Things fall apart for regional retailer Uchumi

Saturday June 20 2015

Shoppers at an Uchumi Supermarket in Nairobi.

Shoppers at an Uchumi Supermarket in Nairobi. PHOTO | FILE | NATION MEDIA GROUP

By SPECIAL CORRESPONDENT

The month of June does not bode well for Uchumi, the regional retail supermarket chain.

In June 2006, Uchumi’s shares were suspended from the Nairobi Securities Exchange after the retail supermarket chain was unable to pay the debts it owed to its suppliers.

Now, exactly nine years later in the month of June, after Uchumi seemed to be returning to good financial health, everything is falling apart for the supermarket chain.

In the past week, the retailer said it had reached out to KCB for a Ksh500 million ($5.1 million) loan to pay off its suppliers — a pointer that it is facing a serious cash flow crisis.

The cash crisis was also highlighted by an announcement last week that shareholders had had to wait until April 2015 to receive their dividends of 30 cents per share instead of being paid in February 2015.

The cash crisis comes barely six months after the supermarket raised Ksh895.8 million ($9.2 million) through the sale of additional shares to its existing shareholders in a rights issue to fund the opening of up to 11 new branches across the region.

With the pressure piling on the Uchumi board to explain how its recovery has come unstuck, the sacrificial lambs have been chief executive officer Jonathan Ciano and chief finance officer Chadwick Omondi Okumu.

But what is really dragging down Uchumi Supermarkets — the only listed supermarket chain in the region — is a combination of poor strategic decisions, ill luck and the misfortune of having been largely controlled by the government, compared with other family-owned supermarket chains like Nakumatt, Tuskys and Naivas.

Uchumi’s current problems can be traced back to the period between 2000 and 2004, when it faced its first cash crisis because of an ambitious expansion plan and miscalculations in its strategy of buying and owning buildings.

In 2003, Uchumi expanded into Uganda, opening its first branch in Kampala at the Garden City mall. But the rapid expansion meant that the retailer had to borrow heavily, especially from KCB and the Eastern and Southern African Trade and Development Bank (PTA) banks, to fund this growth.

Everything came to a head, when its debts piled up in 2006 and it could not pay suppliers, leading to its insolvency in the same year.

KCB and PTA bank, which were owed Ksh956 million ($9.7 million), put Uchumi under receivership. The government had to step in with a Ksh675 million ($6.9 million) loan for Uchumi in 2006.

The biggest consequence of the receivership was that Uchumi could not open new branches, at a time when the Kenyan economy was reporting rapid economic growth in 2006 and 2007.

Uchumi’s misfortunes gave its main rival Nakumatt the perfect opportunity to catch up and take the lead.

Uchumi was made to pay the banks Ksh975 million ($9.9 million) between 2006 and 2010 when the receivership was lifted. It also continued to repay the government’s loan, which was eventually cleared last year.

“Uchumi had to pay creditors for the sake of growth,” said James Murigu, a board member at Uchumi Supermarket, adding, “And then they expanded at the expense of the suppliers.”

Between 2011 — when its shares were allowed back at the NSE — and 2014, Uchumi undertook an ambitious expansion plan, increasing its branch network from 25 branches to 37 including an entry into the Tanzanian market.

However, the expansion was funded through loans from banks and commercial institutions to meet its working capital requirements.

In 2011/2012, the retailer invested up to Ksh513 million ($5.2 million) in “new branches, refurbishment of existing stores and replacement of old equipment,” said Khadija Mire, Uchumi’s chairperson, in the information memorandum for the rights issue.

These huge investments were taking place at the worst time because, as opposed to other supermarket chains, suppliers were giving Uchumi only a 60-day credit period, whereas Nakumatt and Tuskys enjoyed a 120-day credit period.

The model for making money for supermarkets is selling shelf space to manufacturers and suppliers. The supermarket adds its mark-up, the customers pay the supermarket and then the supermarket pays its suppliers. If a retailer enjoys favourable terms with suppliers, it can use the interest-free cash for other investments to generate a better return.

The location is also crucial to the success of supermarket chains, which is why the likes of Tuskys and Nakumatt and soon Naivas have been eager to become anchor tenants in shopping malls.

Uchumi had planned to open a minimum of 16 branches between 2014 and 2016 with money from its rights issue. This means an average of eight new branches each year.

Six of the new branches were planned for the regional market. Three branches were planned for Tanzania, one for Uganda and two for Rwanda.

But, the regional expansion plans face serious hurdles because since 2010, the Ugandan and Tanzanian operations have not made money.