Supermarket chains in Kenya are packaging and branding their own products more aggressively as competition forces firms to come up with more innovative ways to lock in consumers and increase earnings.
The shift has seen supermarkets selling their own branded commodities, edging out traditional suppliers who have had to scramble for customers in kiosks and lower-end retail shops.
Nakumatt Supermarkets, for example, is pursuing its Ksh200 million ($2.3 million) “Blue Label” brand venture that includes packaging everything from beans and home baking flour to bleach and window cleaner, in a move the company said is designed to provide consumers with quality, affordable goods as well as provide a market for local manufacturers. Nakumatt is a regional retail chain that has outlets in Tanzania, Uganda and Rwanda.
Kenya’s formal retail industry — estimated to have a combined annual turnover of between Ksh100 billion ($1.17 billion) and Ksh200 billion ($2.35 billion) — is a fiercely contested market, which is dominated by the Nakumatt, Uchumi, Tuskys, Naivas and Ukwala supermarket chains.
It is estimated that supermarkets command only 30 per cent of the regional retail market while the rest is controlled by non-formal outlets such as kiosks and small corner outlets.
Each supermarket is looking to increase its current market share. Tuskys, Naivas, Ukwala and Uchumi have been able to cater to 50 per cent of the bread market with their inhouse bakeries.
“In our branding, we are looking to include all the basic 500 household goods, starting with the 30-40 products that almost everyone includes in their shopping basket every month, like flour, sugar and milk,” said Atul Shah, the managing director at Nakumatt Holdings.
Supermarket executives said the trend in branding is being driven by a fast-growing middle class, who are demanding specific kind of goods and services.
As a result, the country’s supermarkets have adopted different strategies from marketing smaller size products in what is referred to as “the kadogo economy” to cater for the lower-middle income consumers to setting up in-house bakeries, butcheries and restaurants.
Tuskys, which has outlets in Uganda, now packages take-away ready-to-eat meals to cater for young professionals who have no time to cook at home.
“Consumers in urban areas have more disposable incomes and are trading up for more expensive, higher quality products and global brands,” said a report by global property consultancy firm Knight Frank released late last year.
The Kenya Economic Survey 2012 shows the retail and wholesale sector grew by 19 per cent in the past five years, becoming the second largest driver of economic growth after the transport and communication sectors.
Buoyed by the expanding middle class, improved infrastructure and an enduring property boom, supermarkets are on an upward growth trajectory.
Kenya is set for a retail boom with the entry of four global retail chains in the next two years. Retailers like Walmart (through its South African subsidiary, Massmart), Game Stores, Jet, and Edgars plan to open shop in Kenya by next year, further heightening competition in Kenya’s retail market.
Analysts say that when supermarkets stock their own fast moving consumer goods brands, they push up their profits. For example Uchumi’s brands of milk, sugar, salt and flour account for about 40 per cent of the retailer’s inventories but generate about 65 per cent of the supermarket’s total annual revenue. Freshly baked goods such as cakes and pastries are highly effective in bringing in customers and pushing up sales of other goods.
“Our fresh bread sales account for more than 50 per cent of the total bread sales,” said a Tuskys manager, who requested anonymity because he is not the spokesperson of the supermarket.
The positioning of shelves and sale points such as the in-house bakery is also carefully considered to maximise the sale of other products.
“The baked goods have definitely brought in more traffic into the supermarket, and we position the bakery at the far end of the supermarket so that customers can see and pick other products on the way there and back,” he said.
At an Uchumi branch in Nairobi’s city centre, made-to-order sandwiches are very popular, particularly in the morning hours. The supermarket has also an in-house café in another of its branches, which serves juice, pastries and snacks to shoppers, complete with tables and chairs to sit on.
“It’s all about anticipating our customers’ needs,” said a manager at an Uchumi outlet in Nairobi. At Naivas’s Kasarani branch outside the city centre, a long queue meets you as customers wait for freshly made pizza and fried sausages.
Mr Shah said that Nakumatt’s Blue Label brand will be extended to the wider East Africa once it is well established in Kenya.
“Whether we will source the goods from Kenya or from the local manufacturers in those countries is something we will determine when the time comes,” he told The EastAfrican.
Noting the price
Research firm Consumer Insight in a recent survey of shoppers’ behaviour found that the market share of repackaged sugar more than doubled from seven per cent to 18 per cent as buyers became more “price-sensitive.”
The findings of the 2012 study show that retailer-owned brands are set to upset brand names in future, riding on in-store advertising, which is deemed highly effective.
The decision to move into packaging and marketing in-house brands is part of a global trend in the retail industry as increased competition makes supermarkets fiercely defend razor-thin margins.
Supermarket brands in Australia account for an estimated 25 per cent of the grocery retail sector, which is expected to grow to more than 40 per cent by 2020. For global retail giants Tesco and Wal-Mart, private brands account for 40-50 per cent of sales.
“Branding will enable local supermarkets to have better control over the selling price and hence increase profit margins… it’s also a form of marketing,” said Halima Saadia, a research analyst at Old Mutual Securities.
Last month, Nakumatt launched a cosmetics division, with the acquisition of an exclusive franchise deal with New York-listed Revlon cosmetics.
The franchise deal, worth Ksh87 million ($1 million), gives Revlon its biggest presence in Africa outside of South Africa and makes Nakumatt the only supermarket chain carrying the Revlon line.
Despite the growth in revenues, Kenyan supermarkets have struggled to grow their profit margins, with a 2012 research note by Kestrel Securities showing that in the full year 2011, Uchumi had a profit margin of 3.6 per cent, Tuskys 1.3 while both Nakumatt and Naivas had a profit margin of 0.8 per cent.
According to a 2012 report by Citigroup, Kenya is the second most formalised African country in terms of retail penetration after South Africa, and the opportunities for growth are still huge.
There are currently more than 20 shopping malls in Kenya and retail penetration stands at around 30 per cent.
By comparison, South Africa’s retail penetration is about 60 per cent, while Nigeria’s is at just five per cent — the majority of Nigerians do not shop in supermarkets or formal stores and instead do their shopping in street stalls or open air, informal markets.
“Formal retail is still in its infancy on the African continent and the potential growth in population sizes and employment will be a key driver of formal retail growth in the long term,” said Citigroup analysts.
Additional reporting by Peterson Thiong’o