Barely a month following his appointment as Uchumi Supermarkets’ chief executive officer, Julius Kipng’etich sent shockwaves in East Africa’s retail industry by shutting down the firm’s Uganda subsidiaries.
The former Equity Bank chief operating officer announced on October 14, 2015 the closure of Uchumi Supermarkets Uganda subsidiary, stating that it had not made profit over the last five years. The subsidiary was in fact, draining the main business in Kenya and was not projected to turnaround any time soon given the challenges the business is currently experiencing.
While it is widely expected the Kipng’etich is the right man for the Nairobi Securities Exchange (NSE)-listed firm, he did what very few people thought he would by shutting down all regional branches in Uganda and Tanzania. The retailer had been operating six outlets in Uganda and five in Tanzania – to concentrate on its Kenya operation where it is already experiencing stiff competition from other retailers such as Nakumatt, Tuskys, Naivas and Ukwala.
In its turnaround journey, the retailer began by closing two non-performing branches in Kenya – in Maua and Syokimau in the third quarter of this year – before cracking the whip on regional subsidiaries. The closure of the non-performing outlets is the outcome of a review and refurbishment undertaken by Mr Kipng’etich, who is spearheading a re-engineering of the retailer that once represented Kenya’s ‘Build Kenya, Buy Kenya’ mantra.
“Uchumi is set to benefit, as the closure of non-performing branches will free up misallocated working capital, which they need to pay suppliers, allowing them to shift other funds to growth,” said Cytonn Investment analysts.
Uchumi’s Uganda operations slid into losses in 2012 and it has been hard to turnaround since then, while the Tanzania operation has never broken even since launching in the market.
Uchumi management indicated that the mother company has been providing approximately KSh200 million each month to the subsidiaries to support them to meet their obligations to suppliers, landlords and employees.
“Unfortunately, efforts to turn these businesses around have proved futile and the Board considers that it is no longer tenable to continue the support. The financial drain arising from supporting the two subsidiaries which together comprise less than five per cent of the revenues of the group is placing pressure on the liquidity of Uchumi,” Kipng’etich said in a statement announcing the closure of the subsidiaries.
The move to close the subsidiaries will go a long way in supporting the stability of the Kenyan operation that continues to face the heat from competition long after recovering from receivership.
Laden with debt and unable to pay suppliers, Uchumi Supermarkets was put under statutory management in July 2006. It was revived and headed by Dr. Jonathan Ciano from March 2010. Dr. Ciano was lauded for turning around the retailer and steering it through thick and thin since its revival but was fired in July this year for allegedly mismanaging the firm and mishandling suppliers.
A tough competitive retail environment, delays in paying suppliers and debt characterized Dr. Ciano’s tenure even as the retail chain struggled to regain the market share it had lost to local rivals in the years it was in receivership. Dr. Ciano was also accused of hurriedly taking the retailer on an expansion spree in Uganda and Tanzania, a move that worsened the supermarket’s financial stability even as it battled to remain afloat. This is despite the retailer having declared a dividend of KSh0.30 per share in the financial year that lapsed in June 2013. This had marked its full recovery from receivership under Dr. Ciano’s stewardship.
The ‘thoughtless’ expansion strategies is what was partly to blame for the poor credit standing of the retailer, failure to pay suppliers and turning to costly bank debts to keep it afloat while its competitors were flourishing, with some of them continuing to open branches in strategic locations in Nairobi and across the country.
Global competitors are also opening branches in Kenya in what may present another biggest test yet to the retailer should the international brands expand more aggressively locally.
In May this year, South Africa’s Massmart entered the Kenyan market through its subsidiary, Game at the Garden City shopping mall on Thika Road in Nairobi. The shopping mall also hosts Nakumatt, which is the largest supermarket in East Africa.
French supermarket, Carrefour also plans to open a store at the upcoming Two Rivers mall in Runda. The Two Rivers mall is scheduled for completion before the end of 2016. Choppies, a Botswana retail chain is also planning a Kenyan entry with the proposed take-over of 10 Ukwala Supermarket outlets, however the deal is still in negotiations.
“Though Kenya has the most developed retail market in the region, it is also the most saturated with international retailers setting up shop (Carrefour and Game Stores) and local retailers expanding. Uchumi will likely need to come up with a much better value proposition as well as increase aggressiveness in order to claw back market share in the highly competitive Kenyan retail space,” analysts at Nairobi-based Standard Investment Bank (SIB) said.
Mr Kipng’etich noted that the supermarket will consider re-entering Uganda and Tanzania at an appropriate date in the future after the Kenya operation has gained stability.
The AT Kearney’s 2015 African Retail Development Index report ranks Tanzania’s retail market as the most ideal for investment right now owing to low levels of saturation, a stable economic and political environment as well as a bigger population relative to Kenya or Uganda.
“On the regional front, we think future expansion should be based on high foot traffic locations as well as better and more aggressive value offerings. This is especially because the retailer will be playing catch-up with competitors such as Nakumatt who are already present in these markets and also dealing with reputation damage. Overall, in our view, Uchumi’s expansion was not optimal as the retailer was struggling with low foot traffic due to poor locations as well as small basket sizes,” SIB analysts further said.
Analysts added that Uchumi would need to undertake a complete overhaul of the old outlets to improve the ambience and layout that would be attractive enough to customers, address corporate governance challenges that led to the sacking of Dr. Ciano and identifying themselves with the specific market segment they are serving.
“Lack of unique differentiation of their brand positioning, low quality products, poor customer care, careless retention strategies and lack of effective and efficient internal control framework for financial mechanisms and procurement are the root causes of the downfall of Uchumi,” said a keen observer.
However, “Factoring in the closure of the branches in our analysis, we recommend an “accumulate” on the Uchumi stock with a target price of KSh11.25, representing a potential upside of 12.5 per cent from the current price of KSh10,” said Cytonn Investment analysts.
Written by Joshua Masinde