4 March 2018

Kenya: Foreign Supermarkets Bring Stiff Competition to Retailers

Photo: The Namibian
Shoprite.

The spirited entry into Kenya by multinational chain stores is set to stiffen competition, pitting listed new players against the local family-owned retailers whose footprints hardly go beyond East Africa.

Last week, Shoprite -- Africa's largest retailer by sales -- said it would open its first two stores in Nairobi's Garden City and West Gate shopping malls in August, while Carrefour opened its fifth store at Sarit Centre.

"Kenya's retail sector has been very attractive lately due to favourable demographics and rising income level of the middle class. With the problems facing Nakumatt and Uchumi, there are gaps in the market which need to be filled in," said Kunal Ajmera, the chief operating officer of professional services firm Grant Thornton.

"Companies like Carrefour and Shoprite have substantial financial backing and proven track records. They can also borrow at cheaper rates from their home countries whereas the cost of borrowing in Kenya is very high."

Botswana retailer Choppies, which entered the Kenyan market in 2016, now has 10 stores and plans to open five more across the country, while another South African supermarket Game will open its second outlet soon at the multi-billion Karen Waterfront complex.

Shoprite group has 2,811 outlets in 15 African countries, employing 148,000 people. Last week, its half-year results for 2017 showed a turnover growth of 6.3 per cent to (R75.8 billion), about Sh644.8 billion. On the other hand, Carrefour's network of 12,300 stores in over 30 countries posted annual sales of 88.24 billion euros (about Sh11 trillion) in 2017.

Choppies, which employs 15,234 people in seven African countries, had annual sales of 8.8 billion pula (about Sh93 billion) in June 2017.

As at the end of 2017, Kenyan retail operators appeared to be holding their ground, with 25 key players largely comprising indigenous investors enjoying 98.1 per cent market share. But the question is, for how long will this be the case?

"International operators with a 1.79 per cent market share are playing a good role complementing the trail blazing efforts by the indigenous investors," said Retail Trade Association of Kenya chief executive officer Wambui Mbarire.

Her comments contained in a status report on last year's retail scene turbulence that saw market leader Nakumatt placed under receivership appeared to downplay the expected stiff competition from foreign entrants.

Three of Kenya's largest supermarkets have recently closed several branches, highlighting the current economic pressures.

One time leader Nakumatt, now in administration, and cash-strapped Uchumi, have shut several of their branches in Nairobi while Tusky's, with 63 stores, recently shut its Sheikh Karume branch in Nairobi. Naivas has 45 outlets.

The emergence of small "village" players in major towns has also seen some big retailers close some branches and reduce staff.

Nakumatt's plan to slice off 800 employees as a rescue strategy proposed by its court-appointed administrator, Mr Peter Kahi of PKF, has met stiff resistance from the workers union.

The overseas retail giants say they want to take advantage of the turmoil in Kenya's big retail chains, which have been struggling with supplier, rent and salary debts.

Shoprite's chief executive Pieter Engelbrecht was quoted saying their expansion into Kenya was in response to a glaring vacuum occasioned by weakened competitors.

While local retail chains bank on improved suppliers, the scenario is different for the suppliers and landlords who are hoping that the moneyed new entrants will alleviate their financial crunch.

Association of Kenya Suppliers chairman Kimani Rugendo told a members' forum in 2017 that many small and medium enterprises had closed shop while others had their properties seized for non-payment on goods and rent distress.

They blamed this on large retailers using "big boy" tactics to arm-twist them into compliance with still making them supply goods on credit.

"You owe us Sh40 billion that could have been used to expand our businesses, employ more Kenyans and make our goods more competitive locally and abroad.

"But the delay has forced us to scale down operations and seek overdrafts, which we pass on to consumers," said Mr Rugendo.

Tuskys chief executive Dan Githua said Kenyan retailers can fend off competition in the formal retail market against multinationals.

"2017 was a difficult year but we can confirm that we reached a decision to foster closer relations with suppliers and related stakeholders in our quest to advance a homegrown retail sector," Mr Githua said.

But there is still hope for the local big players, going by the resurgence of smaller supermarkets.

The country's formal retail sector has a penetration level of between 20 per cent and 30 per cent, while the sector is estimated at over $7 billion (about Sh709 billion).

Mr Bell argues in the Broll Shopper Segmentation Vol 1: 2016, report, that Kenyan consumers regularly frequent these retail outlets, proof that against the picture of gloom facing the large retailers a physical store is still relevant to many shoppers.

"Across East Africa, there is an emerging trend of smaller strip malls measuring approximately 10,000 sq m,, where more favourable cost structures and convenience may better suit the much needed up-and-coming retailers," said Gordon Bell, director and head of East Africa operations for Broll Property Group recently.

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