Malls in cut-throat competition for local and international brands

Tuesday April 4 2017

 Two Rivers Mall on Limuru Road. Kenya’s largest mall opened its doors last week. PHOTO | MARTIN MUKANGU

Two Rivers on Limuru Road is Kenya’s largest mall. PHOTO | MARTIN MUKANGU 

By NJIRAINI MUCHIRA

The recent opening of the Two Rivers Mall on the outskirts of Nairobi has raised the stakes in a sector that is struggling to achieve returns despite high occupancy rates by merchants.

In Kenya, the occupancy level in the majority of the malls is currently averaging 83 per cent, but with return on investment only about 8.7 per cent, according to asset management firm Cytonn Investments.

According to Cytonn, developers are operating at less than the return of 20 per cent considered safe for investors putting up such facilities through credit.

“In the immediate future, due to the increase in supply, malls will have to be creative in marketing to attract and retain clients. They will also have to diversify their product offering and incorporate more mixed-use themes while streamlining their supply chain operations,” said Edwin Dande, Cytonn Investments managing partner & CEO.

Some merchants have reported declines in sales of as much as 60 per cent as consumer preferences shift quickly to malls with a wider range of offerings.

“There is a high concentration of malls in Nairobi, something that means competition for consumers is stiff because the attraction is largely the same,” said Julien Garcier, partner and managing director of Nairobi-based market intelligence firm Sagaci Research.

Over the past few years, Nairobi has witnessed a significant increase in mall space, a trend reflected across East Africa.

The unprecedented growth is driven by a steady rise in local consumption, lack of formal retail spaces, influx of investment capital and strong interest from international brands pursuing opportunities in fast growing markets.
“These factors are fundamental and will hold in the long run, creating a huge opportunity in retail with average penetration still at 30 per cent,” noted Mr Dande.

Research by Sagaci shows that East Africa has 82 malls, the majority of them — 53 — being in Kenya. Another 19 are expected to come up by 2020.

Uganda and Tanzania have 16 and 13 malls respectively and the number is expected to increase to 22 and 16 respectively by 2020.

The research shows that in 2015, 27 new malls were opened across Africa, increasing the total retail surface to 6.4 million square metres. Currently, there are 383 malls opened on the continent excluding South Africa.

At least 204 new malls are expected to open by 2020 across Africa, excluding South Africa, increasing the total surface by 75 per cent to reach 11.1 million square metres.

While some markets, such as Kenya and Namibia, are reaching saturation in terms of shopping centre surface per 1,000 middle-class households, the current density of shopping centres remains low across the continent.

None of the malls in East Africa is ranked among top shopping centres in Africa by Sagaci, which has developed a ranking tool based on a mall’s ability to attract international brands.

Two Rivers and The Hub in Karen have not been ranked, having opened only recently.

According to real estate firm Knight Frank, the inability of Kenyan shopping centres to attract international brands has forced malls to compete for the same tenants with supermarket chains Nakumatt, Tuskys and Naivas as the anchor tenants.

Besides LC Waikiki and Swaroski, the other notable global brands to enter Kenya are French retailer Carrefour, which is the anchor tenant at Two Rivers and The Hub, and Game, a retailer operated by South Africa’s Massmart, which is one of the anchor stores at Garden City Mall.

“International retailers are known to be considering entering Kenya but the difficulty of sourcing appropriate local partners is regularly cited as a major obstacle to market entry,” states the Shop Africa 2016 report by Knight Frank.

It adds that there are only a few local firms with the expertise to partner with international retailers, with the most prominent being Deacons, which operates brands such as Adidas, Mr Price and Bossini in Kenya.
Global brands are also concerned about security and currency volatility, which has forced many to adopt a wait-and-see attitude.

Reluctant entrants
With international brands being reluctant entrants in East Africa, malls are being forced to look beyond offering consumers one-stop-shopping centres to providing a full buffet that includes work and lifestyle.

According to Koome Gikunda, director at private equity firm Actis Capital, Garden City has managed to withstand the onslaught of other malls due to the fact that it is a mixed-use development.

There are at least five malls on Thika highway, with Garden City, TRM and Mountain Mall being a stone’s-throw from each other.

“We decided to invest not just in a mall but in an entire mixed-use facility incorporating residential apartments and offices. This has set apart from the competition,” he told The EastAfrican.

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