Retail industry continues to blow hot and cold long after fall of Nakumatt giant

BY ANTONY MUTUNGA

In the early 2000s, Uchumi and Nakumatt dominated Kenya’s retail industry as they battled for the leader’s tag. At the time, the likes of Ebrahim supermarket, Tuskys and Naivas were small fish that only competed for the average customer.

Dominating the industry, access to investment, the desire to expand and a growing consumer class saw the large retailers move with speed to expand in order to increase their profits. As a result, Uchumi, which was the leading supermarket chain since the 1970s, increased the number of stores it had from 10 to 25 across Kenya and Uganda by 2004 with a credit worth of Sh3.6b.

On other hand, its fierce competitor, Nakumatt was also on an expansion journey that saw it’s total stores increase from 10 in 2002 to 64 in 2016. Other than the two large retailers, smaller retailers such as Naivas and Tuskys were also growing in the same period, increasing competition further in the retail industry.

Uchumi

This expansion strategy created the first major challenge for the retail industry. Uchumi, which is the only publicly listed chain store in Kenya, was unable to gain returns that could match its investment. Facing stiff competition from Nakumatt and the other growing retailers, Uchumi would experience a reduction in traffic that saw it unable to match its previous profit records.

In addition, the retailer also saw mismanagement and corruption have a part to play as the management focussed more on expanding rather than trying to increase traffic in their already existing outlets. Uchumi’s management was accused of defrauding the chain store by selling off its property at a lesser value and leasing it back at a higher value. Unable to realize their return on investment as a result, the once leading supermarket was placed under receivership and it was suspended from the Nairobi bourse.

This was just the beginning of challenges for the chain store. In June 2006, the Government injecting cash to have it reopened. The Sh675m was meant to help the store reclaim its former spot in the market share. At the time, the likes of Nakumatt, Tuskys, Ukwala and Naivas had grown, further taking over a majority of the market share the old retailer once controlled.

After the Government’s bailout, Uchumi had a chance to re-evaluate her strategy and get back on track. A strategy was indeed put in place that saw the company return to recording profits. In the three years that followed since it was reopened, the company recorded profits positing a Sh865m profit after tax as at the end of the fiscal year in 2010. A year later, the chain store was rewarded as it started trading at the bourse once again.

The supermarket continued to post profits as it also continued to expand, entering the Tanzanian market. However, despite the company posting profits and expanding, it was facing a reduction in its revenue market share, which according to Kestrel Capital, an independent Investment Bank licensed by the Kenyan Capital Markets Authority (CMA) and a member of the Nairobi Securities Exchange, was fourth behind Nakumatt, Tuskys and Naivas, standing at 12.3% in 2013.

In 2015, the supermarket faced another case of maladministration whereby the management cooked its books to conceal the losses it was making. In accordance with Exotix Limited, a London based company that provides investment banking services, the retailers management used the revaluation of its properties to conceal losses the company was making since 2013 and hide the true status of its financial position.

Having let go of the management, Uchumi moved to change its strategy once again which led to it closing down all its outlets in Uganda and Tanzania and a few in Kenya. This resulted in losses for the chain store, as it was unable to pay suppliers, employees, and shareholders. Its debt also expanded. This was but the end for the once leading chain store as this struggle continued in the years to come with an onward battle with its debt, suppliers and employees. To date the supermarket has evaded liquidation however, it remains to be seen if it will ever be able to regain its former glory.

Nakumatt

As Uchumi struggled with its growing challenges, the other retailers took the opportunity to make a name for themselves Kenyan shoppers. Nakumatt was the largest supermarket chain, having capitalized where Uchumi had failed. Trying to capture the loyal customers that were left by Uchumi, Nakumatt moved to expand across east Africa as they targeted more traffic. As at the end of 2016, the chain store had 47 branches in Kenya, three in Rwanda, five in Tanzania, and nine in Uganda.

Just as Uchumi, Nakumatt faced the same problem. The leading chain store started facing financial and operational difficulties. Even though the new stores were bringing in more revenue than before, they were not bringing in enough to cover the debts the chain store owed. In its attempt to expand, the supermarket relied on credit and internal cash flow, which mostly meant diverting cash from payment of suppliers.

This level of mismanagement saw profitability take a hit, as debts continued to increase to alarming levels. This saw suppliers avoid providing the chain store with new products. What followed was the diminishing of products and varieties on shelves causing customers to run to other retailers.

Since 2017 the company struggled with a cash crunch, which saw it start to reduce the over 60 stores it had as it could no longer raise enough cash to pay rent or its creditors and suppliers. The entry of France’s Carrefour and South Africa’s Shoprite into the market continued to hurt the retailer. With its debts growing and profits dwindling, the court allowed an administrator to take over the company to address the increasing issues of the creditors and assess if it could be revived.

According to its accounting records, the company has amassed a debt of Sh38b owing creditors who include suppliers, banks and landlords. In an attempt to pay off some of the debt, the company sold its remaining six stores to fellow retailer, Naivas for Sh422 million. Creditors were allowed to vote whether the company would continue to operate and amass more losses or liquidate so they regain a part of the money they owed the company. A majority of creditors, over 90%, voted for liquidation bringing an end to the Nakumatt brand. This was despite the fact that liquidation only allowed suppliers to indirectly recoup up to 46% of the value of their debt through tax refunds.

Misfortunes

The two large retailers from the past were not the only ones to face challenges in the Kenyan market as old favourites like Ebrahim supermarket were forced to closed down due to a lack of traffic which was not only caused by stiff competition from other supermarkets but from online stores that have been on the rise recently. With people being able to shop from the comfort of their homes many brick and mortar stores have been affected.

Also looking to close down before the year ends is South African store, Shoprite which had started to gain traction but due to the Covid-19 pandemic recorded loses that caused it to close down two of its stores across Kenya and expect to close down the remaining stores by December 2020. The reason behind the close down has been due to the lack of ability to increase traffic and increase sales. The question remains, what would happen if the South African firm would restructure and look at the numbers post the pandemic?

Additionally, one of the oldest chain stores left, Tuskys has also been facing a crisis that has been brought about by family quarrels. The company has been on a downward trend, to the point of having its goods auctioned out as it is unable to pay its suppliers and employees.

Winners

However, even though a number of retailers have closed down while others are in a crisis, this isn’t the same for all retailers in the industry. Some such as Carrefour, Naivas and Quickmart have been on an upward trend when it comes to market share and number of outlets. For instance, Carrefour has been increasing its outlets as it plans to open three more in the coastal region. As Shoprite looks to exit the sector, it is clear that there will be more room for expansion for the French firm and the other winners.

Naivas, which started off small, has been able to grow to one of the most successful retailers despite the expansion strategy. Recently joined by Quickmart, the two including Carrefour seem to have taken the path that allows them to not only be able to keep up payments for their suppliers but also be able to grow their traffic.

There is a need, however, to learn from the retailers that have come before, that racing to expand without a strategy of how to grow traffic is catastrophic. The current supermarkets remaining require strategies that will take them far from their predecessors who failed. Moving forward isn’t only about finding ways to attract more customers but it also looks to what the past has yielded.

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