Double blow for suppliers as Kenya's retail chains sink

NAIROBI, KENYA: When suppliers put a foot down and turned Nakumatt and Uchumi supermarkets’ shelves empty, they were rightfully agitating for a monumental Sh40 billion debt.

But as the two retailers struggle and fizzle out, suppliers may be at the receiving end of the collapse, with irredeemable stock of debt and collapse of the sole avenue to sell their products.

The fate of Nakumatt’s debt remains unknown even as news this week indicated Tuskys will take over the supply chain to fill the struggling retailers’ shelves using its goodwill. Sources privy to the deal told Weekend Business that the two retailers favour a merger, creating a behemoth of a retail chain. Combined, the supermarkets currently have more than 110 branches countrywide.

Executives from the giant retailers declined to divulge details of the deal saying that could jeorpardise the inter-party negotiations. Whatever the deal, however, it will be subject to regulatory approval.

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Nakumatt suppliers might thus have a longer wait for their dues. From the Uchumi case where manufacturers had pulled out their goods for non-payment, Weekend Business can draw parallels where old Sh3.6 billion debts were frozen and new arrangements entered into for paying suppliers on sales, from an escrow account.

Then again, like Uchumi, suppliers are in court attempting to wind up Nakumatt. Up to 50 companies have joined a High Court petition seeking to close the retail chain over late payment.

Given the precedence where Uchumi stopped a similar suit, it is unlikely that the retailer will be closed or will be able to pay the debt since it has limited tangible assets.

It is estimated that Nakumatt currently owes suppliers and creditors more than Sh35 billion and it would be a steep call for Tusky’s to absorb the debt, or be able to pay it off the sale of new stocks without hurting its own goodwill.

“Any transaction of this nature and magnitude is complex and involves consideration of a broad range of issues and interests of key stakeholders including employees, suppliers, landlords and lenders which are being carefully considered,” a joint press release by Nakumatt and Tuskys read.

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What started off as a standoff that dragged in stakeholders from the retail sector, the Government, suppliers and manufacturers actually turned the tide on suppliers.

DEBT NARRATIVE

Retail Traders Association of Kenya, which has a membership of 100 retailers with over 600 outlets throughout the country, first disputed the Sh40 billion debt narrative.

“The retailers, commenting on the magnitude of the amount given by the suppliers noted that given the current turnover and assuming a 30 days payment period, the amount that retailers should owe the suppliers at any one time is between Sh30 billion and Sh35 billion. At this level, therefore, the amount of concern in the figure given by the suppliers is Sh5 billion,” the retail sector report read.

 In fact, from the industry talks it emerged retailers managed to ward off claims of mistreatment and stated that local suppliers were raising complaints yet they were not living up to standards. For instance, retailers said they refuse to take some goods because they are not bound to receive part or any goods that do not meet their specifications clearly outlined on the Local Purchase Orders.

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They said they do not force suppliers to offer unreasonable discounts but pay less than what the suppliers anticipate since they are guided by market research and comparable realistic price advises for specific products. “A loaf of bread priced at a high cost will rarely outsell comparable products,” the report said.

Suppliers were asked to up their game and accept to play by international standards if they are to remain relevant in the fast-changing market.

“What we are proposing as an industry is international best practices and from the talks we want to adopt the British one. Suppliers have to up their game if they are to compete in the market,” said Naivas Chief Operating Officer Willy Kimani.

The retailers cited a case of a milk supplier who invested in a system that automated invoicing, strongly recommending that the other suppliers invest in automation of invoicing to ease processing of payment.

“For the milk supplier that was quoted as a case in point, the investment has paid dividend to the supplier through assuring them of guaranteed payment at the time agreed in the terms of supply,” the report read. Suppliers were also urged to be ready to absorb additional costs including carrying the burden of promotional activities and not just expect their goods to fly off the shelf.

“It may mean a minimal charge on their margins but it comes with assured business,” said Mr Kimani. The retailers said their business carries many other costs including insurance, shelf space, stock management and electricity to facilitate the market placement of a product.

Nowhere to turn And while Nakumatt shrinks down from more than 60 branches, its space is being taken up by the big boys including international retailers like Carrefour who have not been too enthusiastic with local suppliers. Botswana’s Choppies said it was too early to comment if they are interested in expanding to occupy Nakumatt’s vacuum. French retail giant Carrefour has, however, shown interest in replacing Nakumatt at TRM mall which could indicate interest in filling the void left by the family-owned businesses.

However, Carrefour is not the best news for suppliers as its terms include charges - which are part of its standard contract in the US and Europe - known as pay-to-stay and listing fees that are used to gauge a supplier’s seriousness.

ACT AS SECURITY

The money also acts as security to the supermarket in case a supplier’s product fails to sell.

“Such contracts will become common and will have to shake the market. We should not demonise Carrefour and should instead think about adopting such practices,” said Mr Kimani.

The Kenya Association of Suppliers has been battling with the requirement that all suppliers pay a non-refundable Sh1.4 million fee and commit to paying monthly rebates to do business with Carrefour.

Suppliers are also finding their spaces ever narrowing especially since international retailers carriy very little of the local products, thus if they expand, they may have to exit high-margin business for smaller retailers and shops.

 “If you look at Game and Carrefour, most products in their shelves are not sourced locally, maybe due to standards, and if any they are the basic stuff,” said economic analyst Eric Munywoki of Sterling Capital.

He, however, said suppliers still have space to play in since the market has not reached a saturation point.

“Despite the recent development, the biggest share of the market is still controlled by local supermarkets,” he said.

Mr Kimani concurred, saying that Kenya’s formal retail was still at 30 per cent of the whole market with boundless potential.

“We can triple market penetration and there will still be space left, there is still room enough for local suppliers. South Africa has 64 per cent penetration,” he said.

But what the market has seen from Carrefour, which seeks exclusivity, peripheral business in malls that offered alternatives for suppliers are also shrinking.

In March last year, Carrefour sought the Competition Authority of Kenya’s (CAK) nod to be the sole retail operator at Two Rivers Mall, an application that is still under review.

This year, the retailer is seeking even greater protection from competition including locking out other businesses including butcheries, green grocers and fruit vendors from Two Rivers.

The application, if approved, would keep at bay other Kenyan supermarket chains and retailers that may be eyeing space for the above business lines in the high-end shopping complex.

Suppliers are also losing on private labels, where Nakumatt especially capitalised by giving its own Blue Label products prime positions on the shelf and, being cheaper, swayed customers away from other brands.

“Private labels bring about unjustified competition by allowing two same products from the same supplier to compete - one cheaper under private label and the other under supplier’s own brand,” suppliers complained. Retailers maintain that the concept of private brands is a fast-growing market intervention globally.

“Private brands are designed to provide specific consumer values including price and quality. Such values arise from lower provision costs due to logistical and reduced brand management costs,” they said.

They insisted that private labels are accorded equal treatment on the shelves.

 “Naturally, customers in any retail environment vote with their wallets and are unlikely to pick a product that doesn’t meet their value needs,” the retailers pointed out in the report.

Analysts, however, say that if the Nakumatt-Tuskys deal goes through, Kenya’s local retailers will still have a last stand against domination by the foreign-owned businesses. But Mr Kimani said terms with suppliers even under the new businesses will have to be reviewed.

 “I expect once they merge they are going to review the working capital management and supplier terms to improve,” said the Naivas boss.

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