How turmoil in retail sector is hurting shopping mall owners

Thika road mall (TRM) [photo: David Gichuru/Standars]

Owners of retail space in Kenya are standing on the edge. The turmoil in the retail sector has been a reality check after a decade of heavy investment in the sector that analysts had warned was heading to a glut.

Kenya’s real estate sector is already faced with an oversupply in all types of retail space in Nairobi, and in big malls countrywide. Thus the expected rollback of investment by supermarket chains is piling more problems to what is already a complicated situation.

Today, Nakumatt will shut down for the second time its Westgate branch, which until the terror attack in 2013, had acted as its flagship store and a sign of Kenyans’ resilience and determination in the face of terrorism.

“Dear customers, Nakumatt Westgate store will be closed from October 8, 2017 until further notice. We are sorry for any inconvenience,” the retail chain said in a notice yesterday. “Please visit our nearest stores: Nakumatt Ukay, Highridge and Village Market,” it said.

However, Nakumatt’s PR handler said the closure was temporary and was meant to consolidate all departmental stores under one roof.

Supermarkets act as anchor tenants and their key purpose is to draw shoppers to the mall. They occupy the biggest floor space in the mall and all the other tenants and target customers are woven around the anchor tenant.

Experts say that getting an anchor tenant is one of the first things a developer does before deciding whether or not to make an investment. They say when the anchor tenant coughs, the rest of the tenants catch a cold.

“Everything about a mall is built around who the anchor tenant is. The anchor tenant is the key deciding factor on who your target market is, what will be the tenant mix and how the design of the mall will be done,” says IMG Chief Executive Officer Peter Gacheru, on behalf of the soon-to-be-opened Waterfront mall in Karen.

“All this is done at the visibility stage, that is why you read in the papers the owners of The Junction saying the poor performance of Nakumatt was affecting all the other businesses,” he says.

Not in a hurry

Now with cash-strapped Nakumatt culling its non-performing stores and being chased out of some malls due to rent arrears, the other option for shopping complex developers is to target Tuskys, Uchumi, foreign retailers or tier two supermarkets for tenants.

However, Uchumi too, like Nakumatt is having cashflow problems of its own. Tuskys and Naivas have for a long time been lukewarm towards the mall concept and the foreign retailers don’t appear to be in a hurry to expand rapidly.

In fact, Tuskys, which is currently working on a partnership with Nakumatt aimed at saving the sinking giant, is currently rolling out convenience stores that will enable it compete for shoppers in their neighbourhoods. This is tier 2 supermarket territory which Uchumi is also eyeing  as it struggles to put its head above water.

Nakumatt has so far shut down about ten branches across East Africa and was this week rescued by the courts after the owners of The Junction mall locked them out of their premises. The four branches shut down in Kenya by the struggling retail giant are Thika Road Mall (TRM), Nextgen, Ronald Ngala, Haile Selassie and indications are there are more on the way.

The owners of Junction Mall had evicted the retailer on Monday before Nakumatt sought a court injunction. A ruling on the matter is expected on October 16.

So far only TRM and Nextgen have received new anchor tenants while the rest remain closed with the owners unsure of what to do. Naivas supermarket had initially expressed interest in taking over from Nakumatt at TRM but Carrefour beat them to it.

The opening of the third store in Kenya, two years after entry by the French retail giant, will bring to 215 the number of stores it operates in 15 markets.

“The opening of our third Carrefour store in less than two years of operations illustrates our ambitious growth and expansion plans in the region,” Franck Moreau, Country Manager, at Majid Al Futtaim – Retail Kenya said.

“The new hypermarket will offer our customers who use the busy highway access to wide variety of products at the most competitive prices offered at world class standards.”

Frustrated, Navin Shah, the owner of Nextgen Mall, has decided to open a supermarket at the premises due to fears that another retail chain that will take up space would suffer the same fate as Nakumatt.

Souk Bazaar will open its doors next week with 70,000 square feet on Mombasa Road, making it the second largest store in the country after Carrefour at Two Rivers.

“I am a businessman and you can see what the fall of Nakumatt has done to my mall,” Shah told Weekend Business. “If another supermarket comes and collapses this mall will never wake up again.”

But beyond the two malls, developers are scratching their heads about how to confront the snowballing scenario in the retail sector hoping it doesn’t get worse. Retailers say it is time for all players to go back to the drawing board. “You have to rationalise profitability and the suitability of an open branch. It is not just our fault,” Retail Traders Association of Kenya (RETRAK) Chief Executive Wambui Mbarire yesterday told Weekend Business.

“They are the ones throwing us out because they are angling for foreign retailers. But if you look at the malls placement do you think there was thought when they were being put up?” she asked.

The worst affected malls in the current turmoil are those still in development. For instance, Waterfront, which is supposed to open in September, is now searching for a new anchor tenant. Nakumatt had in 2015 confirmed it will take up 70,000 square feet at the complex but has now bailed out on the deal.

“Negotiations for a new anchor have reached 80 per cent so we cannot disclose who it will be but it is going to be a foreign retailer,” said Gacheru on behalf of Waterfront.

Those in the know say part of Nakumatt’s problems are attributed to the rapid expansion of malls which made it commit to opening new branches years in advance courtesy of its Nakumatt 2.0 strategy that saw it open 64 stores before everything came tumbling down.

Over 90 per cent of its stores are located in malls and today apart from Two Rivers and The Hub, Nakumatt operates as the anchor tenant in almost every large shopping mall.

Although only the rent arrears of TRM and The Junction have been made public, insiders in the industry say Nakumatt owes every mall it occupies outstanding payments running to hundreds of millions of shillings.

Knight Frank, the property managing firm which operates four malls that have Nakumatt as the anchor tenant, declined to say how much the retailer owes it but said the leases run from medium to long-term.

“The ability of a tenant to draw customers is extremely important for any shopping centre as this determines dwell times of shoppers. In settling for the desired tenant-mix, the mall owner will choose tenants with good business records and proven understanding of the market,” said Knight Frank in an email response.

 “Occupancy in malls is governed by commercial leases, which run from six years and can go up to 15 years,” it said.

The retail and real estate sectors have a symbiotic relationship. One depends on the other and despite the current visible turmoil in both sectors, latest indicators show all is well.

According to the Central Bank of Kenya (CBK), the wholesale and retail trade sectors registered a 6.1 and 2.8 per cent growth in quarter one and two of this year, compared to 3.6 and 2.3 per cent at similar periods in 2016.  Real estate registered a growth of 9.3 and 9.7 per cent in quarter one and two of this year compared to 8.8 and 8.2 per cent in 2016, respectively.

Shop near homes

Despite this impressive economic growth in the two sectors,  inflation continues to discourage shoppers, especially in the lower middle income group as their purchasing power takes a pounding from the high cost of living.

Inflation dropped to 7.1 per cent last month, just near the government’s preferred ceiling of 7 per cent. Inflation has averaged 9 per cent in the first nine months of 2017 due to bad weather and the political climate.

Furthermore, shopping preferences have changed and shoppers want to shop near their homes as opposed to malls presenting a new headache that strategists and mall developers have to deal with.

“It is no longer about the big supermarkets. Seventy per cent of the retail sector is now being controlled by the small supermarkets in the neighbourhood. Mall owners and big retail chains have to change their strategy,” said Gacheru.

“In future malls are going to be a place where you go for entertainment, banking etc. What they should do is to start encouraging people to stay because at the moment by charging shoppers more to park longer they are punishing them and making them spend less time.”

As a result, while the big retailers are suffering, tier 2 supermarkets like Eastmatt, Quickmart, Chandarana, Cleanshelf, Mulleys, Mathias, Tumaini, Choppies and Rikana are smiling all the way to the bank.