Middle class provides growing opportunity for Nigeria’s boutique manufacturers

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On the factory floor of Lagos-based children’s clothing company Ruff ’n’ Tumble, a small paisley shirt hangs up bearing the label “Proudly Made in Nigeria”.

The pride is understandable because Nigeria is not an easy place to make things. Though the manufacturing sector has been growing, the recent rebasing of GDP still puts it at only 7 per cent of the total.

As Reginald Odiah, chairman of the infrastructure committee at the Manufacturers Association of Nigeria, points out, production costs are significantly higher not only than South Africa’s but also than Ghana’s, and businesses have to compete with cheap, under-regulated imports.

Nonetheless the enlarged and relatively underserved middle class provides an attractive market for boutique manufacturers such as Adenike Ogunlesi, Ruff ’n’ Tumble’s owner. She makes some of her clothes in Nigeria and supplements them with imports to ensure a competitive selection. The enterprise grew from a sewing hobby in the 1990s to a business with 10 stores and some 60 employees today. She plans to open another five stores this year.

“It’s a growing economy, a growing market; it’s an aspirational market,” she says. Though larger, foreign companies are keen to get a slice of it, she is convinced that being Nigerian gives her an advantage.

“You have to know the influences, the cultural nuances,” she says. “People think Nigerians will buy anything [but] it’s a discerning market.”

Enticing though the market is, the barriers to entry are intimidating, and for now it is production of essential goods that dominates manufacturing in Nigeria.

One significant subsector is cement, built up and dominated by the richest man in Africa, Aliko Dangote. Critics and competitors complain that he has benefited from good connections in government and import protection, though the scale of his investments in the country is undeniable.

Last year, Mr Dangote announced plans to invest $4.7bn in improving cement production in Nigeria and to create a $9bn oil refinery, petrochemical and fertiliser plant on the coast

The biggest manufacturing subsector is food, beverages and tobacco, where there is huge potential to take advantage of Nigeria’s large and rapidly growing population for those who can control operating costs.

The sector, which includes Nestlé and SABMiller, grew 60 per cent between 2007 and 2011 according to Oxford Business Group, an emerging-market consultancy, though some have been affected by pressures on consumer spending in 2012.

Seni Adetu, Guinness Nigeria’s managing director, describes the country as an “attractive market”. “We’re confident of the viability of our business in the long term,” he says. He acknowledges however there are “headwinds”.

The most frequently cited complaint by manufacturers is power. Nigeria suffers from chronic shortages, adding up to 40 per cent to the cost of doing business. Mr Odiah says the need to secure a reliable alternative supply eats up about 25 per cent of investment start-up costs for manufacturers. The government privatised 15 electricity companies last year, though analysts do not expect the supply to substantially improve for some years.

Another problem is the cost of distribution across the country’s strained and inadequate transport network. Bismarck Rewane, an economist, estimates that costs have risen more than 15 per cent in the past two years, as manufacturers increasingly outsource to delivery companies such as DHL.

Imports – on which the sector is heavily dependent – are also a logistical headache. Goods that are not fast-tracked are said to take about 60 days to clear at the port in Lagos.

“I’ve had three months in some cases ... it’s a major, major issue,” says Mr Adetu.

This intersects with another common complaint in the Nigerian business community – the cost of credit, which for small businesses can be more than 20 per cent. Another issue is the uncertainty of the policy and regulatory environment. Keith Richards, managing director of Promasidor food manufacturers, says a significant amount of his time is spent dealing with red tape issues. “[There are] 27 state or federal agencies that could shut me down,” he says.

The government has launched a Nigeria Industrial Revolution Plan aiming to help industry by tackling “substandard” imports and working to improve power supply to key industrial areas. It has also been trying to encourage car manufacturing to return to Nigeria. Last year, Nissan signed a preliminary agreement to start assembling cars there.

Analysts say it is too early to tell whether carmaking investments will take off. The Economist Intelligence Unit, says it is unclear how big the market would be for new cars, arguing that Nigeria’s per capita income of $2,700 is significantly below the $5,000-6,000 threshold at which car buying usually picks up in developing countries.

Mr Rewane argues that, for all the difficulties associated with it, Nigerian manufacturing will prove a good long-term investment as infrastructure costs eventually improve. “There’s a challenge, but there’s also a great opportunity,” he says.

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