Kenya’s retail sector is facing a significant transformation that has seen local operators team up with private equity (PE) firms to ensure survival after the collapse of retailing chain giants — Nakumatt, Uchumi and Tuskys — on botched expansion plans and trading malpractice.
The EastAfrican has learnt that while local retailers are struggling to break even, foreign investors and particularly PE funds are salivating over the country’s retail sector.
This is largely down to Kenya’s recognition as a regional financial and investment hub, positive demographics, dynamic digital technology and mobile money ecosystem and a flourishing middle-class.
Emerging supermarkets such as Naivas and Quickmart, which have risen to fill the space left by the fallen giants, are banking on PE firms to provide fresh capital for expansion and offer managerial expertise to sustain operations.
The latest change of tactic is informed by the thin margins under which supermarkets operate, meaning that there is little room for any inefficiency if the firm has to maintain profitability and ensure decent returns to shareholders.
“We find that family-owned and managed firms would benefit from the capital and expertise offered by private equity firms seeking to invest in the country,” according to a survey by analyst at Cytonn Investments Ltd.
“The long-term capital gained by selling equity stakes to PE firms would alleviate the need to borrow for expansion. Furthermore, external owners would also enforce good corporate governance by insisting on proper processes and procedures.”
The EastAfrican has further learnt that supermarket chains usually operate on a model that involves procuring merchandise on credit and later selling the same in large volumes despite making small, but profitable margins.
As a result, this business model leaves retail chains with little or no retained earnings at all to fund their expansion plans, resorting to bank borrowing, usually at exorbitant rates.
Failure to pay off creditors including banks and suppliers coupled with corporate governance issues have led to the collapse of big supermarkets such as Uchumi, Nakumatt and Tuskys.
Analysts at Cytonn Investments Ltd said for supermarkets to remain profitable they have to eliminate inefficiencies, minimise operational costs and grow volumes by expanding their branch network.
Amongst key challenges that have stifled the profitability of local retailers include thin margins and poor capital management, stiff competition from international brands, high borrowing costs making it difficult for new stores to achieve profitability, high construction costs and poor corporate governance and oversight.
The latest report on the Pan African retail sector titled The Future of Traditional Retail in Africa says PE funds are playing an important role in backing local modern chains, such as Naivas and Quickmart, that target middle-income areas in major cities.
“Investment funds can find opportunities to provide capital and management expertise that will enable local modern retail chains to scale up in new cities,” says a report dated June 30, 2022.
According to the report, Kenya boasts several well-established hypermarket and supermarket chains but the modern sector growth has been sluggish in the past few years.
“Several players have exited or gone bankrupt through a combination of poor management, overly rapid expansion, and inappropriate formats,” says the report.
Loosening family hold
In 2019 Adenia Partners, a PF firm investing in sub-Saharan Africa, and headquartered in Mauritius completed a majority investment in Quickmart Ltd.
The transaction paved the way for the merger of Quick Mart with Tumaini Self Service Ltd, another supermarket retailer in Kenya that Adenia acquired in December 2018.
In 2020, Naivas raised Ksh6 billion ($49.8 million) from the sale of 31.5 per cent stake to a consortium of investors including the International Finance Corporation (IFC), private equity firms Amethis and MCB Equity Fund and German sovereign wealth fund DEG.
The deal was designed to bolster Naivas’ expansion plan.
In June this year, the consortium (IFC, Amethis, MCB Equity Fund and DEG) reached an agreement to sell their 31.5 per cent stake in Naivas International (Mauritius) to a Mauritian conglomerate IBL Group.
Naivas International owns 100 percent of the shares of Kenya-based Naivas Ltd.
The IBL Group’s partners in the consortium include Proparco, a subsidiary of Agence Française de Développement (AFD) and DEG, a subsidiary of German KfW Group.
The family of Peter Mukuha Kago — the founders of supermarket chain Naivas — also sold 8.5 per cent of its shareholding in Naivas, reducing its investment in the firm to 60 percent.
“Proparco is pleased to announce its partnership with IBL Group, the largest conglomerate of Mauritius and DEG ... to jointly acquire a 40 percent interest in Naivas International, which owns 100 percent of the shares of Naivas Limited,” said Proparco.
Vision 2030 pillar
The Majid Al Futtaim-backed Carrefour has become a major international brand in the Kenya retail market after the exit of South Africa’s Shoprite, Botswana’s Choppies Ltd and the collapse of local brands — Uchumi, Tuskys and Nakumatt.
Kenya’s state department of Trade says while the Wholesale and Retail sector is a key pillar of the country’s long-term development plan dubbed ‘Vision 2030,’ its performance has been found wanting and weighed down by trading malpractices and a culture of late payment to suppliers.
“The Government is therefore concerned by the level of outstanding debt in the retail sector because of the threat it poses to the Vision 2030 goal of promoting a vibrant retail sector as an outlet of agricultural and manufactured products,” according to the findings of a study on Kenya Retail Sector Prompt Payment (2017).