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In Kenya, Retail Is Booming for Everyone Except the Local Giants

At its high point, Nakumatt’s turnover equalled nearly 1% of Kenyan GDP. Daily Maverick


  • Nakumatt, a Walmart-inspired Kenyan supermarket chain, has fallen on tough times due to poor supply chain management, weak cash flow, and a flimsy expansion plan.
  • Kenya’s retail sector is booming due to growing levels of wealth, rapid urbanization, and the opening of modern shopping malls.
  • High debt loads, a local credit crunch, and weak expansion strategies have left retailers like Nakumatt with little ability to compete against international giants.


When it reopened its flagship branch in July 2015 at Nairobi’s Westgate Shopping Mall, Kenya’s largest supermarket chain, Nakumatt, had plenty to celebrate. Two years earlier, the mall had played host to one of the worst terrorist attacks in Kenya’s history, when four young gunmen affiliated with the Somali militant group Al Shabaab, stalked the grounds of the glitzy shopping center and murdered at least 67 people. Much of the siege unfolded in the aisles of Nakumatt, Westgate’s anchor tenant and a family-owned retailer selling food, clothes, appliances, and electronics that had grown into one of the country’s most iconic brands.


At the time, the Walmart-inspired chain, which was established in the 1980s as a mattress retailer, was in the midst of a rapid expansion that saw it grow from 36 shops in 2011 to more than 60 at its peak in 2016, with locations across Kenya, Tanzania, Uganda, and Rwanda. The relaunch of its Westgate operation, which coincided with the official reopening of the mall itself, was thus not only a testament to Kenyans’ resilience in the face of terror. The new 80,000-foot store also symbolized the success of Nakumatt’s owner Atul Shah, a Kenyan of Indian descent, and a business empire built on the back of a rising Kenyan middle class.  


Two and a half years later, however, the retail giant’s fortunes are strikingly different. Since early 2017, when a long-simmering internal financial crisis reached boiling point, Nakumatt has shuttered more than half its branches, including its Westgate megastore. Today, inside the Westgate Shopping Mall, its checkout aisles gather dust behind a panel of glass. A majority of the 27 Nakumatt shops remaining open are vastly understocked, and the company, which owes more than $300m to its suppliers and other creditors, filed for bankruptcy in November 2017.


Although Nakumatt has embarked on a plan for revival, and is likely to survive in some diminished form, its struggles, combined with the recent arrival of new international competitors, have shaken the retail sector in one of Africa’s most important emerging markets. Since 2015, France’s Carrefour, South Africa’s Game, and Botswana’s Choppies have all opened shops in Kenya, drawn to the country’s growing level of wealth, rapidly urbanizing population, and recent proliferation of modern shopping malls, including several dwarfing Westgate in size. Carrefour has already occupied two sites vacated by Nakumatt – signs that international retailers, buoyed by deeper pockets and more sophisticated supply chain management, may represent growing threats to the country’s locally dominated retail establishment.


Can Nakumatt and other homegrown retailers still compete? Most analysts say yes, but only if they adjust their management practices to adapt to a new, more professionalized retail era.


An elephant struggles


Even before the surge of interest from foreigners, Kenya’s retail market was one of the most advanced in Africa. On a continent where the majority of shoppers frequent informal open-air markets or roadside stalls, Kenyans, particularly those in urban areas, have long been accustomed to supermarkets. As of 2016, according to Oxford Business Group, 30-40% of Kenyan purchases were made at formal retailers – a rate second in Africa to South Africa’s 60%, and roughly double that of Africa’s largest economy, Nigeria. This is largely due to the presence of several family-owned chains, including Nakumatt, which rose on the coat-tails of steady GDP growth, rural-to-urban migration exceeding 4% per year, and national consumer spending that increased by two-thirds between 2011 and 2016. In its heyday, Nakumatt’s shops, identified by trademark elephant statues at its entryways, were packed with a wide cross-section of Kenyans, from the Mercedes Benz-driving elite to the slum-dwelling urban poor. At its frequently backed-up checkout counters, one might find a professionally dressed woman with a bulging shopping cart next to a tired security guard with milk and bread – possibly his only meal of the day.


Nakumatt’s popularity, however, was not enough to shield it from its fall. Records released as part of its bankruptcy proceedings revealed a history of chronically outstanding supplier debts; a state of affairs experts link to an excess reliance on short-term loans, outdated inventory systems, and suppliers’ willingness to “be on the shelf at any cost”, even if it meant chronically delayed payments. The firm appears to have survived for years in a precarious financial state, but in 2017 finally hit a breaking point, with suppliers refusing to restock its shelves and mall owners threatening eviction due to unpaid rents. The company’s insolvency, its CEO has argued, is in part the result of a local credit crunch that hit the wider Kenyan economy after the country’s Central Bank imposed an interest rate cap in late 2016. Court documents also suggest the crisis may have been triggered by the abrupt exit of a key investor, Harun Mwau, a former member of parliament who was designated as a foreign narcotics kingpin by the United States in 2011. Above all, however, Nakumatt’s fall appears to be linked to problems of management.  


“Nakumatt is a case of poor supply chain management, poor cash flow management, and a non-thought through expansion strategy,” said Johnson Denge, senior manager of regional markets at Cytonn, a Nairobi-based investment and advisory firm. “They tried to expand too rapidly without properly looking at the fundamentals.”


 

Nakumatt’s iconic elephant statue stands in front of a shuttered store. The company has closed half of its branches since early 2017. malindikenya.net


Shopping mall development


Nakumatt is not the only Kenyan supermarket that has struggled. Data from Kenya’s Ministry of Industry and Trade suggests all of the country’s major chains have outstanding supplier debts; Uchumi, Kenya’s fourth-largest supermarket, has also faced a cash flow crisis similar to Nakumatt’s. Ironically, these woes come at a time when the retail sector as a whole has been particularly vibrant. As noted, Kenya’s consumer spending has grown rapidly since the start of the decade. According to Cytonn, formal retail space in Nairobi grew by 41% between 2015 and 2017, and developers, averaging yields of 9.6%, are making money from commercial property investments.


The bulk of the retail additions are due to a handful of ultra-modern shopping malls, including the gargantuan Two Rivers, a 1.7m sq ft complex on the capital’s northern outskirts that features a children’s water park, dozens of restaurants, and even a Persian rug dealer. Its main draw, though, is one of Nairobi’s four branches of Carrefour, the world’s second-largest supermarket chain after Walmart. On a recent Sunday afternoon, its aisles teemed with middle- and upper-class shoppers from across the city. “Here, they have everything under one roof,” one customer told me, noting a Carrefour trip has become a regular weekend family outing. When I asked if the store is an improvement over Nakumatt, he gives me a look that suggests I’m foolish to ask the obvious.


Yet the arrival of global retail giants may not be the Nakumatt deathblow it might appear. Although Carrefour and other international chains do have certain advantages, including better financial muscle, a more diverse array of products, and a demonstrated ability to pay their suppliers on time, they still represent only a fraction of the Kenyan market, and are largely confined for now to high-end shopping centers. According to Denge, locally owned retailers account for more than 85% of supermarket sales, and still command a loyal following, particularly among consumers below the very top of the income pyramid. Wambui Mbarire, CEO of Kenya’s Retail Trade Association, said Nakumatt’s struggles, coupled with the entry of global competition, could turn out to be a badly needed wake-up call – one that forces retailers to streamline their financial management structures and enter into more formalized supplier agreements, which should ultimately help professionalize the retail sector.


Alfred Nganga, a Nakumatt spokesperson, agrees, noting that Carrefour cuts costs by avoiding the use of warehouses, a practice that local retailers may seek to emulate moving forward. “Carrefour is bringing in new practices that [are] helping everyone in the market,” he said.


For now, Nakumatt appears to be slowly crawling out of the hole it dug itself into. Since late 2017, according to Nganga, it has reached new agreements with more than 100 suppliers that have enabled it to significantly restock eight key branches. On January 22, Kenya’s high court appointed an administrator to oversee the company’s insolvency, which protects its branches from eviction and is meant to instill confidence in its creditors as negotiations continue over its outstanding debts. One of the eight revived branches, a small basement-level store at the Ukay shopping center, just down the road from Westgate, appeared well stocked on a recent visit – its shelves filled with middle-class staples such as maize flour, rice, and cooking oil, as well as higher-end items like wines, perfumes, and Pringles. Yet after months during which its shelves contained virtually nothing, it’s notably devoid of one essential element: shoppers.


“We’re still the best,” a bored-looking clerk assures me when I remark on the improvements since my last visit. “We’re on our knees, about to stand back up. Though the customers are still not coming.”


Jonathan W Rosen is a journalist reporting from East Africa and Africa’s Great Lakes region.