Listed Kenya retailer Uchumi Supermarkets has gone into a franchise deal with local traders to operate its Nairobi West branch. The agreement will run for five years. Uchumi is attempting to franchise its stores to leverage its existing brand goodwill while it reduces its debt burden of Sh3.6bn ($35.6m). We don’t think it will work.
The idea is that Uchumi supplies stock to the franchisees and both parties share distribution centres – and presumably the cost of those distribution centres. It is a last gasp roll of the dice for the listed Kenyan supermarket chain, which is struggling to restructure itself to survive.
Uchumi was founded in 1975 and was one of the three big supermarket chains in Kenya, along with Nakumatt and Tuskys. It went into receivership in 2006 and was rescued by the Kenyan government, delisting from Nairobi’s stock exchange. It relisted in 2011, profitable and seemingly on the path to recovery, and during a period where Kenyan supermarket chains were in fierce competition to expand.
In 2015 the wheels came off. The company fired its CEO and CFO, and closed its stores in Uganda and Tanzania. in FY2011, the company had 18 stores, generating revenue of $6m per store. In FY2015, Uchumi had 42 stores, but revenue per store had fallen to $3.75m, while operating costs had soared. to finance its growth, Uchumi had taken on unsustainable levels of debt. Uchumi currently has six stores.
In theory, franchising is a great option. It provides a means for Uchumi to leverage the value of its customer relationships, supplier relationships and existing infrastructure. Both Uchumi and Tuskys have considered the franchising option. In Uchumi’s case, its has publicly talked about franchising since early 2016, and the Nairobi West trial has been in place since mid-2018.
Uchumi also plans to open smaller branches and going the digital to tap online shoppers – both, in theory valuable ideas to reach Kenyan consumers. In particular, there is a yawning gap among leading supermarket chains for smaller, neighbourhood stores in high footfall areas (such as around transport hubs).
The problem is that Uchumi is late with its franchising strategy. It has taken three years to get to this point, in which time Carrefour has opened seven large supermarkets, accounting for $150m of sales, and has two more stores in the pipeline. Shoprite has opened two supermarkets and five more in the pipeline. Naivas is opening new stores. Choppies is seeking to expand. At least one more international chain we know of looking seriously at Kenya.
It’s hard to see that Uchumi can seriously drive a franchising strategy given the debt and duress it is under. And yet, we still think that a franchise model is a valuable addition to Kenya’s supermarket landscape. It offers a way for the long tail of independent supermarket owners to get more buying power, systems brand recognition they will need to survive. So we’re not saying it won’t work for Uchumi and we’re definitely not saying franchising can’t work in Kenya. But we think it’s unlikely that Uchumi’s franchise model will work.
