Which problem should Uchumi CEO fix first?
By Fredrick Ogola | February 9th 2016
Last year, Uchumi Supermarkets hired a new CEO to turn it around after swinging to a Sh3.2 billion loss. It had recorded a profit of Sh491 million in its previous financial year to June.
At the time, this did not look like a very complicated task for Julius Kipng’etich, and the retailer’s new management team got working on a turnaround plan to return the business to profitability.
One of the options was for the retail giant to put its assets up for sale to free up capital, while closing regional branches to cut costs and ease cash flow problems. Other options included seeking Government bailouts, debt and equity.
But the recent revelation that Uchumi lost the Sh900 million it raised in late 2014 was a fresh shocker for investors of the troubled retailer. And as a result, Uchumi’s managers finds themselves with a much more complex problem.
So where does the new CEO start fixing things? With governance issues, the management problem or solving cash flow hurdles? This is like asking a doctor to choose where to begin when presented with a patient who has a mental condition (governance), heart problem (management) and kidney disease (cash flow).
This is not a normal call for a turnaround. Keep in mind that Uchumi, in business for more than 40 years, has undergone four turnaround eras.
In a normal turnaround, you start with people, and then markets, followed by strategy, operations and processes, structure, governance, and finally focus on the entity.
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With regards to governance, Uchumi has reconstituted its board just as was done during the reign of Chris Kirubi, when the retailer went into receivership.
After the receivership was lifted, Jonathan Ciano was appointed CEO, but the new board did not address the conflicts of interest that led Uchumi into trouble during the Kirubi days — the issue of some board members being the retailer’s suppliers.
In a report in The Star last week, Dr Kipng’etich is quoted as saying Mr Ciano was one of the top suppliers of the fresh produce sold at Uchumi outlets, and he paid himself in advance. Can it be assumed that by reconstituting the retailer’s board, governance issues have been fixed?
On the management front, it has been alleged that there is rampant corruption in supplies, where top-level managers at some companies are granted preferential status and trade with Uchumi at inflated prices.
Moreover, some managers are said to have been negotiating with major brands for the strategic display of products in return for favours. For instance, one staff member intimated that a manager involved in such a deal got an all-expenses-paid trip to South Africa to watch the World Cup in 2010. That shows that the heart of Uchumi — the people — is not well. Is the CEO going to start here?
On the cash-flow front, Uchumi Supermarkets is negotiating with a bank for a Sh500 million overdraft to pay suppliers. This has brought to an end speculation that the retail chain had serious cash-flow problems not long after raising funds in a rights issue. What happened to the Sh896 million raised from shareholders, and who is responsible for the loss of this money? Has the board really taken the fiduciary responsibility of guarding shareholders against such risks?
So should the CEO and board first heal the head (governance), or cure the heart (management) or deal with the kidneys (cash flow)?
If they focus on the head and the patient loses the heart or kidney, they will lose the patient. Is the problem governance, which has created management problems that manifest in cash-flow problems? This is the main question the retailer needs to answer.
The writer is senior lecturer, strategy and competitiveness, and academic director, MBA programmes, at Strathmore University.
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