Despite robust economic growth, a rising middle class and increased purchasing power, East Africa’s retailers are still struggling, with two of its biggest players battling huge debts.
The woes that have befallen Nakumatt Holdings and Uchumi Supermarkets have called to question the bullish reports by analysts touting East Africa as the next growth frontier for the retail business, driven by increasing foot traffic and technology.
This optimism started being eroded in April this year, when the Nielsen Africa Prospects Report on macro, business, consumer and retail indicators showed that reduced spending, rising cost of living and high interest rate regimes are making it difficult for retailers to operate in the region.
“With predictions for growth lower than those experienced in the previous 10 to 20 years, and the volatility experienced in 2016 set to continue, businesses will require resilience, relentless adjustments and adaptation to meet consumers’ altered needs,” said the Nielsen report.
Questions abound as to why the retailers are sagging under debt, yet foot traffic has been growing. The Kenyan retail sector recorded $3.16 billion in revenues last year.
According to the Nielsen report, middle class spending has recorded a marginal decline, as consumers in Uganda, Tanzania and Kenya have become increasingly risk-averse.
The report says consumers are not basing their decisions on affordability alone, but also on familiarity, trust and brand loyalty.
“We are seeing other factors now shaping the middle class spending patterns, key among them being the cost of living. This means that they are purchasing on a need basis. This is expected to put pressure on the retailers’ revenues,” said Francis Juma, a development economist.
“Floating Middle Class”
A recent African Development Bank (AfDB) report shows that there exists a “floating middle class” in the region, who are being targeted by the retailers.
But this group which, according to AfDB is 44.9 per cent, is not a reliable market, as they sit on the edge.
Without access to credit, the real middle class would just be 16.8 per cent of the population.
“Some of these (floating) middle class people visit the malls and retail chains, causing a rise in the foot traffic but, in essence, their presence isn’t felt at the tills, as they do not buy, and if they do, it is strictly on a need-to basis,” said Mr Juma, adding that the high foot traffic comprises mainly window shoppers.
Garden City, one of the largest malls situated about 8km north of the central business district, announced that it had recorded 1.18 million visitors in the first quarter of 2017, a 15.69 per cent rise from 1.02 million visitors over a similar period last year.
“Since opening, there has been a healthy growth rate, achieving a steady growth in both foot traffic and car traffic at an average of 10 per cent month-on-month growth. This is a strong indicator of a customer base beginning to form,” the management said in a statement.
It is however not clear how this traffic has impacted retailers in the mall.
A 2016 survey by Proctor & Gamble on Kenya’s retail sector indicated a 13 per cent expansion last year, compared with the previous year. According to the survey, the expenditure in the sector amounted to $17.6 billion across different channels.
Out of this, 18 per cent came from retail chains, which resulted in a 30 per cent market share for supermarkets, measured by expenditure.
But, with these glossy numbers in terms of foot traffic, consumerism, middle class spending and retail sector earnings, why are the big retailers in trouble?
With good revenue streams of as high as $600 million annually for one retailer, is the problem in their inventories, financing models or pilferage?
The losses posted by some have been blamed on pilferage and shoplifting, with Cytonn Investments Kenya Retail Sector Analysis 2016 saying retailers are losing up to $50 million every year.
“CEOs of major retail chains believe that pilferage is being taken lightly by the authorities, as the culprits are always set free, yet the magnitude of the losses, when summed up, is significant,” the report says.
According to the Cytonn report, Kenyan consumers shop mainly on a weekly basis, with the most preferred products being food and lifestyle products.
When it comes to the financing models, the big retailers have either gone for build-and-operate models or lease and operate. However, Nakumatt and Uchumi, which adopted contrasting models, have ended up in the same mire.
According to Moses Ngape, a retail investment analyst at ALH Ventures, the two chains have seen high capital expenditure costs, with working capital for stocking new stores coming from debt.
“We have seen some use a mix of debt and cash inflows to stock up, and that’s where the problem started,” Mr Ngape said.
Robert Juma of Catalyst Capital attributes the troubles of the two big retailers to average sales, rising cost of operations, staffing, rent and warehousing costs.
“With that tight debt management, the net effect is little cash available and the first casualty is always the supplier. Most of the struggling retailers have a weak balance sheet and a strong cost base, despite their cost line only being staff and rent,” Mr Juma said.
The retail business does not have high margins. Nakumatt, in its heyday, averaged 18 per cent on gross profits and net margins of 8 per cent. Uchumi is said to have averaged 15 per cent on gross profits, with a net margin of 8 per cent.
“This means that these businesses expand using the cash generated from daily sales but, when the debt management is impacted, they end up in financial crisis. In an ideal situation, most retailers should be able to pay suppliers on time if they get the balance right — by using the cash they have in the 90 days and replacing it with new fresh cash coming in with a little help from bank overdrafts,” Mr Juma said.
Source: Asoko Insight