Uchumi, Nakumatt review regional strategy over cash flow setbacks
Tuesday April 18 2017
Massive debts, dwindling sales and rising competition have forced two Kenyan supermarket chains to rethink their regional strategies and concentrate on safeguarding their local market.
Nakumatt and Uchumi Supermarkets, which a decade ago opened regional branches, are now at a point of reviewing their regional strategies to focus on the home market, after sinking deep into financial woes.
The two retail chains, whose outlets are characterised by empty shelves due to their inability to pay suppliers and meet other financial obligations, are now betting on strategic investors to turn around their fortunes.
According to analysts, Nakumatt and Uchumi are operating on shaky ground and must sort out their problems with suppliers, modernise operations, re-energise their brands and carry out consolidation to remain competitive.
“The issue of late payments is particularly affecting their business,” said Ken Gichinga, chief economist at Mentoria Consulting. "It does not make business sense, for instance, for Nakumatt to proclaim ‘all under one roof’ when the shelves are empty.”
He said that the regional market is no longer a priority for the retailers owing to the challenges in the home market.
The reality that focus on the regional market is no longer feasible came to the fore yet again this week after Nakumatt was forced to close its Katwe branch in Muganzirwazza Mall in Kampala owing to rent arrears amounting to $82,000.
Its other eight branches in Uganda, five in Tanzania and three in Rwanda however, remain operational.
Departure of a director
The supermarket chain also saw the departure of Thiagarajan Ramamurthy, who was the regional strategy and operations director.
He oversaw the rolling out the company’s pan-Africa expansion programme. Mr Ramamurthy has joined Bidco Africa as CEO.
The EastAfrican has also established that on its part, Uchumi Supermarkets has no plans to return to the regional market in the immediate future and intends to concentrate on the Kenyan market.
“We have many unresolved issues with suppliers and business partners in Uganda and Tanzania. Until these issues are settled there are no plans to go regional anytime soon,” said a source at the company.
Uchumi, which exited the Ugandan and Tanzanian market in 2015 after years of loss making, is yet to settle millions of dollars owed to suppliers in those countries. Before its exit, the outlets accounted for only 4.75 per cent of its operations and over 25 per cent of operating costs.
While it is evident that both Nakumatt and Uchumi feel the regional strategy has largely failed to spur the growth despite offering a market of about 100 million people, the two supermarket chains are also feeling the pressure in the domestic market where competition is on the rise.
To safeguard their local markets, Nakumatt and Uchumi are currently in negotiations with strategic investors seeking to raise $75 million and $47.4 million respectively.
Uchumi, which has seen its share price at the Nairobi Securities Exchange continue to plummet, trading at an average of $0.02 cent (Ksh2.50), is also expecting another $17 million bailout package from the government.
“Plans to have an investor to partner with Uchumi are ongoing and by mid this year we will reveal the most suitable investor to bring life back to the company,” Uchumi chief executive officer Julius Kipng’etich told shareholders during the company’s annual general meeting early this month.
Analysts contend that Nakumatt and Uchumi dug themselves into a hole directing significant resources into expansion while increasing the payment terms for suppliers to as much as 120 days.
Last month, milk processor New KCC had withdrawn supplies to Nakumatt after the supermarket chain failed to honour payment within the agreed period of 90 days and only resumed after a deal was reached.
“Expansion particularly to the region is the main cause of the problems facing retail chains. I believe they have learnt their lessons and will use funds from strategic investors to stabilise their operations as opposed to expansion,” said Francis Mwangi, head of research and investment analysis at Standard Investment Bank.
He added the coming on board of strategic investors will help Nakumatt and Uchumi not only mend the strained relations with suppliers but also consolidate their Kenyan market — which has been invaded by Tuskys, Naivas and global chains like Carrefour of France, Game Stores of South Africa and Choppies of Botswana.
It is important to note that both Nakumatt and Uchumi are struggling to regain their fading glory at a time when Kenya’s retail spending is on a growth trajectory.
According to a report by Procter & Gamble, while the two retail chains are in a financial mess, other supermarkets are recording increasing sales included the country’s retail spending stood at $17.6 billion in 2016 representing a 13 per cent growth.
The report shows that over half of Kenyans living in urban areas shop in supermarkets regularly owing to the fact that supermarkets stock branded products that are well known and perceived to be of good quality.