Optimism grows as Kenyan retailers adapt to change

The retail sector in Kenya has faced a number of challenges in recent years. The collapse of two of its main supermarket chains dealt a major blow to the sector, affecting mall footfall and supplier’s balance sheets, and taxing goodwill. However, with the economy strengthening, foreign investors entering the local retail market and the middle class continuing to grow, prospects remain positive. Conversely, companies that weathered these difficulties are in good shape and in fact benefitting from the rebound.

Structure

Kenya has the second-largest retail sector on the continent, behind South Africa, and one of the most advanced. The industry started to grow locally after the country gained independence in 1963, as foreign-owned businesses began to decline and be replaced by locally owned establishments. Historically, Kenya’s two leading players in the grocery and supermarket segment have been Nairobi-headquartered chain Chandarana, founded in 1964, and its rival Uchumi, established in 1975.

Aside from these two major players, the rest of the segment was dominated by local players until 2018. Among these are East African supermarket group Nakumatt, which at its peak in December 2016 had a network of 63 stores across the region, with 45 of these in Kenya; local chain Tuskys has 66 branches, with seven of those located in Uganda; and Nairobi-based Naivas with 40 domestic outlets.

Playing a significant part in the country’s economy, growth in the retail sector has been strong, and it is one of the major areas of focus for the country’s Vision 2030 strategy (see Economy chapter). The wholesale and retail sector contributed 5.7% of GDP in 2017, up 2.3 percentage points on the previous year, according to the Kenya National Bureau of Statistics. In the first quarter of 2018 the sector grew by 6.3%, up 1.5% year-on-year (y-o-y). Other metrics also provide reason for optimism, with annual GDP growth rates steady at around 5% since 2014, while Kenya’s inflation rate was 4.5% in the first quarter of 2018, up from 4.3% in the same period of the previous year and from over 30% a decade ago. However, inflation can still pose challenges. “Inflation is an issue, as it makes it harder for international companies to meet targets as the shilling depreciates,” Albert Grignard Stockell, managing director of verification company SGS Kenya, told OBG.

Restructuring

Despite the sector’s strengths, it has been going through difficult times. Nakumatt went into receivership in early 2018 after falling behind on its payments to suppliers, while Uchumi has faced similar difficulties during the course of the year. A report titled “Study on Kenya Retail Sector Prompt Payment” by the Ministry of Industry, Trade and Cooperatives found that in December 31, 2016 one-quarter of what was owed to retail suppliers was outstanding by more than 90 days, and that Nakumatt and Uchumi were responsible for about two-thirds of those debts.

Nakumatt was established in 1987 and contributed close to 1% of the country’s GDP at the end of 2016, when the company had more than 60 branches and 1500 suppliers. Challenges arose on the back of insufficient management capacity, as well as a number of incidents that adversely affected performance, including a fire and a terrorist attack in 2009 and 2013, respectively. Persistent theft has also dragged down company performance. While Nakumatt did invest in a modern logistics system, it claims that the main problem was its rapid expansion, which began in 2010 and saw the company grow from 36 stores in 2011 to 63 in 2016.

Meanwhile, Uchumi has also seen several of its branches close down in recent years. In July 2018 representatives told local media that there were 12 branches still open, compared to the 33 in operation in mid-2014. Its workforce as downsized accordingly, from 1500 employees in 2016 to 800 in July 2018.

Both Nakumatt and Uchumi have been working diligently on solutions to curb its debts, rolling out full-scale restructuring plans. Rather than bringing in outside funding or taking a loan, Nakumatt is depending on flash sales for much-needed cash, as well as other forms of financing. In the process, the company saw its number of suppliers reduced from 550 to 225 and its staff down from 6000 to 650. Credibility is gradually being restored, with Nakumatt now paying cash-on-delivery or within a week, though as of August 2018 it still owed its suppliers an estimated KSh35.8bn ($350.8m).

Meanwhile, funding of KSh1.8bn ($17.6m) was approved by the Cabinet to help Uchumi pay its debts. The first portion of KSh500m ($4.9m) was received in January 2017, and another KSh700m ($6.9m) later that year in December. As of August 2018 the remaining KSh600m ($5.9m) had yet to be released. The restructuring process has led Uchumi to close 14 branches in Kenya and two overseas, in Uganda and Tanzania.

The focus now is very much on the future, with the government looking closely at the payment challenges and for ways to prevent arrears from building up again. In July 2017 it was considering the adoption of a UK code that requires suppliers to supermarkets to be paid within 45 days; however, as of early October 2018 there was no confirmation that the policy had been adopted.

Foreign Arrivals

As a result of the changing landscape, a number of new retailers have entered the market or expanded their footprint. Japan’s Miniso opened in the Village Market, a shopping complex in Nairobi, in December 2017, while Turkey’s LC Waikiki opened its third Kenyan outlet in Mombasa in June 2018. In August 2018 US fast food franchise Burger King opened its fourth store in the country at the Thika Road Mall.

The most important trend in recent years has been the arrival of international supermarkets and big box retailers. South Africa’s Massmart Holdings entered the Kenyan market in 2015 with its general merchandise brand Game, followed by two grocery retailers – Botswana’s Choppies and France’s Carrefour – in 2016. The latter set up stores in The Hub Mall and in the Two Rivers Mall, and replaced the Nakumatt shop at the Galleria Mall in mid-2018. Additionally, Ram’s Supermarket, from the dual island nation of St Kitts and Nevis, opened an outlet in December 2017, while South Africa’s Shoprite entered Kenya in February 2018, opening up in seven locations. Turkey’s Dogtas Exclusive also arrived in Kenya in early 2018, while France’s Decathalon is expected to officially open by the end of 2018.

Expansion Mode

Expansion plans are also under way for some of the country’s domestic retailers. In early 2018 Tuskys announced a three-year plan to increase its store numbers from 64 to 100 by 2020, with investment in the project expected to total KSh3bn ($29.4m). The company is also looking to innovate its business by introducing convenience stores as modern consumers prefer to shop closer to their homes. Mavazi, a clothing retailer and sister company of Tuskys, announced in early 2018 that it plans to open more stores in Nairobi, Mombasa and Kisumu. Expansion strategies are also being implemented by Choppies, Game and Naivas. Between December 2017 and January 2018 alone, retailers invested KSh1.2bn ($11.8m) in new outlets in Nairobi, Kiambu, Sagana, Kisumu, Kericho and Eldoret, Wambui Mbarire, CEO of the Retail Trade Association of Kenya, told local media in January 2018.

The market has become relatively open and the arrival of international competitors has been welcomed by some local retailers. Dan Githua, CEO of Tuskys, told local media in August 2018 that domestic companies have historically had problems with managing costs, planning growth, managing their supply chains and dealing effectively with downsizing. However, with foreign players now more active in the market, competition is on the rise, which is prompting domestic retailers to adapt to the changing landscape. “Rising competition is expected to drive consolidation of the industry, as capital requirements rise, foreign companies buy out local competitors and local companies buy out other players,” Ezekiel Macharia Mburu, chief actuary and managing director at Kenbright Holdings, told OBG.

The market could see further expansion with the innovative contribution of young entrepreneurs; however, certain policy and regulatory issues must first be tackled. “It is crucial to accelerate patent and trademark registration in particular, to facilitate and safeguard innovative concepts, because the future of Kenya depends highly on innovation in the market,” Waithera Gaitho, executive director of Alternatives Africa, an accelerator for young entrepreneurs, told OBG.

Construction Boom

Strong construction growth is helping to boost the retail sector, with malls popping up in and around Nairobi. According to international media reports in February 2018, new projects included Maasai Mall in Rongai, Signature Mall in Mlolongo and Highwayy Mall in Upper Hill.

In its first half of 2018 update for Kenya, UK estate agency Knight Frank noted a number of retail structures in development. Those in Nairobi include: the second phase of Westgate Mall, which will span over 14,000 sq metres; Diamond Plaza II, 8361 sq metres; Waterfront Mall, 19,509 sq metres; and the Well, 7432 sq metres.

Following this flurry of developments, the supply of retail space has boomed, rising by 41.6% in 2017 in Nairobi, and attributed in part to the opening of Two Rivers Mall, Rosslyn Riviera Mall and NextGen Mall. The result of this has led to a decline in occupancy rates. In Nairobi, occupancy rates dropped from 89.3% to 80.3% in 2017. In Mombasa, however, occupancy rates rose from 76.7% to 82.8% over the same period. Overall occupancy rates rose to 85.7% by the end of August 2018, up from the 80.2% recorded at the same time last year, according to a report by local consultancy Cytonn Real Estate in September 2018.

With the boom of retail construction, oversupply has been cited as a challenge that could arise in the future. According to some industry players, domestic retailers are too cash-strapped to take up the space, with a few companies starting to transition away from malls altogether as they see how dangerous it is to rely on one large anchor tenant. Foreign firms are signing leases, though not at a fast enough pace to take up all the new and recently vacated sites. However, this adversity has helped in some ways, with some tenants beginning to negotiate lower rents in the face of difficult times.

Rising Optimism

As economic growth strengthens and optimism starts to return, consumers are better able to shop for more than just the necessities. In its report for the second quarter of 2018, global performance management company Nielsen reported that Kenya recorded 104 on the consumer confidence index, up from 102 in the previous quarter and from 94 in the fourth quarter of 2017. Some 69% of Kenyans expected their personal finances to range from good to excellent in 2019, a y-o-y uptick of two percentage points.

In early 2018 the Retail Trade Association of Kenya (RETRAK) said it expected better fortunes for the coming year when compared with 2017. It cited two trends as indicative of renewed optimism for 2018: a rise in both foreign investment and formal retailing. The UN Conference on Trade and Development reported in June 2018 that foreign direct investment in Kenya soared by 71% in 2017 to $672m. Meanwhile, the formal retail sector accounts for 30% of the market, according to a report published by the US Department of Agriculture in September 2017. RETRAK also cited an expanding middle class as another reason for the growing optimism.

A number of challenges remain for the sector, however. According to Nielsen’s report for the second quarter of 2018, only 31% of those surveyed said that it was a good or excellent time to make a purchase. Furthermore, 66% said that they had changed their spending habits, while 53% cut back on home entertainment spending. Meanwhile, 16% said that their biggest concern was food prices, with 70% saying that they generally bought according to price. The availability of goods had also become a problem, as insolvent supermarkets were having difficulty keeping their shelves stocked.

Outlook

The retail sector in Kenya is recovering as major supermarkets carry out restructuring plans to repay their debts. Dislocation and disruptions are still very much possible, however, and talk of unoccupied malls and empty retail spaces in Nairobi have been noted by local players. Nevertheless, the arrival of foreign firms and a rise in international investment indicate that the sector is set to expand in the future.

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The Report: Kenya 2018

Industry & Retail chapter from The Report: Kenya 2018

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