Deacons to close shop in Tanzania over endless losses

Deacons, the clothing and lifestyle goods retailer, will close its Tanzanian operations in the next two weeks shielding it from continued losses in that market.

The fact that Deacons has found the going to be tough in Dar es Salaam highlights the challenges of doing business in Tanzania, which is ranked fourth out of the five member states in terms of the ease of doing business in the East African Community, according to the International Finance Corporation’s Ease of Doing Business report 2011. 

The firm’s board decided to exit the country after its subsidiary, Tanzanian Fashion Stores, lost Ksh13 million ($154,394) in the full year ended December 2011, marking a fifth straight year of losses despite efforts to turn it around.

Deacons will close three stores in Tanzania: Truworths, Identity and 4u2 branded stores, and in the process shed 15 jobs.

The high cost of doing business in Tanzania, especially the high rental charges where a square foot of office space costs almost double what the prices in Kenya, Uganda and Rwanda, and that their target market, the upper to middle income — is very small compared with operations in other countries, led to the decision, the company said. 

The cost of rental space in Tanzania is $40 dollars compared with $18 dollars per square foot in the rest of the region.

“The cost of doing business in Tanzania is 30 to 40 per cent higher compared with other markets. The middle class is also not as big and the uptake of our brands was also not as big,” said Deacons chief executive Muchiri Wahome.

Tanzania’s middle class make up just 12 per cent of the total population, which is far much smaller compared with Kenya’s 44.9 per cent and Uganda’s 18.7 per cent of the population. Rwanda’s middle class is at 7 per cent its population.

Dar es Salaam, Tanzania’s Capital, only boasts of two shopping malls. In contrast, Nairobi, Uganda and Rwanda are experiencing a boom in the construction of malls and hence rapid growth of the shopping mall concept.

Also, long supply chain in Dar es Salaam is a challenge, where it can take up to five times longer by air to clear and deliver goods compared with the rest of the region.

The firm will be looking to have a fire sale before it shuts shop by the end of February.  However, the company will have to write off Ksh20 million ($237,500) in assets and inventories.

Although Deacons Tanzanian operations have been loss making, it expects to make profits from its operations in Kenya and Uganda boosting its overall profitability. Rwanda, where the retailer opened two stores in December has been a good market

In the six months to June 2011, Deacons’ sales grew by 38 per cent to $11.7 million compared with the same period last year. Profits after tax grew 51 per cent to $507,700 compared with the previous year.

The company said operations in Uganda were doing well with a 44 per cent growth in revenues contributing 7 per cent of the total group revenue for the 2011 financial year. Swedfund International is the main shareholder in Deacons, which is  publicly traded firm, with a 19.45 per cent stake.

Pinpoint investment Ltd (12.06 per cent), Charles Mwangi Gathuri (11.04 per cent) and Diana Bird (11.03 per cent) are the other  main shareholders of the publicly traded firm, which hopes to list its shares on the Nairobi Securities Exchange later this year.