Builders, a subsidiary of South Africa’s retail giant Massmart, is closing down its business at the Waterfront Karen Nairobi in less than three years of operation after finding the going very difficult in East Africa’s largest economy.
The announcement of the closure, which was made two weeks ago, did not come as a surprise, going by the trend of recent exits by South African retail brands such as Shoprite, Massmart and their Botswana-based counterpart Choppies.
The latest exit by Builders Warehouse, however, has left policy makers, investment analysts and the investing fraternity pondering the future of investments by South African firms in Kenya and the entire East African region.
The Kenya Private Sector Alliance (Kepsa), an umbrella body for private businesses in the country acknowledges that the exit of South African firms from the country is an issue of concern and efforts are being put together to establish the specific issues impacting South African firms in the country.
“Not sure why South African investments have found it hard to invest in Kenya unlike others. We are trying to find out their unique issues as we deal with other business environment issues affecting business as we always do,” says Carol Kariuki, the Kepsa chief executive.
Certainly, South African retail firms have found it difficult to crack the regional market and have been busy scaling down and completely exiting the East African market.
Analysts reckon that South African retailers have failed to localise and connect with the local consumers contrary to other South African firms which have opted for mergers and acquisition to conquer the local market.
“While many South African companies understand the promising macroeconomic landscape of Kenya, they don’t spend enough time appreciating the equally important microeconomic elements of consumer behaviour, price sensitivity all of which are aspects of behavioural economics. In the end they fail to connect with the customer,” says Ken Gichinga, chief economist at Mentoria Consulting,
“It really comes down to the ability to localise and connect with the consumer. There is a great need for corporates to now pay attention to consumer and household behaviour through what we call behavioural economics.”
Partnered with local firms
Several South African firms have partnered with local firms to understand the local market and the consumer behaviour to sustain operations.
For example, in the financial sector Stanbic Bank, owned by South Africa’s Standard Bank acquired a 60 percent shareholding CfC bank creating a new company, called CfCStanbic Holdings, the largest banking merger in Kenya’s history.
In 2019, South Africa’s financial conglomerate Old Mutual Ltd acquired 66.7 percent majority stake in UAP Holdings forming UAP-Old Mutual Group. Old Mutual Ltd is listed on the Johannesburg Stock Exchange.
On the other hand, South Africa’s MultiChoice DStv are partnering with local content creators to sustain their operations.
Economic and political challenges
According to Eric Musau, a director-in-charge of Research at Standard Investment Bank, difficult operating environment characterised by both economic and political challenges have adverse impacted investments in the country.
“If you are a multinational, and a key subsidiary market is bleeding, those tend to go first to save the main operation,” says Mr Musau.
The Finance Act (2022) amended the income tax law by increasing capital gains tax from five percent to 15 percent with effect from January 1, 2023, while in December last year, Kenya’s Court of Appeal upheld a ruling to stop implementation of the controversial minimum tax terming it unconstitutional.
Array of barriers
In 2020, the National Assembly amended the Income Tax Act to give Kenya Revenue Authority powers to collect the minimum tax starting January 2021.
In a statement dated February 1, 2023, Builders Warehouse attributed its planned exit from Kenya to persistent financial losses and poor performance due to various factors including inability of the firm to import inventory timeously and stringent regulatory import requirements which have colluded to adversely affect the firm’s competitiveness.
“As a result, the business has had to consider closing Builders Warehouse Karen Waterfront in Nairobi, Kenya. We have initiated the process required for potential closure,” the firm concluded.
In October 2022, South African retailer Massmart, which operates the Game Stores said it had started talks with staff on the planned closure of its three stores in Kenya after efforts to sell the business failed.
The JSE-listed retailer said that it did not find domestic buyers for its 14 Game stores in Kenya, Uganda, Tanzania, Ghana and Nigeria.
In 2021, South Africa’s Shoprite Holdings Ltd (Shoprite) completed its exit from Kenya, Tanzania, Uganda, Mauritius, Madagascar and Nigeria.