A mix of economic realities and internal mismanagement are forcing the closure of Kenya’s largest retailers. Nakumatt Holdings, which at its peak had over 60 outlets across East Africa and annual revenues of $700 million, is the latest to collapse after creditors voted in favour of liquidating the retail chain on Tuesday.
The company’s management first announced they were facing cash flow problems in October 2016, which culminated in a financial and operational meltdown. From 60 in February 2017, its branches dropped to six in September 2018, which were later sold to Naivas for $4.2 million.
Reports show that Nakumatt owed its creditors including banks, suppliers and landlords, up to $380 million. Amid the financial problems, it entered voluntary supervision in early 2018 to seek protection from its creditors under Kenya’s newly enacted corporate laws. The legislation provides a pathway for distressed firms to avoid complete collapse.
The decision to dissolve the giant retailer came after efforts to revive the supermarket chain failed. “An attempted turnaround of the business would be very costly and the company is likely to be lossmaking for the better part of the turnaround window,” explained Peter Kahi, the court-appointed administrator of the troubled retail chain, who also presented the liquidation plan in a meeting with the creditors.
The situation implies that such a turnaround would need to be financed by additional debt to sustain operations before achieving breakeven, Kahi said, adding that the company also has no assets to collateralize such additional funding.
A court will decide on the liquidator on January 17, marking the formal end of the Nakumatt brands, Business Daily reported. But Nakumatt is not the only company facing such struggles with other established retailers in similar crisis or on the brink of collapse.
Ventures Africa in September reported the exit of Botswana-based supermarket chain Choppies from Kenya after failing to gain a substantial share in the retail market coupled with other internal problems. After years of recording losses, Uchumi, one of Kenya’s oldest retailers founded in 1975 and listed on the Nairobi Stock Exchange (NSE), left Uganda and Tanzania in 2015. It reportedly owes millions of dollars to suppliers.
From being a widely reported success story of Kenyan-retail-gone-regional to imminent liquidation, the eventual shutdown of Nakumatt (which grew from a mattress shop to a retail chain with branches across Kenya, Uganda, Tanzania, and Rwanda) and the struggles of local retailers in Nairobi, are attributable to a range of factors among which is competition.
The battle for the limited group of middle-class shoppers between local and foreign supermarkets in Kenya is intense. Both local and foreign retail chains have been opening new branches in the capital Nairobi and other parts of Kenya.
Foreign supermarkets have in recent years penetrated the East African nation with Massmart, through its Game Stores, Shoprite from South Africa and French retailer Carrefour all cementing their respective positions. There is also the presence of online retailers – Kilimall, Masoko, Alladin and formerly Jumia – which are looking to take advantage of the boom in the uptake of mobile devices and internet connectivity across the continent.
The increasingly competitive retail environment leaves local players unable to match deep-pocketed multinationals with sophisticated supply chains and exclusive online shops. Kenya has about 20 indigenous retail outlets but only a few are major such as Naivas, Tuskys, and Nakumatt, which is set to be dissolved in the coming weeks.
But the presence of global retailers who have a far more superior financial muscle, wider value chains with more diverse product offerings, and a proven track record of timely payments to suppliers does not in itself spell doom for Kenyan supermarkets.
This is because they still represent a fragment of the Kenyan market, and are mostly located in high-end malls. Locally-owned retailers account for over 85 percent of supermarket sales and they still “command a loyal following, particularly among consumers below the very top of the income pyramid,” said Cytonn, an investment advisory firm in Nairobi.
Poor governance and gross mismanagement are just some of the other factors behind the drastic fall of local retailers in Kenya. A recent review of Nakumatt’s financial statements by its independent auditor Parker Randall Eastern Africa shows that the company had lent its directors over $10 million in interest-free soft loans by the time it was placed under administration on January 22, 2018.
Amounts owed by insiders had dropped to $9.48 million as of February 2018, the period for which the latest financial records are available, according to the report. The loans are among several related party transactions such as amounts claimed from subsidiaries in other regional nations that have shut down operations.
Totalling $28 million, most of the amounts receivable are unlikely to be recovered and $15 million or 53 percent of the receivables have been written off by the administrator. In comparison to other firms, the financial report depicts loose corporate governance at Nakumatt.
Furthermore, the company’s founder Atul Shah faces investigations over the loss of over $100 million worth of stock. According to Kahi, a forensic investigator will probe why he wrote off stock worth $180 million in May 2018, before the company ground to a halt.
Financial problems, empty shelves, and store closures. With the seemingly unavoidable collapse of the once undisputed leaders of the Kenyan retail market, their foreign counterparts will most certainly capitalize on the immediate opportunity and ultimately extend their share of the high-end as well as the middle-income market.
