Despite news of a cash injection from an investor, we understand that Nakumatt is still under financial stress. Reports from stores in Kenya indicate low stocks on shelves and suppliers are telling us that payments are very late. Nakumatt has also announced that it will shut its stores in Uganda and Tanzania in a bid to focus on its core Kenyan market. Many have blamed these problems on the retailer’s aggressive expansion strategy. However, trading issues are more widespread than just Nakumatt and shed light on deeper issues in the Kenyan retail market.
Nakumatt has opened sixteen stores in the past two years in a move to head off international competition – notably from Shoprite, which exited East Africa in 2015. At the same time it has expanded into international markets such as Uganda, Tanzania and Rwanda – at one point even talking about South Sudan. While the company has grown revenues, it has taken on significant debt and costs related to the expansion. This has led to a severe cash flow crisis, failed or slow payments to suppliers and in some cases shelves empty of core products such as Coca-Cola, milk or toothpaste.
Nakumatt is not the only retailer paying the price of rapid expansion in this challenging market, and passing the pain onto suppliers. A March 2017 report from the Kenya Association of Manufacturers found that “some retailers issue bouncing cheques despite an agreed payment period of between 90 to 120 days which has seen outstanding payments rising to Sh40 billion [USD387m] in the past two years.”
Choppies, which bought the debt-ridden Ukwala chain, is now reportedly having trouble meeting obligations with suppliers. Tuskys is in the midst of a public family feud and has closed stores in Kenya. Uchumi, the only major Kenyan supermarket chain that is listed, required a significant bail-out from the Kenyan government.
These widespread problems highlight some of the major challenges retailers face. Not only financing expansion via debt, but also the levels of risk involved in assuming higher fixed costs (often, in Nakumatt’s case, as an anchor tenant) without clear data to support the flow of revenues. The real size of the addressable consumer market, for example, is often unknown to supermarket retailers operating outside their comfort zone – especially in poorer and less urbanised markets such as Uganda. A second problem is that all the major domestic retailers have sought to expand at the same time, and when big hitters such as Carrefour, Massmart are entering and trying to take valuable market share.
In particular, the opening of two large Carrefour hypermarkets in Nairobi has increased the pressure on domestic retailers. Its 10,000m2 hypermarket at the Two Rivers Mall, which opened in February 207, directly competes with Nakumatt’s stores in Westgate Mall, Village Market, Ridgeways. For domestic supermarkets, Carrefour’s size and perhaps also its patience growing the business into profitability pose a formidable threat.
The Kenyan supermarket landscape is considerably more sophisticated, mature and consolidated than that of any country in East Africa, and indeed in West or Central Africa. But this apparent maturity has masked a real fragility among its leading players, and a sorely needed lack of external investment and expertise. In short, it belied the growth pains Kenyan retailers have experienced in their bid to reach scale over the past decade.
Nakumatt has recruited former Tesco executive Andrew Dixon to bring in these much needed reforms. But it has remained tight lipped on its mystery investor, who has apparently pumped $75m into the business. If it succeeds in channeling investment into its operations, and attracting more international talent into its business it may well end up in a strong position of being able to focus on the many smaller domestic rivals that are still family owned and not large enough to be strong acquisition targets.
Note: we have updated analysis on Nakumatt.
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