Local top tier supermarket chains face test of radically changing market

Kenya’s top tier supermarkets are caught between a rock and a hard place. Small retailers have replaced them on the residential space and deep-pocketed foreign chains are leading the assault for the premium upmarket.

Researcher Isaac Kariuki, in a 2011 study on the challenges and survival strategies of supermarkets in Nairobi, observed that Kenya’s top tier supermarkets were significantly stratified.

Retailers such as Naivas and Ukwala are seen to target low-income earners and use this core attribute to attract customers. Nakumatt is known to have premium pricing to attract the high-end market while the Chandarana chain has centralised its businesses to primarily serve the Asian community.

When all the supermarkets expanded, they tended to serve the whole market hosting locations both in the Nairobi’s Central Business District and residential estates.

“Findings revealed that 38.9 per cent of the supermarkets were located in estates while 27.8 per cent were located within the Nairobi CBD. Others (33.3 per cent) were located in both estates and CBD,” said Mr Kariuki in the study report.

But as the leading retailers stepped up competition for locations within the City, increasingly their absence from residential areas opened up the space for smaller retailers.

Supermarkets such as Cleanshelf and Tumaini, often operating in small-sized shopfronts but strategically located for convenience, grew in number.

Over the last couple of years, tier one supermarkets led by Nakumatt adopted a strategy where they to took up space mostly in the city or as anchor tenants in malls.

This did not prove sustainable when Nakumatt fell flat on its face in the wake of corporate governance concerns and binge expansion.

The fall then attracted foreign retailers and emboldened those who had just recently set up shop to play a big role in the top tier retail business, jostling the leading local retailers to examine their strategies.

“Five years ago, Kenya wasn’t considered by us because they had three very big retailers,” Shoprite Chief Executive Pieter Engelbrecht told Reuters.

“Starting last year...the retailers in Kenya were in total disarray and we were able to secure seven sites and leases,” he said.

Secured leases

The South African grocery retailer is eyeing seven locations in Kenya, saying it had already secured leases to sites where Nakumatt once traded.

Shoprite will use its local supply subsidiary to enter the market with two new outlets at Garden City and Westgate.

“We have concluded with Westgate and Garden City and will follow up on others as they become available,” Shoprite director Gerhard Fritz told Weekend Business.

“Shoprite is a registered company in Kenya and we have previously sourced stock from local manufacturers for our stores in the rest of the continent. We are hoping to build on this as we continue to expand our footprint.”

Marceline Gatebi, a research analyst at Kingdom Securities, says the entry of foreign retailers and expansion by leading local supermarkets to defend market share may lead to a race to the bottom where the biggest beneficiaries will be convenience stores in residential areas and online markets.

“Sooner or later we will reach a saturation point as people go for convenience of the shops located near them, and online,” she said.

Ms Gatebi however said that while the international retailers will be able to stave off the risks because they come with deep pockets, new ideas and innovations, the race will be difficult for top-tier local retailers.

The challenge is already becoming apparent. While the foreign supermarkets are getting premium space, local retailers are cannibalising some branches within the low and middle class areas and the CBD.

The CBD in itself has lost the shine since the customers they were targeting - those who use passenger service vehicles - would rather shop near home than carry huge bags of shopping in the matatus.

Last year demonstrated the ineffectiveness of CBD branches when Nakumatt closed down Ronald Ngala and Haile Selassie outlets, while Tuskys shut down Sheikh Karume Road branch and lease terminated at Beba Beba.

Nakumatt’s location at Lifestyle was not doing as well by the time they were closed down, partly due to the construction of Hazina Towers and also decline of CBD retail trends.

But as Nakumatt closed shop, Naivas and Tuskys have gone about scooping up the locations including Nakumatt Moi Avenue and others in Kisumu, Kisii and Eldoret.

This in itself is a risk since rapid expansion just to take advantage of the decline of a competitor opens up the danger of spreading money thin and liquidity shocks that shattered Nakumatt and Uchumi in the first place.

“I think it is a worrying trend to see the rate at which Tuskys and Naivas are expanding, if they are mirroring what Nakumatt and Uchumi did,” said Gatebi.

“But for Nakumatt, there were also the corporate governance issues so the others may survive. Generally, expansion should be a cause for concern if the same trends are replicated.”

The prime locations have become the backyard of South Africa with Shoprite’s entry, joining Game and Botswana’s Choppies.

With the decline of Nakumatt, French retailer Carrefour became the undisputed king of high-end retailers with locations at Junction Mall, The Hub in Karen, Sarit Centre in Westlands and Two Rivers, located at the diplomatic blue zone that hosts the biggest concentration of embassies and the United Nation complex.

In fact, Carrefour is said to have beaten Shoprite to the Junction premises last year while in turn Shoprite beat Carrefour to Garden City as they take their battle to Thika Road’s mostly middle-income belt.

“Carrefour went to Thika Road Mall (TRM) because Garden City was not available at the time. I think they really wanted a presence there but now it has been taken up by Shoprite,” Gatebi said.

Offers footfall

“What TRM offers, however, is footfall which could be balanced off with its premier locations if they do not do well.”

This is the same niche for the leading local retailers with only Naivas boasting of a supermarket around the Thika road area.

Game, which will share Garden City mall with Shoprite, has been playing catch-up and has only recently ventured to the Waterfront Mall, which will give it a piece of the prime pie in the Karen suburb.

Waterfront, expected to open later this year, plans to wow clients with a man-made lake to “evoke the spirit of Engare Nairobi”, the Maasai name for Nairobi. It had initially signed up Nakumatt.

Choppies had taken a different approach when it entered the market opting to stay within the ten Ukwala supermarkets it had acquired, but as opportunity knocked they also stepped up in setting up new locations.

It is now the anchor tenant for the new Southfield Mall as well as Kiambu Mall, the space that was previously allocated to market leader Nakumatt.

The retail chain plans to open more outlets at Diamond Plaza (Parklands), Signature Mall (Molo), Spur Mall (Ruiru) and another one in Diani (Mombasa) by the end of this year, and three more by mid 2019.

Gatebi said that to survive, local retailers need to reassess their pitch and carve out a market for themselves with the growing competition.

“Entry of foreign retailers will provide competition for local supermarkets who should fight for their own market segmentation,” she said.

The analyst said Carrefour and the other international brands have chosen the high-end mall space because they feel they have a niche there, but local retailers are playing in the whole market.

They will have to streamline operations to align their business to some operational aspect of the market share.

Beneficiaries

Landlords are also big beneficiaries of the influx of foreign retailers, having suffered non-payment of rent by Uchumi and subsequent litigation stopping the retailer’s re-entry into their locations.

Ben Woodhams, Managing Director of real estate firm Knight Frank Kenya, said Shoprite’s entry into the country is expected to stiffen competition in the shopping centre market, which experienced a tough year in 2017 as some household brands faced financial difficulties.

“Shoprite brings a new offering into the market and retail property landlords will have more choices for anchor tenants,” he said.

“With Shoprite, we are extremely excited to introduce another strong international anchor tenant into our market and feel that its high-end fit-out will suit Westgate’s profile very well.”

Some mall owners say they are also focusing on trying to be less reliant on supermarkets as anchor tenants