facilitates a portfolio of digital services, including airtime purchases, bill payments, and peer-to-peer transfers. Some 50,000 African retailers use the Kenyan procurement marketplace Wasoko (formerly Sokowatch) to order stock on credit via a mobile app and receive it the same day. The Moroccan procurement B2B marketplace Chari, which has a market value of more than $100 million, aggregates demand from independent retailers through its app and delivers goods around the clock.
E-payment companies are also helping traditional retailers expand their digital capabilities. Egypt’s Fawry, an e-payment platform that has been adopted by around 30 million Egyptians and had a successful IPO, is a good example. Through Fawry’s platform, final customers can pay utility and other bills with cash by using terminals located in more than 225,000 service points (including retail stores), rather than by visiting the offices of agencies. In South Africa, the start-up Flash provides a similar service, making it the nation’s largest network for informal retailers.
In the long run, such platforms aim to provide super apps with a large selection of services. This would enable them to totally digitize traditional retailers and integrate them into the formal economy. Start-ups are also providing working capital and financial management systems to help traditional retailers grow and run their businesses more efficiently; however, they must overcome a lack of awareness and training among retailers.
The future of retail in Africa can best be described as local and increasingly modern. By local, we mean that successful formats—whether big or small—will be tailored to the needs of their communities and that growth will be driven to a large degree by domestic ecosystems of entrepreneurs, investors, and innovators. By increasingly modern, we mean that traditional retailers will adopt more sophisticated business models and, in many cases, collaborate with chains operating modern formats.
Traditional retailers will continue to dominate. But to thrive, they must modernize by offering new services and leveraging opportunities offered by digital solutions. Many small retailers are already aware of this imperative and say they intend to take action in three ways. Our research found that a significant number of respondents, ranging from 48% in South Africa to 79% in Nigeria, prioritize offering higher quality products. A large majority in most countries would like to open more stores. And anywhere from 36% in Egypt to 59% in Nigeria cited “modernizing look and feel” as a priority.
In most countries, independent retailers can grow by becoming part of the network of modern retailers. Based our analysis, around 40% of traditional retailers in Morocco and Kenya are interested in affiliation or franchise models; around 50% of Egyptian and 60% of South African retailers are also interested.
This future will take different shapes across the continent in accordance with local conditions. Our 2030 projections for the markets in this study illustrate this variety of paths. (See Exhibit 3.)
Given the central role that traditional shops will continue to play in Africa’s retail landscape, there will be a number of opportunities for various players in the ecosystem as the environment evolves. Some are already pursuing these opportunities in the following ways:
Traditional retailers not only are the cornerstones of African economies today but will also constitute the core of the region’s future commercial landscape. By helping traditional shops modernize and evolve to serve the changing and particular needs of their local communities, all players in Africa’s retail ecosystems will find opportunities to grow along with them—and to bring greater financial inclusion across the continent.
The authors wish to thank Adham Abouzied and Tolu Oyekan for their valuable contributions to this article.