Kenya’s leading supermarket, Nakumatt, is staring at possible shutdown after a delay in concluding a long-awaited $75 million cash injection from a strategic investor continues to sour its relations with suppliers. A piling debt has aggravated the retailer’s financial position as key suppliers continue to withhold stock and workers have gone for months without pay.
Nakumatt declined to reveal to Quartz how much it owes suppliers saying it did not want to discuss the issue publicly “due to existing contractual limitations” but it is believed to run in the tens of millions of dollars.
Shoppers in Nairobi and Kampala are getting used to the empty shelves and the absence of certain popular brands in various outlets as suppliers withdraw services until their bills are settled. The retailer’s management has acknowledged the retailer is facing challenges paying up but was doing its best to normalize operations and address the stock-outs.
“The stock out situation is regrettable and sincerely keeps us awake,” CEO Atul Shah told Quartz by email. “It is not a deliberate outcome and it’s not something that we would have wished to see.”
The inability to generate cash quickly enough to pay both workers and creditors has put Nakumatt in a precarious spot and the possibility of going out of business is slowly coming closer to reality. But chief marketing officer, Andrew Dixon, a veteran of UK retail giant Tesco who joined in January to lead turnaround efforts hopes the deal will be finalized in July. The financing deal in which it would cede 25% of its stake to an unnamed foreign investor has been delayed since January.
Nakumatt’s troubles could also seem as an early indicator of challenges ahead for Kenya’s expanding consumer base who have favored its stores particularly in the capital Nairobi. International investors, who have been betting on the expansion of Africa’s middle class, would have had an eye on the chain which has more than 60 stores in Kenya, Uganda, Tanzania and Rwanda.
With countries such as South Africa boasting of a more mature and sophisticated retail sector, investors have been looking to the markets in East and West Africa for expansion. Like other African countries, Kenya’s economy is dominated by the informal sector. But, as the economy expands and the middle class rises with busy city dwellers having less time to haggle in market places, the transparency and efficiency of shopping in retail outlets becomes more attractive. East Africa, where Nakumatt and other chains operate, was the engine of growth for the entire continent last year, according to the African Development Bank. But much of the growth in the sub-region was driven by Ethiopia, where the chains do not operate.
Analysts at Nairobi-based Cytonn Investments attribute the poor performance of retailers in Kenya to messy corporate governance practices and financial constraints related to rapid expansion and weak sales volumes.
Although, the worst affected are Nakumatt and Uchumi, others such as Tuskys (the second largest in East Africa) and Naivas are not only facing herculean moments in servicing debt but also feeling the heat from rising competition by new players.
Local suppliers produced a stinging report that showed retailers owed them around $400 million of debt that had breached the usual 60-day payment agreement.The retailers (numbering over 100 with over 600 outlets in Kenya) were unwilling to share information on the scale of debt instead. Suppliers have complained of unfair trade practices practiced by retailers “due to an imbalance in the bargaining power between the retailers and the suppliers”.
“The sum total of these practices is late payment to the suppliers, which is estimated at 40 billion Kenya shillings,” the report states.
From 22 suppliers sampled, Nakumatt accounted for the largest amount of debt. Before its recent struggles surfaced, the retailer’s apparent success and the proliferation of shopping malls were signs of an unstoppable fast-growing consumer base. Nakumatt was often the ideal anchor tenant for many of these new malls.
But as it turns out, many of the malls have remained empty and the supermarket has had to vacate some spaces as a section of its landlords and suppliers in Uganda drag it to court over debt and legal costs.
The retailer has also slammed brakes on expansion, closed down underperforming branches in Kenya and Uganda and frozen hiring of workers. Uchumi, another Kenyan retailer exited Uganda and Tanzania and closed down several branches in Kenya due to debt and losses.
“Given the financial challenges that have plagued Nakumatt recently, we believe corporate governance changes are eminent to help get the retailer back to stable ground,” analysts at Cytonn suggest.
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