Double blow for suppliers as Kenya's retail chains sink
SEE ALSO :Court cases hinder Uchumi turnaroundNakumatt 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.
SEE ALSO :How malls avoid Nakumatt case scenario“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.