On Monday, February 28 this year, Kenyans got a rare and embarrassing peep into the lives of the secretive family that runs Tuskys, one of the region’s biggest and most successful supermarket chains.
On that day, Stephen Mukuha Kamau, the managing director of Tuskys, appeared before Chief Magistrate Esther Maina to answer charges that he had beaten Yusuf Mugweru Kamau, his younger brother, in full view of shocked employees at the headquarters of their family business in Embakasi. Mr Mukuha denied the charges. He also refused to comment for this story.
This week, after many attempts at reconciliation led by the former director of public prosecutions, Phillip Murgor, through his law firm, Murgor & Murgor, along with consultancy Deloitte, which serves as Tuskys’s auditors, and Atul Haku Shah, the managing director of Nakumatt, Kenya’s largest supermarket, the family drama heads to Kiambu Road, to the headquarters of the Criminal Investigations Department.
This time, three brothers — first born John Kago Kamau, second born Samuel Gatei Kamau, and fourth born Mugweru — are accusing their third born brother of mismanaging their company in business dealings between Tuskys and seven other suppliers that are either related or personal ventures of the directors of the company. The three are also demanding a forensic audit into the finances of the business, the immediate firing of their brother and the recruitment of an outsider as the chief executive.
There are five brothers in all, who are all directors of the company, with Mr Kago serving as chairman, Mr Mukuha as managing director and Mr Mugweru as director of sales and marketing. The five took over Tuskys from their father Joram Kamau, who died in 2002. Mr Kamau’s brother is the pioneer of Naivas supermarket. At Tuskys there is no external director in the business. Apart from Mr Kago, the four other brothers own a 17.5 per cent stake in Orakam, the holding company of Tusker Mattresses Ltd (Tuskys Supermarkets). Mr Kago and his two sisters hold the remaining 30 per cent stake, shared equally among them.
While Kenya has in the past two years seen a number of high-profile family business disputes involving siblings and wives in polygamous wealthy families, and even a husband and wife blackmailing each other in a real estate deal gone sour, the Tuskys affair affords a rare glimpse into the internal workings and financial position of one of Kenya’s fastest growing businesses and a secretive dynasty spanning three generations and two families that control East Africa’s supermarket retail business.
These are the warring Kamaus who own Tuskys, the Shahs who own Nakumatt, and the other Kamau (brother to Joram), who inherited the original shop that Tuskys was founded on and grew it into the now prosperous Naivas, Kenya’s fourth largest retail chain after Nakumatt, Tuskys and Uchumi Supermarkets. The Tuskys affair is now illustrating how disputes over corporate governance are starting to tear family businesses apart.
The money factor
The battle for the control of the business reads like an episode from the globally famous feud between the Ambani brothers, Mukesh and Anil –– the two wealthiest men in India — who ended up splitting the massive Reliance Industries empire built by their father Dhirubhai Ambani.
In the Tuskys’s affair, as in the Ambani’s family drama, money was the central theme. A look at documents filed by Murgor & Murgor and the latest audit report by Deloitte shows the Kamaus swimming in money. In 2010, the report shows that Tuskys sales amounted to Ksh20 billion ($236.39 million), and net profit stood at Ksh245 million ($2.89 million). Sales and net profits stood at Ksh17 billion ($200.94 million) and Ksh266 million ($3.14 million) respectively in 2009. In 2011, the business is estimated to have grossed Ksh33 billion ($390 million), according to well-placed insiders. This puts Tuskys among the largest companies in East Africa.
However, when you analyse the amount of money the company is grossing against the net profit generated — compared with say Uchumi — Tuskys emerges as a not particularly well-run company. It is basically making one Kenyan cent for every shilling of sales it makes or 1.2 per cent net margin. Uchumi, which is expected to report Ksh15 billion ($177.30 million) in revenues this year, had a net margin of 3.6 per cent. However, market leader Nakumatt appears even worse managed than Tuskys, with a margin of 0.8 per cent.
Tuskys has been a major rival of Nakumatt both locally and in Uganda, where both have five branches. In the local market, Nakumatt has 30 branches, Tuskys 32, Uchumi 18 and Naivas 19 branches.
However, for the five brothers and their two sisters, this modest level of profitability has ensured a comfortable life for the family. In 2009 and 2010, the family paid out Ksh206 million ($2.43 million) in dividends, declaring a dividend of Ksh1 million ($11,820) per share held. The directors paid themselves fat salaries comparable to what chief executives of Kenya’s biggest companies earn. In 2009, the directors earned Ksh37 million ($451,219) in salaries, which was bumped up to Ksh46 million ($560,975) in 2010. Tuskys also boasts of Ksh531 million ($6.27 million) in retained earnings. In June 2010, the company had invested Ksh775 million ($9.16 million) of idle cash in short-term deposits with several banks at rates ranging from six per cent to 10 per cent.
In addition to the dividends, salaries and fees, Tuskys, like many other family-owned firms, extends sweetheart deals to the directors by cultivating a cosy business relationship that allows their private companies to trade with the supermarket. This allows them to exploit the brand power of Tuskys and also provide crucial trade credit. These private businesses are related through common ownership or directorship. As of June 2010, such deals amounted to Ksh911 million ($10.767 million) comprised of loans and advances to seven related companies and directors. This amount ballooned to Ksh1.5 billion ($17.77 million), which is the subject of dispute. These businesses include: Guthera Villas, Tuskys Uganda, Pop Media, Kenspore, Enkarasha, Kiran Drycleaners and Gourmet Company. It is not illegal to do business with your subsidiary, but the law requires it should be at arms-length.
Things fall apart
The cosy business relationship between Tuskys and the brothers’ private interests worked well as long as everyone appeared to be getting a fair share and everything was on the table. However, according to the detailed records of the arbitration meetings, things soon began to fall apart.
A trail of correspondence and a series of meetings between the five directors, their lawyers and family friends serving as arbitrators detail how relations at the business have been getting rocky. The correspondence unravels a tale of corporate betrayal, espionage, sabotage and mistrust inside the Tusky’s boardroom.
Next week, the CID is expected to start questioning directors and other involved parties in the dispute. Documents obtained by The EastAfrican show the directors are in dispute over the appointment of finance director Frank Kamau — the senior most non-family member in the company — and the suspension of several family members from the running of the business as well as over who should be the signatories of key bank accounts.
Mr Kago, Mr Gatei and Mr Mugweru also want a forensic audit conducted on the business to rule out fraud and diversion of company funds to non-related business entities. The directors are raising concerns over faltering governance structures and practices in the supermarket chain and the need for restructuring — a process that could place the business under the management of outsiders, a departure from the current situation where it is run mainly by family members.
A week ago, officers from the CID are said to have visited the supermarket’s head offices for crucial documents.
The three brothers who are not happy with how Mr Mukuha has been running the empire sought the services of the CID to help unearth what they claim are fraudulent dealings in the company. Through their lawyer Murgor & Murgor, the three, in a letter sent to Mr Mukuha dated March 3, 2012, are questioning the diversion of Ksh1.5 billion ($18 million) to non-related businesses. Mukuha in his written response says that the amounts and beneficiaries had been table and a board meeting and the issues are well understood by all parties.
A reconciliation meeting was held on March 3, the documents show. On March 5, Mr Mukuha, in a reply said: “The action on those matters and their resolution required more proposals on the structure of the company as well as its management in order to address pertinent issues… The audited accounts presented and discussed in the last board meeting and AGM of Tusker Mattresses provided the information on the investments into these entities,” wrote Mr Mukuha. But Mr Mukuha’s rivals, through their lawyer, in a letter dated March 8, maintain the need for more explanations on these investments. Another issue in contention is the planned purchase of a commercial building in Nairobi at a cost of Ksh550 million ($7 million). Some brothers want the planned purchase stopped because Tuskys’ strategy is to avoid tying down the firm’s cashflow in expensive real estate deals like the ones that sank Uchumi Supermarket in the 2000s.
Things have not always been this rough between the Kamaus, who grew up together in the small town of Rongai near Nakuru. Their father Joram Kamau ran a small shop called Magic selling mattresses in Nakuru in the 1980s. The senior Kamau had cultivated a unique relationship with the founder of Nakuru Mattresses (today known as Nakumatt), who was doing brisk business across the street. They made an arrangement where the latter would supply Joram certain goods that were nearing expiry on generous credit terms, which he would the sell at very low prices. Years later, as his business grew even larger, Joram would leave his first shop to his brother, which he transformed into Naivas.
When the sons joined their father in business, they threw their energies into the expansion of the business to Nairobi through their subsidiary Tusker Mattresses, located near the OTC Bus Terminus in the 1990s. Tusker Mattresses hit on a unique formula of locating the supermarket near bus stations and offering very low prices. It continues to use the same formula, expanding into the residential estates and peri-urban areas ,and defines its vision as being a “Successful Brand on Every Street and Corner”.
In mid 2000, the brothers merged Magic Super Stores with Tusker Mattresses. Magic had two shops, one on Ronald Ngala Street in Nairobi and one on Pandit Nehru Road in Nakuru. Tusker had three shops in Nairobi, one on Mfangano Street, one next to OTC and one on Hakati Road. In the year of the merger, they opened two other shops in Nairobi — Express on Sheikh Karume Road and Pioneer on Moi Avenue. They soon opened the underground Imara Daima supermarket next to the busy Tom Mboya Post Office bus stop, a unit that has proved very popular with commuters.
The five brothers ultimately grew the supermarket into a regional retail giant, after their father died in 2002. But the past three years have been testing ones for the Kamaus. As the 30-year-old business expanded both in Kenya and in Uganda, so did the dispute over the running of the affairs of the company deepen, worsening over the past two weeks and threatening to degenerate into an expensive legal battle that may inform the texture of future family business partnerships in the region.