Poor strategy, not sabotage, to blame for Uchumi woes

Uchumi Supermarket is in a tight spot — literally, between a rock and a hard place.

A competitive retail sector, delay in payments to suppliers, apathy on its on-going rights issue and a growing debt portfolio have put the firm in a dilemma, even as it details plans to increase its footprint in East Africa.

Falling profitability and erosion of the firm’s share price have also put Uchumi’s future in doubt, with analysts blaming a “poor” business strategy for the woes. The share price fall has seen the retailer’s capitalisation shrink to Sh2.2 billion currently, from highs of approximately Sh6 billion last year.

Since June 2014, the share price shed 37 per cent of its value to Sh8.20 some time last week. This led chief executive officer Jonathan Ciano to claim institutional and foreign investors were sabotaging the firm’s share price in a bid to take it over. The retailer is conducting a rights issue at a discounted price of Sh9 apiece.

“We believe the share price movement was greatly affected by the delay in the rights issue, loss in competitive advantage and market share as well the company’s strategy on expansion, profitability and risk, which have not been properly communicated to the market,” African Investment Bank (AIB) analyst Teddy Yanga said in an analysis of the retailer last week.

Lose competitive edge

He further said Uchumi has been unable to keep up with modern, sophisticated consumer trends, compared with its competitors. This has seen it lose its competitive edge.

“Weeding out inefficiencies in the company, refurbishment and/or complete overhaul of some of the old branches, as well as shaping its expansion strategy, will easily bring Uchumi back on track, given its strong brand name and the industry’s growth prospects,” he said.

As at the end of Friday last week, Uchumi’s share price gained 8.9 per cent to close the day at Sh9.15, 2 per cent above its rights issue price.

A plunge of the share price below the discounted price had caused alarm to the management.

“I think any trading that is happening on Uchumi is on a willing buyer-willing seller basis, and that is the beauty of markets where people are able to meet and transactions happen where they agree on the price,” Nairobi Securities Exchange (NSE) acting chief executive officer Andrew Wachira told Smart Company last week.

“When you are in an open market, you can’t blame the forces of supply and demand. You can’t challenge these forces when you are a publicly-listed company. Ask yourself where you went wrong,” said the director of investment banking at Standard Investment Bank, Mr Amish Gupta.

The Capital Markets Authority said it could not comment on Uchumi’s allegations of sabotage of its share price, adding that was a non-issue meant to divert attention on the real issues facing the supermarket.

Other analysts have blamed a lack of proper strategy and management focus for the supermarket, even as it does a balancing act between a rights issue, expansion plans, debt repayment and paying its suppliers.

Liabilities more than the assets

“On the one hand, you are doing a rights issue and, on the other hand, you are negotiating with suppliers. What kind of message is that? How can current liabilities be more than current assets in a supermarket?

The margins are low. The government has the biggest stake of 13 per cent, but its interest in the supermarket appears to be at its lowest,” an analyst who did not wish to be quoted said.

By June 2014, the retail chain had Sh2.2 billion in current assets against current liabilities of Sh3.3 billion, meaning that Sh1.1 billion of liabilities can be repaid only by selling long-term assets such as properties. 

Of these, supplies stand the biggest risk — with stock in the supermarket standing at Sh1.3 billion against a claim of Sh1.9 billion.

Loans and overdrafts have also grown from Sh573 million in June 2013 to Sh1.4 billion, indicating the company is having cash-flow problems.

The strain in cash-flow is evidenced by the fact that in the year to June 2014, Uchumi returned a negative cash-flow position from operating activities, deteriorating from Sh366 million in 2013 to negative Sh560 million. This means the retail chain is not making money from its core activity, which is selling merchandise.

Analysts have also advised that the government should exit the supermarket and pave the way for a strategic investor who can provide better direction on the management of the 39-year-old retailer.

Support retailer’s growth plans

The Cabinet Secretary for East African Affairs, Commerce and Tourism, Ms Phyllis Kandie, on Friday sought to assure shareholders not to panic but participate in the rights issue to support the retailer’s growth plans.

Despite calls by analysts that the government should exit the retailer, through a strategic investor, Ms Kandie said the State was in Uchumi for the long haul.

“As shareholders of this great enterprise, we are proud to note that a company that had once closed its doors has turned around successfully,” Ms Kandie noted last week in a notice to investors.

The supermarket is in the market seeking Sh895 million from shareholders to finance its business, which is now bogged down by debt and delayed payment to suppliers.

Government to exercise its rights

The government, with a 13 per cent stake in the retailer, has committed to exercise its rights to the tune of Sh264 million.

The government established Uchumi Supermarket in 1975 to enable the supply of manufactured goods and products in Kenya. The firm’s presence now transcends Kenya, with branches in Tanzania and Uganda.

Heavily indebted and unable to pay its suppliers, the supermarket was put under receivership between July 2006 and March 2010.

This affected its credit rating, forcing suppliers and other creditors to demand tough repayment terms that seriously strained the retailer’s cash-flow.

The supermarket was in September this year forced to borrow Sh405 million from Co-operative Bank to pay money owed to suppliers.

In the year that ended June 2013, Uchumi declared a dividend of Sh0.30 per share, marking a complete turnaround after it had closed shop in June 2006 due to insolvency.