End of era as retail giants fall

With Tuskys and Uchumi on their deathbeds, Nakumatt and Choppies folded, Shoprite on its way out, the trouble is real

BY GILBERT NG’ANG’A

Kenya’s retail industry is at crossroads and battling perhaps its worst crisis year exacerbated by the Covid-19 pandemic and failing consumer value propositions.

Tuskys Supermarkets is financially troubled, its shareholders are embroiled in a damaging row, creditors are up in arms lining up for its assets and auctioneers are not making this any better.

The ailing regional retail giant that is owned by Tusker Mattresses Ltd has fired tens of workers and shut down at least four branches in Kenya in the last two months, exposing the crisis that threatens to bring down the chain. The supermarket is struggling to pay its workers. It has defaulted on rent in most of its outlets. It owes suppliers more than Sh7b. Kenya Power has switched off electricity supply to a number of branches due to unpaid bills.

At its peak, Tuskys was running 63 branches in Kenya and Uganda but over the past two years, things have turned south, throwing into disarray this local and regional presence strategy.

That is the sad story of Tuskys.

“We are obviously monitoring the alternatives and measures that they have taken to see whether they are sufficient to keep it running as they resolve the problems. Yes, things are not good. I don’t like to see businesses suffer but there is also a limit which you can try to rescue it,” Betty Maina, Kenya’s Cabinet Secretary in-charge of Industrialization, Trade and Enterprise Development is quoted in the media recently.

Around the corner, Nakumatt went burst. Once the biggest retailer in Kenya, it went into voluntary supervision in early 2018 after seeking protection from its creditors. Data shows that the creditors including banks, suppliers and landlords are owed Sh38b. The retailer ceased operations on Tuesday, January 7, 2020, after creditors approved the sale of assets to clear outstanding debt. The slide was swift. By February 2017, Nakumatt had 60 branches across the region (44 in Kenya, eight in Uganda, five in Tanzania and three in Rwanda). By April 2018, you could only count seven.

Down the street, Uchumi Supermarkets has three months to decide its future. Early January, the chain was given six months to settle its Sh4.7b debts to over 100 suppliers or face auction of its assets by creditors and eviction by their landlords. It also risks repossession of stock. Uchumi is banking on the sale of the controversial piece of land at Kasarani, next to TRM, to change its fortunes. But the Kenya Defence Forces, which is also laying claim of the land, has had its soldiers on site to deal with trespassers.

Several promises of a bailout to the retailer in which the State is a shareholder have not materialized over the years. Could it be that the Government is skeptical of any chances of a recovery? Discussions were that creditors would take a 70% cut on Uchumi’s troubling Sh3.6b debt. When the retailer went into insolvency on June 1, 2006, the Government put in some Sh675m and seems to have convinced PTA Bank and KCB, the two lenders with the greatest exposure in there, to consider the revival plan. Uchumi reopened afterwards.

Tuskys Supermarket Kisumu that was shut down by auctioneers on August 20, 2020

The problem isn’t local.

Early September, in a shocking turn of events, South African retailer Shoprite said it would leave Kenya, for good. Barely two years since coming, it said this has been informed by underperformance of its supermarkets. It will close or dispose of its two remaining outlets at Westgate Mall and Garden City by December, sending hundreds of workers home.

“Kenya, with three stores at year-end, has continued to underperform relative to our return requirements. Post year-end, one store has been closed given the ensuing economic impact of Covid-19. Most likely, we will be out of the market by the end of the calendar year, either by closing or disposing,” said Shoprite CEO Pieter Engelbrecht.

For Tuskys, luckily, some investors are keen on taking it up, despite the rivalry among the brothers who own the chain. On September 30, the High Court froze the liquidation proceedings against Tuskys for 45 days to allow the retailer complete a Sh2.1 billion debt deal that will allow payment of suppliers. Tuskys argues that the cash will be used to turn around the troubled business and payment of all creditors both secured and unsecured.
Majority of Tuskys shareholders approved the raising of the debt from an offshore fund and retailer’s shares will secure loan. But two shareholders of Orakam Holdings, the firm that owns Tuskys are not keen on the deal which could scuttle the plan.

Analyst aver that the siblings who own Tuskys Supermarket should not allow selfish interests to scuttle a proposed deal to rescue the cash-strapped retailer. Equity funding opportunities in the current difficult business environment, complicated by the Covid-19 pandemic, are rare and Tuskys should not let it pass by. Once giant retailers Uchumi and Nakumatt, which have in the past faced found themselves in similar trouble, have tried looking for such funding without success. Tuskys should not allow siblings rivalry to condemn the business to this painful path that will ultimately result in a revenue hit, desertion by suppliers and many job losses.

“While some of the concerns being raised by one of the siblings may be legitimate, they should be addressed in an orderly way without jeopardizing the buyout deal or eroding the goodwill the retailer is trying to foster among suppliers,” they add.

On the other side, some retailers are keeping their heads up. In a bid to tap into the retailing industry, Naivas Supermarket, Quickmart and Carrefour, as well as other upcoming chains have aggressively expanded across the country taking up space previously occupied by Nakumatt and Uchumi.
In September, the Majid Al Futtaim owned Carrefour said it would open three new stores in Mombasa County, taking it outside Nairobi. The first two stores located in Nyali and Diani will open in November 2020, the third in Shanzu Mall will be opened upon completion of the mall in 2023. This will bring Carrefour’s local brand network to 11, eight of the stores being in Nairobi.

“We have a have long term plan for Kenya,” said Franck Moreau, Country Manager of Carrefour Kenya. The chain opened an outlet at the Mega space along Uhuru Highway, a space previously occupied by Nakumatt. The French retail chain recorded sales worth Sh18.7 billion from its Kenyan outlets last year.

The aggressive expansion by the retailers is being driven by shifting consumer habits as Kenyans increasingly shop in formal retail centres, are increasingly appreciating international brands and stable economic growth.

In August, it emerged that Naivas has raised Sh6b from the sale of a 30% stake to a consortium of investors, including the International Finance Corporation (IFC), valuing the retailer at Sh20 billion. According to media reports on this development, IFC, private equity firms Amethis and MCB Equity Fund and German sovereign wealth fund DEG teamed up to acquire the minority stake, with the deal set to fuel Naivas’ expansion across the country.

The Sh6b is nearly twice what an investor would have paid for a similar stake in 2013 based on the valuation of Naivas by Massmart, a South Africa-based subsidiary of retail giant Walmart. Massmart wanted to purchase a 51% stake in Naivas for Sh3%, but the deal collapsed following a shareholder row in the family-owned supermarket.

So how does the future look like in the retail sector?

Data shows that the real estate space for the retail sector has been shrugging over the past two years. In 2019, the Kenyan retail sector’s performance dropped slightly with average rental yields declining by 1.6 percentage points to 7% in 2019, from 8.6% in 2018. Occupancy rates declined by 8.7% points to 77.3% in 2019, from 86.0% in 2018, shows data from Cytonn, the investment arm. The decline in performance was mainly attributed to an introduction of more retail space into the Kenyan market driving down rents and occupancy rates by 10.2% and 4.8% points, respectively and constrained spending power among consumers due to a tough economic environment. The new retail spaces included the Waterfront Mall and Signature Mall, amongst others.

“We see increased market activity with the presence of international retailers into the Kenyan market and the expansion efforts by local retailers such as Naivas as they take advantage of the attractive rental rates” said Cytonn.

A tough operating environment coupled with strict underwriting rules adopted by banks and financial institutions has led to a constrained credit environment, with private sector credit growth subdued. This has led to reduced purchasing power among consumers, thus impacting negatively on the Kenyan retail sector as retailers generate less revenues due to the decreased demand.

Expansion of formal retail chains such as fashion retail stores has been difficult due to competition from informal retailers. As such, formal retail space penetration is approximately 35% in Kenya, compared to 60% in developed countries such as South Africa according to a Nielsen Report.

According to Nielsen, Kenya’s formal retail penetration is 30%, making it the second highest in Africa, after South Africa’s 60%, which has served as an incentive for foreign retailers. Over 20 notable local and international retailers have aggressively penetrated the Kenyan market within the last 6-years, including, Carrefour, Shoprite and Game of French and South Africa, respectively, supported by a widening middle class and provision of high-quality spaces in line with international standards as well as infrastructure.

According to the Retail Trade Association of Kenya (RETRAK), a lobby, the projected average growth of business units in the next two years in retail sector is 20.78%. The area of cooked food and bakery seems to be of great interest to retailers and the refer will grow fastest in the next two years both recoding 38.46% and 25% respectively. Consumer demand for availability of wide range of products will see the grocery grow by 20%. Mobile and electronics will grow by 21.43% due to increased consumer demand. High consumer demand for home consumption in the new normal due to Covid-19 restrictions on movement and social activities will lead retailers to expand their core business to Wines and spirit 16.67%, fruits and vegetables 15.38%.

“Even in the current circumstance of Covid-19, retailers are optimistic of the future as combined majority 47.05% foresee constant growth with a promising potential. Another 44.12% find the growth to have slowed down. This may be due to consumers selective spending due to economic uncertainties. Inspite of this, a significant number of retailers, 11.76% are uncertain of the future,” said the lobby.

In a September 2020 report commissioned by Retrack that players said of the top three barriers of trade facing retailers in Kenya, majority, 37.5% named human resource as the greatest barrier. Corporate governance at 28.13% resulting from weak governance structures especially in family owned businesses. A similar percentage 28.13% is limited by financial capacity.

Even in the current circumstance of Covid-19, retailers are optimistic of the future, the Retrack report shows, adding that a combined majority, 47.05% foresee constant growth with a promising potential. Another 44.12% find the growth to have slowed down.

“This may be due to consumers selective spending due to economic uncertainties. In spite of this, a significant number of retailers, 11.76% are uncertain of the future,” said the report.

The two biggest challenges facing the retail sector according to the survey are low economic growth, 76.47% and government regulation, 61.76%. This is replaced in slow GDP, inflation and now compounded by Covid-19. Other challenges include customer retention, 23.53% due to price sensitivity. 26.47% of retailers are struggling with staff retention and turnover due to an undefined career path in retail.

“In spite of the challenges experienced, many retailers expressed a positive future with over 30% looking to store expansion, over 40% maintaining the same number of stores but complimenting with online presence. Only less than 12% were unsure about the future,” Retrack said.

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