A shopper at a supermarket checks out prices of various goods on sale.
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Dilemma for businesses as retail sales plunge on weak demand in tough economy
Retail sales are dropping as soaring food prices prompt shoppers to rein in spending on non-essential items, leaving manufacturers with idle capacity and jeopardising the government’s hopes of collecting increased consumption taxes.
The demand for some products has declined to levels last seen in January despite the festive season being around the corner, a signal that households’ purchasing power is battered and they have little room to step up spending. The households are struggling to keep up with increased prices but manufacturers are seeing a narrower room to absorb some of the production costs and encourage more consumption without falling into losses.
Higher input costs as a result of higher taxes and a shilling that has lost more than a fifth of its power against the dollar have seen the majority of retailers purchase stocks at higher prices and eventually pass it to consumers.
Kenya Association of Manufacturers (KAM) chief executive Antony Mwangi says new or enhanced taxes introduced in July and the rising costs of raw materials have hurt manufacturers, forcing them to pass the costs to wholesalers and retailers—a move that has triggered a downward spiral for the economy.
“There is nothing much we can do. Everybody will be scrambling as we roll down the road. The fact of the matter is that we had still not recovered from global shocks such as Covid-19 then came in the Finance Act 2023 with another wild card,” said Mr Mwangi.
“The Act has had a huge impact on manufacturing because of the direct taxes on intermediate materials for manufacturing that were levied on raw materials and the erosion of the purchasing power of consumers. All these, when put together, have put the economy on a downward spiral.”
Drop in sales
Central Bank of Kenya (CBK) survey on CEOs of companies in different sectors including manufacturing shows 52.9 percent of them have seen a drop in sales compared with the previous three-month period ended September and they expect this to persist in the new year.
About 65.4 per cent of the surveyed CEOs of firms in the manufacturing sector told CBK they have witnessed reduced demand and sales for their products, forcing them to cut production volumes and therefore leaving them with more idle capacity than anticipated.
Kenya’s upper-middle and high-income households are increasingly dropping premium brands across various products from their shopping baskets as a way of coping with the rising cost of living, a June survey by Ipsos Kenya showed.
Reduced consumption of goods is likely to put pressure on Kenya Revenue Authority’s tax revenue targets, according to Ken Gichinga, the chief economist at Mentoria Economics.
“Over half of the businesses reporting a drop in sales means, we are likely to see collection from consumption taxes come down as it has already played out on items such as fuel. The government needs to take note of the reduced demand and the continued switch to cheaper options,” said Mr Gichinga.
A high dollar-shilling rate, elevated fuel prices, greater electricity costs, and increased value-added tax have been at the centre of what is being witnessed in the economy.
“Demand for some products was reported to be at their lowest level since the beginning of the year. Nevertheless, some firms reported improved sales albeit at higher costs and prices. In the services sector, firms reported that business activity remained low, indicative of erosion of purchasing power,” said the CBK in the survey.
The CBK survey usually targets CEOs of key private sector organisations, including members of KAM, Kenya National Chamber of Commerce and Industry and the Kenya Private Sector Alliance.
The CEOs have painted a grim picture going into 2024, with 55.6 per cent projecting that sales would remain depressed in the first quarter of next year while 21.2 per cent see the sales dipping even further. Just about a quarter (23.2 per cent) see a recovery. Only 18.2 per cent of the surveyed CEOs said their businesses had seen a rise in sales, coming in the period in which 43.3 per cent of firms said they had to increase their selling prices on the back of increased spending on stocking.
This is presenting a headache for manufacturers, many of whom are reporting increased idle production lines, as retailers post reduced sales. Many households are cutting on consumption and even abandoning premium brands to fit their earnings into the many competing needs.
CBK findings are in line with those of Stanbic Bank Kenya Purchasing Managers’ Index (PMI) findings that business conditions in Kenya remained in a steep decline halfway through the final quarter of the year, amid sizeable falls in output, new orders and employment.
Rapid inflation
The Stanbic survey said firms across the private sector noted that rapid inflation had suppressed demand and created cash flow challenges, leading to further cuts in activity, staffing and purchasing.
“Inflationary pressures and cash flow difficulties saw customer spending declining, and the rate of job losses increasing in the private sector because of weaker output and reduced workloads,” said Christopher Legilisho, economist at Standard Bank.
Mr Legilisho added that input prices and purchase price pressures were a result of further increases in fuel prices, electricity costs and taxes, among other factors.
Mr Gichinga says a continued fall in sales may tempt some companies to go the shrinkflation way which refers to reducing a product’s size while maintaining its retail price so that it looks affordable to a consumer.
“Kenya is a highly price-sensitive market and this is even worse with the purchasing power already weakened. Even a marginal price increase may not be tenable,” says Mr Gichinga.
But he says a reliable strategy would be for manufacturers, especially those of fast-moving consumer goods, to understand the new purchasing power and the competitive landscape.
“Companies will have to put their innovation caps on and redo product development and come up with the right products. It may include smaller-sized packages,” says Mr Gichinga.
The CBK survey said the drop in demand and sale of goods saw 36.9 per cent of the surveyed CEOs cut jobs, with only 4.9 per cent increasing their headcount.
In the first quarter of next year, 35.2 per cent expect further job cuts while only 6.6 per cent see room to hire, pointing to a gloomy start to the New Year for millions of job seekers.
The CBK and Stanbic surveys corroborate the recent statement by the Federation of Kenya Employers that Kenya has since the start of the year lost about three per cent or 70,000 of the jobs in the formal private sector due to the rising cost of doing business
The introduction of export promotion and investment levy are some of the levies that have increased the costs of production.
Costs of paper used for manufacturing packaging materials have gone up and so has the cost of importing clinker and steel pellets, according to Mr Mwangi.
“We have given practical solutions on how we can get out of this. We need a philosophy where as a country we are not taxing raw materials and intermediate goods meant for production. Such taxation kills production,” said the KAM chief executive.
