Two months ago we analyzed Nakumatt’s future, looking at its situation and how it might recover. We look again at the retailer’s options.
At the beginning of July we wrote a detailed piece on Nakumatt’s problems and its options. Two months later it’s time to revisit what we wrote and see what has changed.
Perhaps surprisingly, not that much has changed. Two months ago, it felt as if Nakumatt might fold any day. It hasn’t, which in itself is impressive.
The headline news is that Nakumatt has no investor and it has no bailout from the Kenyan government.
On social media, Kenyan consumers continue to post pictures of empty stores. Nakumatt’s social media accounts on Facebook and Twitter are at pains to present a business-as-usual face. Nakumatt’s CMO Andrew Dixon has countered by posting awkward photos of full shelves. At the time of publication he had tweeted once since July 14th.
Nakumatt has now exited Uganda, closing its last three stores. It continues to trade with three supermarkets in Rwanda and even talks of expansion. In Kenya, it is moving to close down or offload its poorly performing stores – no easy task.
The scenarios for Nakumatt
Two months ago, we dismissed two scenarios:
- A Kenyan government bailout
- Nakumatt trading itself out of its problems
We also offered three scenarios:
- Nakumatt will fail completely
- Nakumatt finds an international investor
- Nakumatt gets carved up
We don’t yet know if Nakumatt will fail completely. It has major cash flow issues: at the beginning of August staff had not been paid for two months. Several stores have empty shelves. There are angry landlords and wearied suppliers. The company is trading hand to mouth. It hasn’t solved its problems. It has merely found a way to cope with them in the short term.
Nakumatt has searched hard for international investment but is unlikely to find it. Leaving aside issues of price, timing and due diligence, CEO Atul Shah and his family want to retain control of the business. Any inbound investor now will want control.
Which leaves our third option: Nakumatt gets carved up. Nakumatt wants and needs to offload stores. In order to do so it will have to sell off some of its best performing Kenyan stores as well as its worst ones.
Carving up Nakumatt: the medicine it may need to survive
Domestic competitor Naivas has quietly waited while other chains expanded and may seek to pick up some stores on the cheap. In Nairobi, Chandarana could be interested in some stores. Nakumatt could get a cash injection by selling off its crown jewels – anchor spots in Nairobi malls such as Westgate and Junction. Massmart, Carrefour and possibly even Shoprite would all take those calls.
It’s a huge penalty for Nakumatt. It would lose its prime stores and close down its poorly performing ones. From a network of more than 60 stores in mid 2017 it could end up with 20 stores and having lost its pivotal presence in Nairobi. Where would those remaining stores be? Would it be a coherent and manageable network?
Some context: Nakumatt had just 10 stores in 2002, before it embarked on its expansion spree. At the start of 2010 it had fewer than 20 stores.
Let’s assume that’s enough for Nakumatt to survive. It’s a step down. But not the end of the world.
The silver lining: the right time to rethink things?
It’s rarely a great feeling to cut back drastically and offload stores. Nakumatt isn’t choosing the style or severity of its haircut. If it ends up selling off its prime Nairobi stores it will feel like the heart has been ripped out of the company.
But there might be a silver lining.
Arguably, Nakumatt is scaling back from a congested marketplace targeting wealthy Kenyan consumers at a time when Carrefour is throwing its weight around. In Kenya, as elsewhere in Africa, middle class spending struggles to keep pace with the ambitions of modern retailers. The competition is especially intense among premium supermarkets in Nairobi.
Nakumatt has learnt harsh and valuable operational lessons about pain points: scaling up past 10 stores, 20 stores, 50 stores. It has taken a bold gamble to launch private label. Although its relations with suppliers are heavily strained it still has those relationships and experience. One of the reasons why Nakumatt may be a poor investment proposition is because so much value and institutional knowledge sits within the Shah inner circle.
Nakumatt’s pain could open the door for a strategic rethink. A look at where the company’s strengths (its relationships, positioning, IP, systems) and its weaknesses (oversized store network, cash flow, congested marketplace) offers new options.
Some options for Nakumatt’s future
One option is Nakumatt makes a virtue of a necessity and becomes a regional specialist. Kenya has a large number of regional supermarket chains with fewer than 10 stores, all of whom are relatively soft targets.
A second option is that Nakumatt focuses away from larger, destination stores and more towards the average consumer in Kenya. 70% of grocery spend in Kenya still goes through the traditional trade. The competitive landscape is more open. If Nakumatt went down that route it would seek to differentiate on operational efficiency.
A third option is that Nakumatt reinvents itself as a franchise owner and focuses on distribution – going down a route Tuskys has partially adopted and Uchumi is exploring.
None of those options are mutually exclusive.
If you’d like to get more news and insight sent directly to you, please sign up for our weekly newsletter.
