Why supermarkets in Kenya are collapsing one-by-one like flies

Let’s take a walk down memory lane. Ten years ago, three supermarkets Nakumatt, Uchumi and Tuskys were household names dominating the retail sector.

Nakumatt and Uchumi specifically were formidable that they seemed too-big-too-fail from their expansive reach and penetration in the market within East Africa, also looking at the number of people the two had on their payroll.

In general, this sector is quite fragmented and includes small independent supermarkets but also well-established brands. Names such as Naivas and Ukwala were up there at the second tier below the three dominant tour de-force.

Today, the sector's landscape looks totally different, Nakumatt and Uchumi have been wiped out of the market and Tuskys the remaining one among the trio, is hanging by the thread.

Dark clouds linger over survival of Tuskys, it is compounded with debts leading to main suppliers withdrawing their products, signaling lack of confidence in the retail chains sustainability.

Ukwala was acquired by Botswana's Choppies, which has already announced its exit from Kenya. South Africa's Shoprite a late entrant in the local market has announced its exit after a short stint.

Poor business decisions

What exactly is happening to supermarket chains, may seem to eclipse maturity then stagnate before they completely crash.

Some have argued that these retail chains making poor strategic business decisions, they possess poor management structure, the market is saturated making it very competitive for long-term survival.

There are those that say strong online presence where customers are finding good stores to shop has disrupted the sector. Despite e-shopping increasing presence, it is farfetched to argue that it has disrupted the supermarket sector. Two main issues seem to be the constant Achille’s heels for many of these retail chains.

First, aggressive expansion to increase presence seem to have been their strategic waterloo.

Take Uchumi for example, which had established itself as an upper end supermarket targeting high income consumers then decided to expand its reach and started targeting middle and low-income consumers by opening stores located near bus stations which later were among the first to close down when its scaled down operations.

Any supermarket targeting low income earners is bound to fail because many in this bracket are not shoppers but simply buy daily necessities in small quantities making them more dependent on their neighbourhood kiosks whom they are able to establish a relationship and access credit purchases.

Big malls

There is plenty of research that shows low income earners source of credit is their neighbourhood kiosk therefore any supermarket situated in big malls targeting to convince them to shop in their stores has not done their homework.

For Nakumatt, it went for aggressive expansion throughout the country as a strategy meant to lock out competitors, increasing presence and be the only household name, and it wasn't long before it started struggling. After Nakumatt's exit, Tuskys also chose to expand its operations after feeling that Nakumatt had left a void but today we are witnessing its struggle to say afloat.

The underlying problem in the strategy of aggressive expansion is that companies overstretch their financial muscle when the profit margins are slim, which precipitate a financial crisis.

The second issue top retail chain struggled with is proper governance and professional management. In the case of Uchumi which was government owned, senior managers run down the company through incompetence just like most State-owned companies.

 For example, there was blatant conflict of interest where top management were also leading suppliers to the retail chain and would pay themselves before others. There was also misrepresentation of the company's books by massaging accounts. It is said Uchumi's management lied about its financial position for more than three years until it couldn't hide any further.

For the case of Nakumatt and Tuskys, they chose to keep the company as tightly family-owned with little professionalism through a corporate governance structure within its top management rank when this very competitive market required them to run on a cost-efficient strategy because of the slim profit margins. 

In short, the supermarket sector requires a company to have a solid corporate structure for professional management as well as target the high and middle income consumers for its sustainability.

Tony Watima is an economist